Copy-CATs: Commercial Activity Taxes Proposed in Three States

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

Tax Policy

Bloomberg BNA regularly spotlights the insights of state and local tax attorneys at KPMG LLP. In this installment, Sarah McGahan discusses the proliferation of draft commercial activity taxes modeled after Ohio's, enacted more than 10 years ago. Three such bills have been introduced this session, though it's unclear if they will join the small list of states that have followed Ohio's lead.

Sarah McGahan

By Sarah McGahan

Sarah is a director in the State and Local Tax group of KPMG LLP's Washington National Tax practice. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

Over a decade ago, legislation was signed into law in Ohio that implemented a new gross receipts tax and incrementally phased out property taxes on business personal property, as well as the corporate franchise tax (as applied to general corporations). This new tax, the Ohio Commercial Activity Tax or CAT, became effective on July 1, 2005. In short, the CAT is an annual privilege tax measured by gross receipts sitused to Ohio under a specific set of situsing rules. The CAT applies to all types of businesses regardless of entity form, (e.g., partnerships, LLCs, sole proprietorships, and all types of corporations). Taxpayers with taxable gross receipts of more than $150,000 and up to $1 million are subject to a minimum tax; businesses with Ohio-sitused receipts exceeding $1 million pay tax at a rate of 0.26 percent. CAT taxpayers can elect to file as a consolidated group. If the election is made, receipts between consolidated group members are eliminated from the taxable gross receipts base. However, the consolidated group includes all entities meeting the requisite ownership requirement (even non-nexus entities). If consolidated filing is not elected, combined reporting is required for related entities that meet a more-than 50 percent common ownership test. Only nexus entities are included in the combined group, but intercompany receipts are not excluded. The Ohio CAT was the first state tax to include a factor presence nexus standard— a standard that many other states have borrowed for corporate income tax purposes.

Since 2005, many states have considered gross receipts taxes and a couple states have adopted them, including Michigan (the now-defunct Modified Gross Receipts Tax component of the now-repealed Michigan Business Tax) and Nevada (Commerce Tax). However, this year at least three states are considering “borrowing” not just the CAT's factor-presence nexus standard, but the CAT itself.

In November, a measure that would have revised Oregon's corporate minimum tax to impose a gross receipts tax on receipts sourced to Oregon in excess of $25 million was defeated by voters. If enacted and a corresponding constitutional amendment was approved, Oregon House Bill 2230 would adopt a 0.7 percent Commercial Activity Tax (almost identical to Ohio's) and would eliminate the corporate income/excise tax. Oklahoma House Bill 1664, the Oklahoma Corporate Activity Tax Act of 2017 very closely mirrors the Oregon legislation with a few key differences. First, the Oklahoma CAT would be imposed at a rate of 0.26 percent upon taxable gross receipts sitused to Oklahoma. Second, the Oklahoma CAT would appear to be imposed in addition to the current corporate income tax in that House Bill 1664 does not repeal the corporate income tax law. Finally, while the Oregon CAT would be subject to the approval of a constitutional amendment, the Oklahoma CAT would be effective January 1, 2018. The last copy-CAT state is West Virginia. In his State of the State address, Governor Jim Justice called for the adoption of a CAT that would be imposed in addition to the state's current income and sales taxes. The West Virginia CAT, per the budget documents and Senate Bill 484, would be imposed at a rate of 0.2 percent and would raise an estimated $214 million for the state annually. The Governor subsequently revised his budget proposal and appears to now want to impose a gross receipts tax or CAT at a rate of less than 0.2 percent.

While it is unclear whether any of these proposals will advance, it should be noted that all three of these states—Oklahoma, Oregon and West Virginia— are currently facing budget deficits for the upcoming fiscal year.

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