Schwabe, Williamson and Wyatt attorney Dan Eller assists clients with tax and business law issues in both transactions and controversies. The Business Tribune asked him how he sees the coming Corporate Activity Tax (CAT).
Business Tribune: Is this closer to a sales tax on consumers, or Measure 97?
Dan Eller: Although the CAT is different in many respects from both a sales tax and the tax contemplated by Measure 97, the CAT is more like the Measure 97 tax.
BT: Do you know how they came up with the rate of 0.57%?
Eller: My understanding is that the rate was settled on after the Legislature studied the anticipated revenue impact of the rate and consulted with stakeholders.
BT: Do you believe this will happen: The CAT is in addition to the state's current corporate income tax?
Eller: Under the terms of the governing law, revenue from the CAT is to be transferred to the Fund for Student Success for use in funding education spending. Yes, it is true the CAT is a new tax that is in addition to all of the other taxes in the state of Oregon. The law provides the revenue raised by the CAT will fund the Fund for Student Success. That being said, I have heard those who speculate future legislatures may pass new legislation around the Fund for Student Success or how the General Fund is used that could affect the intent of the CAT's revenue collection. Time will tell.
BT: Any idea of how it has fared in other states such as Ohio?
Eller: I have not tracked how those taxes have fared in the same detail I have been studying the CAT. I know all new taxes, such as those in Ohio and Texas, usually lead to a fair amount of activity in the practitioner community, at the agency level, in the state legislatures, and, quite frequently, in the courts. For example, I read an article this week indicating the NBA's Cleveland Cavaliers organization is in a dispute with Ohio regarding how "gross receipts" will be defined for purposes of that state's tax.
BT: Who is on the front line in caring about this tax right now? CPAs? In-house accountants at firms? CEOs?
Eller: Given the CAT is so new, the frontline is a busy place. This is especially true as we head into the short session of the Oregon Legislature. With the prospects of one or more "technical fix" bills pending, legislators, taxpayers, and practitioners are involved daily in discussions around open CAT issues, as well as rethinking issues that are settled by the current version of the CAT, but settled in a manner one or more constituent group finds in need of change. Couple all of that with the Department of Revenue's active rulemaking around the CAT, and this a very busy time for the CAT.
BT: Should consumers expect prices to go up? Of what?
Eller: Yes. I sometimes hear the notion that taxes on corporations have little impact on the average Oregon consumer, either because the corporations at-issue are located outside of Oregon or because corporations are believed to be able to absorb new taxes without changing prices those corporations charge for goods and services. Here, however, the "C" in "CAT" may read "Corporate" in the terms of the governing law, but the CAT applies to most taxpayers in the State, from partnerships to sole proprietorships — your so-called "mom and pop" businesses. Moreover, I have spoken with Oregon business owners who have estimated the impact of the CAT on their business operations to be well in excess of the .57% rate. That is due to the "stacking" that occurs with the CAT. For example, one construction company executive estimates the cost of one input to construction could see a 2.5% price increase. That executive noted price increases such as those would need to be factored in going forward. That will mean a rise in consumer prices.
BT: How do you see this as a political solution?
Eller: The CAT is a creature of statute. We must look first to the Oregon Legislature, an inherently political body. From there, we will be looking to and working with the Department of Revenue in its rulemaking process. Although not necessarily a "political" agency, rulemaking has the effect of setting tax policy. Our clients are asking us how they can interact with the Legislature and how their voices can be heard in the rulemaking process. I expect the law and its rules to continue to evolve in the years to come.
BT: Are there any other points that jump out to you?
Eller: I am looking forward to the next few months. Many issues are sitting out there, and the tax practitioner and taxpayer communities are looking for more guidance. Although too numerous to list, I would pick three for now. First, many industries — chief among those the real estate and construction industry — enter into contracts that take months if not years to complete. Many of those contracts have set prices and do not contemplate the CAT. Some have lobbied for "grandfathering" those contracts so they would be excluded from the CAT. Second, the CAT excludes certain payments made in the agency context. What is meant by "agency" for purposes of the CAT remains unsettled. Finally, the Department of Revenue has regularly stated the CAT may be passed through to consumers but has cautioned that then a CAT would be charged on the passed-through CAT. The Department's pronouncements in this area should not be confused with a statement of law that passing through the CAT would always be permissible, such as in the case of an existing contract between two or more parties. And those are only three issues. With more time, we could discuss dozens more.
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