No Nine Lives for the Oregon CAT on Insurers
Oregon S.B. 164 has repealed the imposition of the Oregon Corporate Activity Tax (CAT) on most insurers, effective for tax years beginning on and after January 1, 2021. Specifically, the legislation exempts foreign and alien insurance companies subject to the Oregon retaliatory tax.
During the 2019 legislative session, Oregon signed H.B. 3427 into law, thereby creating the Fund for Student Success, a special purpose fund for education that is separate and distinct from the state’s general fund. In addition, H.B. 3427 implemented the CAT as a source of revenue for the Fund for Student Success. The CAT is a modified gross receipts tax imposed on all types of business entities doing business in this state. The CAT is imposed on taxable Oregon commercial activity in excess of $1 million at a rate of 0.57 percent plus $250.
Due to the hurried nature of developing a brand new tax regime, the CAT was destined for future revisions. Oregon made a series of technical and policy clarifications to the statutes governing the CAT in H.B. 2164, Laws 2019 and H.B. 4202, Laws 2020. The current legislation was developed to provide further technical revisions, including a corrective measure for insurance companies. Although Oregon domestic insurers were fully supportive of the Fund for Student Success, they had also conceptually agreed with legislative leadership and the Oregon Bureau of Insurance that the CAT should not create additional retaliatory taxes in other states. The Oregon Department of Revenue and Oregon domiciled insurance companies collaborated on this technical correction, which was supported by the American Property Casualty Insurance Association.
The Insurance Issue
Unfortunately, the final language in H.B. 3427 failed to prevent this unintended retaliatory tax consequence. As a result, the CAT was applicable to all insurers doing business in Oregon, and Oregon domestic insurers are now required to include a CAT component in the retaliatory tax computation for every other state they do business in, which effectively requires them to pay a CAT equivalent to the other states. Further, most foreign and alien insurance companies doing business in Oregon are on the Oregon basis for purposes of the Oregon retaliatory tax, and as a result of adding the CAT to the Oregon basis, this merely shifts revenue to the state from retaliatory tax to the CAT (but has net zero impact to the state). In addition, there is a statutory provision that requires a transfer from the Fund for Student Success to the General Fund to backfill any decline in General Fund revenue due to the CAT. As such, the retaliatory tax shift for foreign and alien insurance companies effectively moves the CAT revenue from these companies out of the Fund for Student Success to the General Fund.
The Fix & Additional Concerns
As mentioned above, S.B. 164 amends the CAT provisions in Oregon Revised Statutes Section 317A.100(4)(h) to exempt foreign and alien insurance companies subject to the Oregon retaliatory tax. This language potentially results in some insurers remaining subject to the CAT:
- Oregon domestic insurance companies
- Surplus lines insurance companies doing business in Oregon
- Foreign and alien insurance companies not licensed in Oregon, but subject to the CAT via unitary combination with noninsurance affiliates
Furthermore, since the CAT was implemented as of January 1, 2020, and the S.B. 164 exemption begins as of January 1, 2021, there is a full year of CAT imposition for all insurers.
Hopefully, the Oregon legislature or Department of Revenue will provide some additional guidance and perhaps even retroactive applicability to eliminate or clarify some or all of these grey areas.
To learn more about the Oregon CAT and the new exemption for insurance companies and how they could affect your organization, or for assistance with any of these new provisions, contact your BKD Trusted Advisor™ or submit the Contact Us form below.