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Oregon CAT: Draft Rule Regarding the Sourcing of Commercial Activity for Financial Institutions in This State

May 5, 2020

Overview

On May 4, 2020, the Oregon Department of Revenue (“DOR”) issued a new draft rule regarding the Oregon Corporate Activity Tax (“CAT”). This draft rule provides guidance to assist taxpayers in determining the sourcing of commercial activity for financial institutions for the purposes of the Oregon Corporate Activity Tax (“CAT”).  

As a starting point, the rule notes that commercial activity for financial institutions is the items of income as reported on the form required under ORS 317A.100(1)(a)(B)(i)-(iii). The draft rule then notes that a taxpayer may request an alternative method, and that the DOR may require or permit an alternative method under ORS 317A.128(2)-(3). Finally, the rule provides commercial activity for financial institutions is sourced to Oregon as follows:  

  • Receipts from the Sale, Rental, Lease, or License of Real Property (-1050(4)(b)). Receipts from the sales, rental, lease, or license of real property owned by the taxpayer are sourced to Oregon if and to the extent the property is in Oregon or receipts from the sublease of real property if the property is in Oregon.  
  • Receipts from the Lease of Tangible Personal Property (-1050(4)(c)). Subject to a provision below (i.e., OAR 150-317-1050(4)(c)(B)), receipts from the lease or rental of tangible personal property owned by the taxpayer is sourced to Oregon if the property is located within Oregon when it is first placed into service by the lessee.   
  • Receipts from the Lease or Rental of Transportation Property (-1050(4)(c)). Receipts from the lease or rental of transportation property owned by the taxpayer are sourced to Oregon to the extent the property is used in Oregon. If the extent of the use of any transportation property within this state cannot be determined, then the property is deemed to be used wholly in the state in which the property has its principal base of operations.  

Exception for Aircraft: Multiply the receipts from the lease or rental of the aircraft by a fraction x (# of landings of aircraft in Oregon / total # of landings of aircraft).  

Motor Vehicle: A motor vehicle is deemed to be used wholly in the state in which it is registered.

  • Interest, Fees, and Penalties Imposed in Connection with Loans Secured by Real Property (-1050(4)(d)). Interest, fees, and penalties imposed in connection with loans secured by real property are sourced to Oregon if the property is located in Oregon. If the property is located in Oregon and another state, then receipts are sourced to Oregon if more than 50% of the fair market value of the real property is located in Oregon. If, however, less than 50% of the fair market value of the real property is located in Oregon, then the receipts are sourced to Oregon if the borrower is located in Oregon. Note that the determination of whether the real property securing a loan is located within this state is made as of the time the original agreement was made, and any and all subsequent substitutions of collateral are disregarded.  

  • Interest, Fees, and Penalties Imposed in Connection with Loans Not Secured by Real Property (-1050(4)(e)). 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.  
  • Net Gains from the Sale of Loans (-1050(4)(f)). Net gains from the sale of loans include income recorded under the coupon stripping rules of Internal Revenue Code section 1286.  

Net Gains from Sale of Loans Secured by Real Property. The amount of net gains (but not less than zero) from the sale of loans secured by real property is sourced to Oregon by multiplying such net gains by (the amount sourced to Oregon under OAR 150-317-1050(4)(d) / total amount of interest, fees, and penalties imposed in connection with loans secured by real property). 

Net Gains from Sale of Loans Not Secured by Real Property. The amount of net gains (but not less than zero) from the sale of loans not secured by real property is sourced to Oregon by multiplying such net gains by (the amount sourced to Oregon under OAR 150-317-1050(4)(e) / total amount of interest, fees, and penalties imposed in connection with loans not secured by real property).

  • Receipts from Fees, Interest, and Penalties Charged to Cardholders (-1050(4)(g)). Such receipts including, but not limited to, annual fees and overdraft fees are sourced to Oregon if the billing address of the cardholder is in Oregon.

  • Net Gains from the Sale of Credit Card Receivables (-1050(4)(h)). All net gains (but not less than zero) from the sale of credit card receivables are sourced to Oregon by multiplying such net gains by (the amount sourced to Oregon under OAR 150-317-1050(4)(g) / the taxpayer’s total amount of interest and fees or penalties in the nature of interest from credit card receivables and fees charged to cardholders).

  • Card Issuer’s Reimbursement Fees (-1050(4)(i)). All debit issuer’s reimbursement fees, interest, and penalties charged to debit are sourced to Oregon by multiplying such fees, interest, and penalties by (the amount sourced to Oregon under OAR 150-317-1050(4)(g) / the taxpayer’s total amount of fees, interest, and penalties charged to the debit cardholders). The same analysis is done for “debit cardholders” or “all other card issuers” by substituting “debit cardholders” or “all other card issuers,” as applicable.

