1. Why is Miner writing an article on taxes?
Good question, because I am not a tax lawyer and (as with all of our articles) this is not legal advice. MHCO has been receiving questions from owners about the new corporate activity tax. The below questions and answers are an attempt to summarize HB 3427 and the possible effect it may have on some owners of manufactured home parks. Each situation is different and it is imperative for every owner to speak with their tax professional on whether and how the new law will be applied to each owner’s individual situation. If you are interested in getting specific advice on your situation, or need a referral to a tax professional, please feel reach out to me.
2. What is HB 3427?
HB 3427 (“the Act”) was signed into law by Governor Kate Brown on May 16, 2019. It technically became effective on September 29, 2019, but will apply to the 2020 tax year. The Act’s official title is the “Student Success Act”. The first 55 sections of the Act establish various programs to invest in early childhood and K-12 education programs in Oregon. Examples include an “early warning system” for high school graduation, a statewide “youth reengagement” system, and school breakfast and lunch programs, to name a few.
Section 58 of the Act creates the Corporate Activity Tax (“CAT”), also known as Oregon’s first modified gross receipt tax. The CAT is intended to raise approximately $2 billion per biennium to fund the programs listed in the Act. Section 56 of the Act slightly reduces personal income tax rates.
3. What is the CAT?
The CAT, or corporate activity tax, is a tax on gross receipts(or sales) over $1 million by any affected person or business in Oregon. Any person or business with a taxable commercial activity in excess of $1 million will be imposed a tax rate of 0.57% plus $250 on receipts above the first $1 million of taxable commercial activity ($250 +.57% of revenues in excess of $1 million). The first $1 million in gross receipts are exempt from the CAT. In other words, if your park does not make more than $1,000,000 per year in gross revenue (from all sources), you most likely won’t need to worry about it. BUT, check with your tax professional.
4. What is “commercial activity”?
Commercial activity is defined as transactions and activity in the regular course of the person’s trade or business, without deduction for expensesincurred by the trade or business (although there does appear to be some qualified deductions (see question #8 below)).
5. Does the CAT apply to the gross income (i.e. all the rent, utilities, fees, interest) that I make at my manufactured home park?
Again, it is imperative that you speak with your own tax professional to determine whether the CAT applies to you and what exactly it applies to. The Act specifically refers to receipts from the sale, rental, lease or license of real property to the extent the property is located in Oregon. There are several exemptions of what constitutes “commercial activity”. For example, receipts from the sale, exchange or other disposition of an asset as described in Internal Revenue Code Sections 1221 or 1231; contributions to capital; interest and dividends; sales of motor fuel; distributive income received from a pass-through entity; receipts from the wholesale or retail sale of groceries, are a few of the exemptions.
If you own multiple entities that own multiple parks in Oregon where the total gross receipts exceed $1 million, you will want to talk to your tax and/or legal advisors on whether you are required to aggregate the receipts. If you have one entity that owns several parks, you may want to discuss having separate legal entities for each property.
6. What if I have another property outside of Oregon?
Only Oregon sourced commercial activity is taxed. The Act defines taxable commercial activity as the total amounts realized by the taxpayer arising from transactions and activity in the regular course of taxpayer’s trade or business that is sourcedto Oregon. Receipts from outside Oregon wouldn’t be considered.
7. Can I pass on the CAT to others (i.e. my tenants)?
There appears to be no prohibition on passing on the tax through increased pricing (why this is viewed by some as a backdoor sales tax); however, you must always keep other restrictions in mind. For example, you continue to have the ability to raise your rent every year pursuant to the provisions of SB 608, but there is a cap (7% plus CPI).
8. Can I take any deductions from “gross receipts”?
Again, talk to your tax professional, but the Act provides a 35% subtraction from taxable commercial activity of “labor costs” (defined as total compensation paid to all employees excluding any compensation paid to any single employee in excess of $500,000) or“Cost inputs” (defined as the cost of goods sold calculated in accordance with IRC Section 471).
9. Does this replace the existing corporate tax?
No. The CAT is a new business tax and will apply in addition to Oregon’s existing corporate tax.
10. Does this apply to income earned in 2019?
No. The CAT will take effect for tax years beginning on or after January 1, 2020. Any person or business generating more than $750,000 of Oregon sourced commercial activity will be required to register with the Oregon Department of Revenue and file an annual return by April 15 of the following year.
11. Can I wait until April to pay?
Again, talk to your tax professional, but taxpayers must pay at least 80% of the balance due for any quarter or the DOR may impose penalties, starting at 20%. It is similar to paying estimated income taxes.