Controversial Oregon Draft Rules May Restrict CAT Exclusion for Grocery Sales

The Oregon Department of Revenue published two draft rules with major implications for food and grocery wholesalers and retailers. The draft rules are controversial because they appear to restrict the exclusion for the wholesale of groceries beyond what the statute provides, with regard to Oregon’s new corporate activity tax (CAT).

The rule requires that an item be sold in the form intended for sale to the final retail customer without further processing, which significantly narrows the scope of the exemption. It also potentially imposes CAT at every step of grocery sales—from farm production throughout the processing chain—until the food in final-packaged form enters the distribution process.


Here are some of the key terms defined by the legislation.


Oregon Laws 2019, Chapter 122, Section 58(1)(b)(EE), as amended by Oregon Laws 2019, Chapter 579, Section 50, excludes “receipts from the wholesale or retail sale of groceries” from “commercial activity” subject to CAT. Section 58(8) defines groceries as “food as defined in 7 US Code 2012(k).”


For purposes of the federal Supplemental Nutrition Assistance Program (SNAP) 7 US Code 2012(k) defines food as, “any food or food product for home consumption except alcoholic beverages, tobacco, hot foods, or hot food products ready for immediate consumption,” with exceptions for hot food products sold to certain institutions or by certain nonprofit organizations.

This definition of food refers to the nature of the item itself—for consumption—when it’s intended for home consumption.

Wholesale Sale of Groceries

Temporary Rule 150-317-1140, dated January 21, 2020, and published in draft form, restricts the application of the exclusion for wholesale sales of groceries. To qualify as an excluded wholesale sale, a sold item must meet the federal definition in 7 US Code 2012(k) as well as several additional requirements.

Additional Requirements

  1. The product must be sold in a form that may be resold to the final consumer for home consumption without processing.
  2. The sale must be made to a purchaser for the purpose of reselling the groceries to the final consumer for home consumption.
  3. The wholesaler must obtain written verification from the purchaser that the groceries will be sold:
    • Without processing
    • By a store that typically sells groceries to the final consumer for home consumption

The seller isn’t required to obtain separate verifications from purchasers that are qualified SNAP retailers with current permits to accept SNAP benefits, or when a purchase is made for the purpose of resale of groceries at a store authorized as a retail food store.

Exclusion Restriction

The draft rule appears to restrict the exclusion significantly in at least two ways:

  1. Foods that meet the 7 US Code 2012(k) definition and are sold to a processor won’t qualify for the exclusion. For example, flour sold to a bakery, even if the bakery sells exclusively to retail customers for home consumption, wouldn’t qualify under this definition. Fruit sold to a fruit packer wouldn’t qualify; nor would many other common foods typically considered food.
  2. The exclusion is restricted to sales from stores that typically sell groceries to the final consumer. If the food is sold by a store that doesn’t typically sell such items, the wholesale sale wouldn’t qualify for the exclusion—regardless of whether the food is sold for home consumption.
Home Consumption

To determine whether a store typically sells groceries for home consumption, draft proposed Rule 150-317-1150, dated January 23, 2020, provides that if a store’s receipts from the sales of hot food or hot prepared food comprise 80% or more of the store’s total food sales, the store doesn’t typically sell groceries for home consumption. Wholesale sales of groceries to such a store, even if the groceries meet the other requirements and are sold for home consumption, wouldn’t qualify for the exception.

Retail Sale of Groceries

Temporary Rule 150-317-1150, dated January 23, 2020, and published in draft form, bases the exclusion for retail sale of groceries on whether the seller typically expects that the sale of food from a specific store is purchased for home consumption.

This is a facts-and-circumstances test. The department will consider four things:

  1. Whether average gross receipts from hot food are greater than average gross receipts from groceries
  2. Whether the store offers on-site dining facilities
  3. Whether the store advertises itself as a seller of hot food
  4. Any other relevant facts and circumstances

The rule provides a safe harbor for stores with a valid permit as a SNAP-qualified retail food store. Sales of groceries by these stores are excluded from commercial activity, as are sales of groceries by a store that meets the requirements to qualify as a retail food store under 7 US Code 2012(o), even if the store doesn’t hold a SNAP permit.

Bright-Line Test

The draft rule also imposes a bright-line test: If a store’s receipts from hot food or hot prepared food constitute 80% or more of its total food sales, it may not exclude its sales of groceries from commercial activity—even if they would otherwise qualify as excluded sales.

To meet the definition of a retail food store, 7 US Code 2012(o) requires that a store offers at least seven foods for sale in each of four defined categories. It doesn’t require that a specific volume of total food sales be from these foods, only that the foods be continuously offered.

Potential Contradictions

The draft rule, therefore, may contain a contradiction because a store may hold a SNAP permit or qualify as a retail food store under the relevant federal law and meet the safe harbor, but it may violate the bright-line test if the volume of these sales doesn’t exceed 20% of total food sales. It appears such a retailer could make sales to customers who pay with SNAP benefits, but couldn’t exclude the sales from commercial activity.

Additionally, this bright-line test appears to exceed the scope of the statute, which refers to the nature of the item sold but doesn’t impose volume-specific restrictions on sellers.

Next Steps

The rules are currently in draft form and aren’t final. Taxpayers may submit comments to the Oregon Department of Revenue through the email address

House Bill (HB) 4009 will be presented to the Oregon legislature during the session scheduled to begin February 3, 2020. HB 4009 will be introduced to modify administrative and other provisions of the CAT. This short session is scheduled to end March 8, 2020, so it will be important to promptly express concerns and comments to legislators.

Taxpayers with ambiguous or uncertain transactions can ask the department to provide its opinion on how it would view a specific fact pattern. These construe requests may be made anonymously, and the department’s response isn’t binding on the taxpayer or the department.

We’re Here to Help

To learn more about the Oregon Department of Revenue’s draft rules and potential implications for food and grocery wholesalers and retailers, contact your Moss Adams professional.

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