Oregon CAT: Draft Rules Regarding the Wholesale Groceries Exclusion, the Retail Sale of Groceries Exclusion, and Property Resold Out of State
Last week, the Oregon Department of Revenue (“DOR”) issued three draft rules regarding the Oregon Commercial Activity Tax (“CAT”). The DOR may change these draft rules before it issues them as temporary rules, which we anticipate to be in February 2020. Nevertheless, this update describes each of those draft rules.
Newly Issued Draft Rules
In this draft rule, the DOR described the requirements that must be met in order for receipts from wholesale sales of food items to be exempt from computation of the CAT.
The rule provides that receipts realized from the wholesale sale of groceries may be exempt from the computation of the CAT if the sales transaction meets the following requirements:
- The transaction is a wholesale sale;
- The items sold in the transaction are food or food products that meet the definition of groceries, in a form that may be resold to the final consumer for home consumption without processing;
- The sale is made to a purchaser for the purpose of reselling the groceries to the final consumer for home consumption; and
- The wholesale seller obtains written verification from the purchaser that the purchased groceries will be resold without processing, by a store that typically sells groceries to the final consumer for home consumption.
To prove that the aforementioned requirements were met, a wholesale seller must retain sufficient documentation to serve as verification. The rule provides that any document may serve as such verification, so long as it includes:
- The purchaser’s name and address;
- The date of purchase, the item(s) purchased, and the amount purchased; and
- Verification from the purchaser of the amount of the purchase that will be resold, without processing, to the final consumer for home consumption.
The rule then goes on to provide six examples. Finally, the rule provides a safe harbor for wholesale sales to stores authorized as retail food stores, or those qualifying as retail food stores for purposes of the supplemental nutrition assistance program (“SNAP”).
In this draft rule, the DOR described scenarios under which retail sales of food may be exempt from the computation of the CAT. To be exempt from the computation of the CAT, the retail sale of groceries must only consist of groceries that are sold at retail to the final consumer for home consumption.
The rule provides that the determination as to whether an item is sold to a consumer for home consumption is based on the type of items sold and circumstances of the sale. In making such a determination, the DOR will consider the following factors:
- Whether the store’s average gross receipts from the sale of hot food are greater than the average gross receipts from the sale of groceries;
- Whether the store offers on-site dining facilities, and if so, whether the percentage of total floor space allotted to dining facilities for customers is greater than the percentage of floor space dedicated to shelves displaying groceries available to customers for retail sale;
- Whether the store advertises itself as being engaged in the sale of hot food or ready-to-eat food; and
- Any other relevant facts and circumstances.
The rule goes on to provide two examples, as well as a safe harbor for stores authorized as retail food stores, or those qualifying as retail food stores for purposes of the SNAP.
In this draft rule, the DOR described requirements that must be met in order for receipts from sales to a wholesaler to be exempt from the computation of the CAT.
The rule first provides that a wholesaler purchasing property for the purpose of resale may, at the time the purchase is made, provide the seller of property with an out-of-state resale certificate, which declares the amount of purchased property the wholesaler will resell out of Oregon. The rule then provides that any document provided at the time of sale may suffice as an out-of-state resale certificate, so long as it includes:
- The wholesaler’s legal name and Oregon address;
- The wholesaler’s federal tax identification number;
- The date of the purchase;
- The total amount of purchased property;
- The purchase price paid by the wholesaler;
- The dollar amount of purchased property that the wholesaler will resell outside of Oregon; and
- The signature of the wholesaler, their authorized representative, or employee certifying that the person is a wholesaler.
Based on the facts available to the wholesaler at the time of purchase from the seller, the wholesaler must also determine the amount of purchased property that will be sold outside of Oregon. If the wholesaler cannot determine the amount of purchased property that will be sold outside of Oregon, the rule allows the wholesaler to use an “approximation ratio” to estimate how much of the purchased property will be sold in Oregon and out of state.
The approximation ratio is the amount of commercial activity the wholesaler:
realized from sales to Oregon customers in the prior year
realized from all sales during the prior year
In calculating the ratio above, if a wholesaler has locations in multiple states, the wholesaler only includes the commercial activity realized from property delivered from its Oregon locations. Sales of property delivered from the wholesaler’s locations outside of Oregon are not included in the calculation. After computing the approximation ratio, the wholesaler must multiply the ratio against the purchase price of goods it purchased from the seller. The wholesaler must then include the product of that calculation as commercial activity for purposes of the CAT. The rule provides an example illustrating the calculation.
As an alternative to the above computation, this rule permits the wholesaler to use an alternative method of approximation if the wholesaler does not believe the approximation ratio fairly and accurately approximates its in-state and out-of-state sales. If a wholesaler chooses to use an alternative method, the wholesaler must document the method, and include a complete explanation of that method, how it was determined, and why the approximation ratio is not a fair approximation of the wholesaler’s sales. Once an alternative method is used, the wholesaler must continue to use the alternative method until it no longer accurately approximates in-state and out-of-state sales.
Finally, if the DOR audits the wholesaler and it determines that the wholesaler’s method of approximation (approximation ratio or alternative method) does not fairly and accurately approximate its in-state and out-of-state sales, then the wholesaler must immediately discontinue use of that method.