Idaho blocks application of Oregon's CAT

Idaho enacted a law to prevent some Idaho based businesses from being subject to the Oregon Corporate Activity Tax (CAT).

What does the law prevent?

The Idaho law states that no out-of-state taxing entity can tax an Idaho business for conducting sales or other business in Idaho between an Idaho business and a nonresident physically present in Idaho.

What is Idaho's reasoning in enacting the law?

The intent of the Idaho legislature was to protect citizens of Idaho from out-of-state taxing entities. The immediate focus is the imposition of the Oregon CAT. However, it also covers other states that pass or are considering passing similar taxes on businesses not found inside their borders.

According to Idaho, Oregon has taken the position that the CAT can be imposed on an Idaho business selling an item inside Idaho if the purchaser is an Oregon resident physically present in Idaho during the sale. 

Idaho states that this extension of the CAT is an unwarranted extension of the holding in South Dakota v. Wayfair and that it violates the requirements of the Commerce Clause and the Due Process Clause of the United States Constitution.

In Wayfair, the Court held that a seller's physical presence in a taxing state is not essential to establish a substantial nexus between an out-of-state seller and a state attempting to impose a sales tax on the seller. The Court cautioned that the ruling applied only to the substantial nexus requirement.

What is the Oregon CAT?

Oregon enacted the CAT in 2019 and began imposing it in 2020. The CAT is imposed on each person with Oregon taxable commercial activity for the privilege of doing business in Oregon. While commercial activity includes most business receipts, there are exclusions for some activities and commercial activity threshold amounts.

Further, the CAT can only be imposed on persons that have substantial nexus with Oregon.

What is substantial nexus under CAT?

Substantial nexus with Oregon does not require a person to have a physical presence in Oregon.  It exists where a person regularly takes advantage of Oregon’s economy to realize commercial activity for the person.

Substantial nexus is established through the significant economic presence of the person in the state. In deciding if a person has significant economic presence with Oregon, the state may consider if the person: 

• maintains continuous and systematic contacts with Oregon’s economy or market;
• conducts deliberate marketing to, or solicitation of, Oregon customers;
• files or is required to file reports or returns with Oregon regulatory bodies;
• realizes significant gross receipts attributable to customers in Oregon;
• realizes significant gross receipts attributable to the use of the person’s intangible property in Oregon; or
• receives benefits provided by the state.

How does the new law protect Idaho Residents?

The Idaho law says that any attempt to tax an Idaho business violates the United States Constitution and will not be enforced in the state. While the law protects taxpayers from actions in Idaho, it does not prevent Oregon from trying to collect the tax.

The likely result of the Idaho law will be litigation in the federal courts when Oregon tries to collect from an Idaho based person.