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July 20, 2020

Portland Has A New Tax, Oregon Issues More CAT Guidance and Washington Expands Its Voluntary Disclosure Program

Posted by Darcy Kooiker

tax, taxes, tax payments, tax rules

Summary

Oregon voters in Multnomah, Clackamas and Washington counties (the “Metro area”) recently approved Measure 26-210, authorizing a 1% tax on certain high-earning individuals and a 1% business profits tax on certain businesses for the purpose of supporting housing services for the homeless. 

Additionally, the Oregon Department of Revenue has issued a Permanent Administrative Order which finalized various temporary rules and has an effective date of June 28, 2020. As a reminder, the Oregon Commercial Activity Tax (OR CAT) is a tax on “taxable commercial activity” (TCA) and is in addition to Oregon’s corporate/excise tax. The OR CAT tax rate is 0.57% on TCA in excess of $1 million, plus $250 for the first $1 million of TCA. However, taxpayers with less than $1 million of TCA are exempt from the OR CAT. This is not a pass-through tax and is meant to tax the “person” receiving the commercial activity.

In good news, the Washington Department of Revenue has expanded its existing Voluntary Disclosure Agreement (VDA) program, effective July 15 through November 30, 2020. The VDA program covers sales/use taxes, business and occupation (B&O) gross receipts taxes, and other excise taxes administered by the department.

Portland’s Homelessness Tax in Detail

Measure 26-210 imposes the following taxes for individuals and businesses in the Metro area beginning January 2021:

  • A 1% tax on all taxable income of greater than $200,000 for joint filers or $125,000 for single filers, which is applicable to both resident and nonresidents; AND
  • A 1% business profits tax upon each person doing business within Metro.
    • Small-Business Exemption: Businesses will not be subject to the 1% business profits tax if the gross receipts from all business income (both within and outside the Metro area) is less than $5 million.

 EXAMPLES:

  1. Joint filers earning $201,000 during calendar year 2021 will pay a homeless services tax equal to $10.
  2. Businesses with $1 million of business profits and gross receipts in excess of $5 million during calendar year 2021 will pay a homeless services tax equal to $10,000.

These taxes are expected to generate $250 million per year and will expire in 2030.

The Metro Council stated that upon the passage of 26-210, they will “take further action to establish rules to enforce and implement the taxes imposed by the measure. This may include rules regarding penalties, interest, filing dates, required forms and documentation, residency determinations for income tax payment purposes, determinations for business tax purposes, refunds and deficiencies, audit authority, overpayments, estimated payments, exemptions, appeals from income determinations, legal collection actions and any other provision deemed necessary to effectively and efficiently administer the taxes and achieve the purposes.”

Additionally, revenue from the tax will be proportionately distributed to Clackamas, Multnomah and Washington counties based on the tax revenues collected from each county, currently estimated to be 21.3%, 45.3% and 33.33%, respectively.

As of today, the Metro Council is working on creating an Intergovernmental Agreement and selecting the 20 members of the oversight committee. Local jurisdictions are expected to develop their implementation plans between September 2020 and January 2021, with the first phase of the supportive housing program to start in July 2021.

Oregon Issues Permanent Rules Related to the Corporate Activity Tax (OR CAT)

Summary of Permanent Rules:

Rule 150-317-1000

  • Provides definition of “commercial activity” to mean the fair market value of all amounts realized in the regular course of the taxpayer’s trade or business that meet the “transactional test” in OAR 150-314-0335(5).

Rule 150-317-1010

  • Provides guidance to assist taxpayers in determining whether they have substantial nexus for OR CAT purposes.

Rule 150-317-1020

  • Provides guidance to assist taxpayers in determining whether they are engaged in a unitary business under ORS317A.100(18) and explains common ownership attribution and filing requirements for unitary groups.

Rule 150-317-1025

  • Clarifies that unitary groups with non-U.S. members that have no commercial activity or expenses related to commercial activity in OR can omit those members from the group’s OR CAT return.

Rule 150-317-1030

  • Provides guidance for sourcing of sales of tangible personal property for taxpayers who have business activity inside and outside of OR for purposes of the OR CAT.

Rule 150-317-1040

  • Provides guidance for sourcing sales of other than tangible personal property for taxpayers who have business activity across state lines under ORS 317A.128.

Rule 150-317-1100

  • Provides guidance to assist taxpayers in determining whether they are acting as an agent for purposes of the exclusion provided by ORS 317A.100(1)(b)(M) of the OR CAT.

Rule 150-317-1120

  • Provides definition of “single-family residential construction” for purpose of ORS 317A.122 which provides general contractors an exclusion from their commercial activity equal to 15% of the payments made to subcontractors for labor costs.

