During the hearing, commenters raised a number of concerns over the rules, many of which focused on the rule interpreting the CAT Subtraction.¹ Commenters asserted that the CAT Subtraction rule goes beyond the statutory authority, which provides only that the CAT Subtraction shall be apportioned to Oregon in the manner required under Oregon’s corporate income tax statute.² In contrast, the rule apportions the CAT Subtraction using a “commercial activity ratio”, computed by dividing taxable commercial activity sourced to Oregon by commercial activity everywhere (plus exclusions from commercial activity).³ Commenters noted that the sourcing method for the CAT Subtraction in the rule not only conflicts with the statute, but also that the sourcing method set forth in the rule could create significant compliance issues, because taxpayers would be required to calculate separate apportionment factors for corporate income tax and CAT Subtraction purposes. (However, it should be noted that some taxpayers may benefit from the sourcing method under the rule, to the extent that the statutory method—which includes a throwback rule—results in higher apportionment). Commenters also noted that under the rule, the employee cost component of the CAT Subtraction favors corporations by excluding employee costs paid by partnerships (despite the lack of language in the statute excluding partnership employee costs from the CAT Subtraction).⁴

Finally, commenters noted that the rule addressing unitary groups provided insufficient guidance on the inclusion of foreign entities in a CAT unitary group, even though the CAT applies on a worldwide, rather than a water’s edge, basis.⁵ The requirement to include all foreign entities, even those without Oregon commercial activity (unless certain requirements are met), in the CAT unitary return will create a significant compliance burden for many taxpayers.

The rules will become final only after the Department holds a public meeting to adopt the rules, making available any public comments received. While taxpayers look forward to receiving clarification regarding some of the ambiguities found in the temporary rules, they should consider other opportunities and filing positions in advance of filing their first CAT return (due April 15, 2021), such as:

• Whether certain arrangements, such as cost-plus contracts or conduit payments, qualify for the agency exclusion;
• Excluding discounts, rebates, and other reductions to purchase price in computing commercial activity;
• Adopting a broad interpretation of the exclusions for interest and capital assets;
• Whether the alternative apportionment rules can be used to include certain expenses (such as interest and depreciation) not included in the deduction for cost of goods sold; and,
• Sourcing positions for determining Oregon commercial activity, particularly for services under Oregon’s “reasonable approximation” market sourcing rules.

If you have any questions about the temporary rules or how the Oregon CAT may impact your company generally, please contact one of the authors or the Reed Smith State Tax attorney with whom you typically work.

1. See Or. Admin. R. section150-317-1200.
2. Or. Rev. Stat. section 317A.
3. Id.
4. Or. Admin. R. section 150-317-1220(1)(a)(A).
5. Or. Admin. R. section 150-317-1025; see also Or. Rev. Stat. section 317A.100(19).