New guidance from the Oregon Department of Revenue (the “DOR”) with respect to Oregon’s Corporate Activity Tax (“CAT”) was issued yesterday.
Specifically, the DOR announced that:
- Certain forgivable federal loans and advances, including Paycheck Protection Program (“PPP”) loans, are excluded from the definition of commercial activity under the CAT;
- The DOR is scheduling a public hearing to discuss the first set of permanent rules promulgated under the CAT; and
- The DOR released a draft temporary rule regarding the sourcing of commercial activity for financial institutions.
Payments with Respect to Certain Federal Loans and Advances Are Not Subject to the CAT
As discussed in prior blog posts, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), signed into law on March 27, 2020, created the PPP under which the Small Business Administration (“SBA”) is authorized to make up to $349 billion in forgivable loans to small businesses to enable them to meet payroll costs, benefits, rent and utility payments (the funding for which was increased to $659 billion on April 24, 2020 when the Paycheck Protection Program and Health Care Enhancement Act was signed into law). The CARES Act excludes from gross income for federal income tax purposes the amount of any loan made and forgiven under the PPP.
The CARES Act also provides for emergency grants to applicants applying for loans under the SBA’s Economic Injury Disaster Loan Program (“EIDLP”). Applicants can get an advance up to $10,000 within two days of applying for an EIDLP loan. The advance must be used for payroll and related expenses. The EIDLP grant does not have to be repaid, even if the applicant is subsequently denied an EIDLP loan. The CARES Act does not appear to provide any similar income exclusion with respect to EIDLP grants that are not repaid, so business owners should expect to have taxable income in the amount of any EIDLP grant that is not repaid as part of an EIDLP loan.
In an email sent by the DOR and as elaborated on the DOR’s website, the DOR announced that the receipt of funds pursuant to PPP loans (whether or not forgiven), EIDLP advances and SBA debt relief for certain business loans do not constitute commercial activity under the CAT. Accordingly, taxpayers will not have to include these amounts in computing their Oregon commercial activity under the CAT.
This is obviously the correct result. These loans and advances, as well as repayment forgiveness, are not the result of commercial activity by any stretch of the imagination. Further, they are isolated, non-repetitive events. Commercial activity under the CAT is limited to amounts arising from transactions and activity in the regular course of a trade or business. The DOR got this one right!
Permanent Rule Hearing
The DOR announced that a public hearing on the first set of permanent CAT rules will take place by conference call on May 26, 2020, from 9 to 11 a.m.
OAR 150-317-1050 (Draft Temporary Rule)
The DOR released a draft temporary rule regarding the sourcing of commercial activity for financial institutions. Similar to the other temporary sourcing rules the DOR has issued, this draft rule borrows heavily from a comparable rule under UDITPA (in this case, OAR 150-314-0088).
As a general rule, commercial activity of financial institutions is sourced to Oregon if it is from business conducted in Oregon. Specifically:
- Receipts from sales, rental, lease or license of real property owned by a financial institution are sourced to Oregon if and to the extent the property is in Oregon or, with respect to a sublease of real property, if the property is in Oregon;
- Receipts from the lease or rental of tangible personal property owned by a financial institution are generally sourced to Oregon if the property is located within Oregon when it is first placed in service by the lessee;
- Interest, fees and penalties imposed in connection with loans secured by real property are sourced to Oregon if the property is located within Oregon;
- Interest, fees and penalties imposed in connection with loans not secured by real property are sourced to Oregon if the borrower is located in Oregon;
- Fees, interest and penalties charged to credit and debit cardholders are sourced to Oregon if the cardholder’s billing address is in Oregon;
- Receipts from merchant discounts are generally sourced to Oregon if the merchant is in Oregon;
- Receipts from ATM fees are generally sourced to Oregon if the cardholder’s billing address is in Oregon; and
- Receipts from the sale of a service not otherwise sourced under this rule are sourced to Oregon if and to the extent the service is delivered to a customer at a location in Oregon.
Additional rules apply to the sourcing of the sale of loans and card receivables, loan servicing fees, and receipts from a financial institution’s investment and trading assets and activities.
As noted above, the DOR borrowed heavily from the UDITPA rule when drafting this draft temporary rule. The following are items that were not adopted from the UDITPA rule:
- The requirement that a financial institution’s method for sourcing each receipt from a merchant discount must be consistently applied to such receipt in all states with similar sourcing rules;
- Certain provisions that address the sourcing of receipts from investment and trading assets and activities;
- The attribution rule of receipts where a taxpayer is commercially domiciled in Oregon; and
- Provisions related to the property and payroll factors (which are not present in the CAT).
The CAT landscape continues to change, including the welcome addition of relief from CAT liability for amounts received pursuant to the CARES Act discussed above. Guidance under the CAT will presumably continue to plod along, with a public hearing on the horizon and perhaps more new rules to come. We will continue to review and analyze guidance as it comes out. Stay tuned!
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Larry J. Brant
Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.
Upcoming Speaking Engagements
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Portland Tax ForumVirtual Event, 9.24.20
- To be rescheduled
- “The Road Between Subchapter C and Subchapter S – It May Be a Well-Traveled Two-Way Thoroughfare, But It Isn’t Free of Potholes and Obstacles,” Oregon Association of Tax ConsultantsBeaverton, OR, To be rescheduled