Rule 150-317-1130

  • Provides guidance on when property brought into this state is included in taxable commercial activity.

Rule 150-317-1150

  • Provides guidance to assist taxpayers in determining whether receipts from retail sales of food items may be excluded from the taxpayer’s commercial activity under ORS 317A.100(1)(b)(EE).

Rule 150-317-1200

  • Provides guidance to assist taxpayers in how to compute the cost input or labor cost subtraction.

Rule 150-317-1220

  • Provides guidance to assist taxpayers in determining who is considered an employee and what compensation includes for purposes of calculating the corporate activity tax labor cost subtraction.

Rule 150-317-1300

  • Provides guidance to assist taxpayers in determining when estimated OR CAT payments are required, including guidance on due dates for short-period returns, refund requests, electronic funds transfer payment requirements, and how to apply an overpayment to a future tax period.

Rule 150-317-1310

  • Provides guidance to assist taxpayers in determining the correct amounts of corporate activity estimated tax payments and establishes requirements for interest imposed on underpayment of estimated tax.

Rule 150-317-1320

  • Provides guidance regarding estimated CAT tax payment obligations for unitary groups of taxpayers filing a single return and for those who must apportion their commercial activity.

Rule 150-317-1330

  • Grants the OR Dept. of Revenue rule writing authority to allow extensions of time to file the CAT return for “good cause.”

Rule 150-317-1410

  • Provides guidance regarding documentation that a vehicle dealer must retain in order to exclude receipts from commercial activity as provided in ORS 317A.100(1)(b)(W).

Washington Expands VDA Program

Effective July 15 through November 30, 2020, the Washington Department of Revenue is expanding its existing Voluntary Disclosure Agreement (VDA) program. VDAs cover sales/use and B&O taxes, as well as other excise taxes administered by the department. The VDA expansion provides the following additional scenarios where a VDA will be temporarily available: 

Traditional VDA Criteria Temporary Expanded VDA Criteria (July 15 – Nov. 30, 2020)
Businesses never registered with or reported taxes to the department
  • Businesses that closed their tax registration prior to Jan. 1, 2020.
    • This includes businesses that have previously filed tax returns.
  • Businesses that were placed on Active Non-Reporting status prior to Jan. 1, 2020.
Businesses never contacted by the department for enforcement
  • Businesses whose most recent enforcement contact was prior to July 1, 2019.
    • Enforcement contact made on or after July 1, 2019, would disqualify the business from receiving voluntary disclosure benefits.
    • Businesses that have been contacted at any time by the department regarding Wayfair, Marketplace Fairness or Remote Seller Relief do not qualify for the VDA program.
  • Businesses who have not been named as an affiliate of another business through an enforcement contact.
  • “Named affiliates” means affiliates addressed specifically by name, by the department through enforcement contact, or by the businesses in a response to enforcement contact by the department.

Please note that if you have additional Washington taxes to submit but do not meet the criteria for the traditional or expanded VDA program, there may be other options available.

Insights

We will have to wait for the regulations to clarify how profits will be sourced to the Metro area and provide more details on how the taxes will be implemented and administered.  Stay tuned.

Note that the new Homelessness Services tax is just one of several new taxes imposed in Portland and further expands the list of taxes Portland residents and/or businesses are required to pay.

The other taxes currently include:

  • Oregon’s Corporate Income/Excise Tax
  • Oregon’s Corporate Activity Tax (effective 1/1/2020)
  • Multnomah’s County Business Income Tax
  • City of Portland’s Business License/Income Tax
  • Applicable business taxpayers may also be subject to the City of Portland’s Clean Energy Surcharge (effective 1/1/2019) and/or the City of Portland’s Pay Ratio Surtax (effective 1/1/2018).

Portland is now among the growing number of local jurisdictions that have imposed a tax to combat homelessness, following San Francisco’s Homelessness Gross Receipts Tax (effective 1/1/2019) and most recently, Seattle (JumpStart Seattle was passed by the Seattle City Council on 7/6/2020 and is currently pending the mayor’s signature). Homelessness is more often a significant problem in metropolitan areas, and it may just be a matter of time before other metropolitan areas enact a similar tax.

Additionally, OR continues to provide additional guidance and clarifications regarding the OR CAT as taxpayers continue to struggle with applying the rules and understanding their liability for OR CAT purposes. As a reminder, the OR CAT is a calendar-year tax including taxpayers with fiscal year-ends. The quarterly tax payments are due April 30, July 31, October 31 and January 31. If you are expecting $750,000 or more of OR sourced receipts in 2020, you should be considering the impact to your tax provisions and compliance responsibilities for 2020.

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