The new tax, $250, plus 0.57 percent of taxable commercial activity over $1 million, will have a significant impact on low-margin businesses, such as general contractors. This tax is on the gross receipts of a business, regardless of profitability, less only an amount equal to 35 percent of “cost inputs” or “labor costs.” Also, the tax is imposed on each step of the construction process (i.e., manufacturer, subcontractor, general contractor), resulting in taxation on the same economic value multiple times. The tax will have a significant impact on the cost of all goods in Oregon, including housing and real property development.
There are just a few exclusions to the tax imposed on gross receipts exceeding $1 million, including:
exclusion of the greater of 35 percent of “cost inputs” or “labor costs,” where “cost inputs” means the costs of materials incurred in the creation of a good or service and the cost of purchases of items held in the ordinary course of business for inventory, and “labor costs” means total compensation of all employees, not including compensation to any single employee in excess of $500,000 per year;
a number of industry-specific exclusions (i.e., groceries, residential care facilities, motor vehicle fuels); interest and dividend income, as well as receipts from the sale of IRC Section 1221 and 1231 assets; and
the exclusion of most interest to companies in the design and construction industry is the exclusion of receipts for transactions among members of a unitary group. Transactions among members of a group of businesses with common ownership, such as equipment leasing subsidiaries, separate construction entities for residential and commercial construction, etc., are excluded from the calculation of gross receipts. Under the Oregon law, the threshold to determine common ownership is at least 50 percent, either direct or indirect, common ownership. This is much lower than the 80 percent threshold for filing consolidated returns in Oregon.
A unitary group with revenues in excess of $750,000 must register with the Oregon Department of Revenue and pay the tax as a single taxpayer under the name of the entity with the greatest amount of commercial activity for the year. This may create unique challenges for allocating liability for the gross receipts tax among the members of the unitary group. This also may present reporting challenges if the member of the unitary group with the most commercial activity in Oregon changes from year to year. Will a new registration be required each year?
Gross receipts include the value of any property transferred into Oregon for use in the trade or business of the company. Accordingly, contractors with business operations in several states will need to be careful moving equipment and other assets among projects inside and outside of Oregon.
Every business with gross receipts in excess of $1 million must file an annual return. The tax itself must be paid quarterly on or before the last day of January, April, July and October for the previous calendar quarter. The new statute is silent on whether the $1 million gross receipts filing threshold is before or after exclusions for cost inputs or labor costs. A strict reading of the statutory language suggests the threshold requirement is before the exclusion of cost inputs or labor costs. Accordingly, reporting may be necessary, even if no tax liability is due. Expect regulatory guidance on this issue to be forthcoming.
The new Oregon law applies for tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2021, and to returns filed on or before April 15, 2021.
The new tax is scheduled to go into effect on Jan. 1, 2020. However, the consensus is that the new tax will end up in front of Oregon voters in a special election. That special election is likely to occur in early 2020. Given the public rejection of Measure 97, a similar gross receipts tax proposed in 2016, the outcome of such a special election is uncertain. However, with the new tax due to take effect before a special election can occur, appropriate planning is needed in 2019 to minimize the impact of the new tax.
Thomas B. Eriksen is an attorney in Jordan Ramis PC’s Business Law practice group. He represents business and corporate clients in all aspects of business operations. Contact him at 503-598-5590 or [email protected].
Kathleen M. Bertero is an attorney in Jordan Ramis PC’s Business Law practice group. She focuses on real property sales and acquisitions, commercial leasing, business acquisitions, and corporate formation. Contact her at 503-598-5554 or [email protected].
This column is intended to provide general interest for readers. Consult professional counsel for legal advice regarding specific situations.