  • Receipts from Merchant Discount (-1050(4)(j)). Such receipts are sourced to Oregon if the taxpayer can readily determine the location of the merchant, and the merchant is in Oregon. If the taxpayer cannot readily determine the location of the merchant, then such receipts are sourced to Oregon by multiplying such receipts by (the amount of fees, interest, and penalties charged to a credit card under OAR 150-317-1050(4)(g) / the taxpayer’s total amount of fees, interest, and penalties charged to credit cardholders). The same analysis is done for “debit cardholders” or “all other card issuers” by substituting “debit cardholders” or “all other card issuers,” as applicable.

  • Receipts from ATM Fees (-1050(4)(k)). All ATM fees that are not forwarded directly to another bank are sourced to Oregon if the cardholder’s address is in Oregon. All fees charged to a cardholder for the use at an ATM of a card issued by the taxpayer are sourced to Oregon if the cardholder’s billing address is in Oregon. All fees charged to a cardholder, other than the taxpayer’s cardholder, for the use of such card at an ATM owned or rented by the taxpayer are sourced to Oregon if the ATM is located in Oregon.

  • Loan Servicing Fees (-1050(4)(l)). Loan servicing fees derived from loans secured by real property are sourced to Oregon by multiplying such fees by (the amount sourced to Oregon under OAR 150-317-1050(4)(d) / the total amount of interest and fees or penalties in the nature of interest from loans secured by real property). Loan servicing fees derived from loans not secured by real property are sourced to Oregon by multiplying such fees by (the amount sourced to Oregon under OAR 150-317-1050(4)(e) / the total amount of interest and fees or penalties in the nature of interest from loans not secured by real property). In circumstances in which the taxpayer receives loan servicing fees for servicing either the secured or unsecured loans of another, such fees are sourced to Oregon if the borrower is located in Oregon.

  • Receipts from Services Not Otherwise Sourced Under this Rule (-1050(4)(m)). Receipts from the sale of a service not otherwise sourced under OAR 150-317-1050 are to Oregon, if and to the extent the service is delivered to a customer in Oregon.

Services Delivered to Individual Customers. In such a scenario, the state or states in which the service is delivered must be reasonably approximated. The taxpayer must first assign the receipts from a sale to the customer’s state of primary residence, or, if not possible, to the state of the customer’s billing address; provided, however, in any instance in which the taxpayer derives more than 5% of its receipts from the sale of all services from an individual customer, the taxpayer must identify the customer’s state of primary residence and assign the receipts from the service or services provided to that customer to that state.

Services Delivered to Business Customers. In such a scenario, the state or states in which the services are delivered must be reasonably approximated (unless the taxpayer is eligible to use the safe harbor). First the taxpayer must assign the receipts from the sale by assigning the receipts to the state where the contract of sale is principally managed by the customer. If the place of customer management is not reasonably determinable, then the receipts must be assigned to the customer’s place of order. Finally, if the customer’s place of order is not readily determinable, the receipts must be assigned to the customer’s billing address; provided, however, in any instance in which the taxpayer derives more than 5% of its receipts from sales of all services from a customer, the taxpayer is required to identify the state in which the contract of sale is principally managed by the customer.

Safe Harbor. A taxpayer may source its receipts from sales to a particular customer based on the customer’s billing address in any tax year in which the taxpayer engages in substantially similar service transactions with more than 250 customers (whether individual or business), and does not derive more than 5% of its receipts from the sales of all services from that customer. The rule also provides guidance to a taxpayer on how to source receipts if the professional service is sold to a related party.

  • Receipts from the Financial Institution’s Investment Assets and Activities and Trading Assets and Activities (-1050(4)(n)). Interest, dividends, net gains (but not less than zero), and other income from investment assets and activities and from trading assets and activities that are reported on the taxpayer’s financial statements, call reports, or similar reports are sourced to Oregon if it is from business conducted in Oregon. The rule continues to provide in-depth instructions on how to calculate certain receipts under this category.

  • All Other Receipts (-1050(o)). Receipts derived from property, transactions, and activities having a connection to Oregon are sourced to Oregon. Receipts derived from the sale of tangible personal property have a connection to Oregon if the tangible personal property is delivered in Oregon. Receipts derived from intangible personal property have a connection to Oregon if the intangible property is used or held for use in Oregon. A taxpayer must attach a statement to their return that describes each receipt and the property, transaction, or activity from which it is derived for any receipts to be considered “other receipts.”

We anticipate future versions of the draft rule will contain numerous examples, similar to the draft version of OAR 150-317-1040 (Sourcing Commercial Activity Other Than Sales of Tangible Personal Property), which was dozens of pages in length and contained more than 40 examples when first issued. We will be on the lookout for any developments related to this draft rule and the CAT in general.

Lastly, we should note that the DOR released additional information regarding the upcoming public hearing on the first batch of permanent rules, discussed here. The public hearing will be via conference call (phone: (541) 465-2805; PIN: 234470) on May 26, 2020, from 9:00 a.m. PST to 11:00 a.m. PST. If you wish to testify at the hearing, you must register before it begins. Registration will begin at 8:45 a.m. PST on May 26, 2020, on the conference call line.

In the meantime, if you have any questions or comments about the CAT, please do not hesitate to contact Dan Eller or Alee Soleimanpour.

Please visit Schwabe’s COVID-19 resource page for additional information.

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