United States: Oklahoma Enacts Budget Package With Tax Provisions, Including Expansion Of Sales Tax Nexus And Notice Requirements

Oklahoma Governor Mary Fallin has signed several tax measures into law as part of the budget agreement reached to bridge the state's $1.3 billion budget deficit. The legislation expands the sales and use tax nexus standard by amending the definition of "maintaining a place of business in this state." Also, out-of-state retailers or vendors that are not required to collect use tax must provide an annual statement to customers of the total sales made to the customer during the preceding calendar year. However, out-of-state retailers may participate in a compliance initiative that essentially provides tax amnesty for retailers that register with the Oklahoma Tax Commission by May 1, 2017. The statute of limitations for sales and use tax refund claims is reduced from three years to two years. Various corporate income tax credits are limited or repealed. Other legislation addresses personal income tax by requiring taxpayers to add back state and local taxes deducted for purposes of the federal income tax and eliminating the earned income tax credit refund. Also, the exemption from the gross production tax for an economically at-risk oil or gas lease is amended and limited. Finally, the Tax Commission is directed to improve tax collections by increasing the number of auditors and enhancing technology.

Sales and Use Tax

Nexus Expansion

Effective November 1, 2016, legislation, referenced as the Oklahoma Retail Protection Act of 2016, makes significant changes to the sales and use tax nexus standards.¹ The definition of "maintaining a place of business in this state" is amended and substantially expanded. First, the existing definition is amended to mean and is presumed to include: (i) utilizing or maintaining in Oklahoma, directly or by subsidiary, an office, distribution house, sales house, warehouse, or other physical place of business, whether owned or operated by the vendor or any other person, other than a common carrier acting in its capacity as such; or (ii) having agents operating in Oklahoma, whether the place of business or agent is within the state temporarily or permanently or whether the person or agent is authorized to do business within the state.² Second, "maintaining a place of business in this state" is expanded to mean and is presumed to include the presence of any person, other than a common carrier, which has substantial nexus in Oklahoma and that:

• Sells a similar line of products as the vendor and does so under the same or a similar business name;
• Uses trademarks, service marks or trade names in Oklahoma that are the same or substantially similar to those used by the vendor;
• Delivers, installs, assembles or performs maintenance services for the vendor;
• Facilitates the vendor's delivery of property to customers in Oklahoma by allowing the vendor's customers to pick up property sold by the vendor at an office, distribution facility, warehouse, storage place or similar place of business maintained by the person in Oklahoma; or
• Conducts any other activities in Oklahoma that are significantly associated with the vendor's ability to establish and maintain a market in the state.³

The above presumptions may be rebutted by demonstrating that the person's activities in Oklahoma are not significantly associated with the vendor's ability to establish and maintain a market in the state.⁴ The legislation also provides that any ruling, agreement or contract between a person and the executive branch of Oklahoma, or any other state agency or department, stating, agreeing or ruling that the person is not "maintaining a place of business in this state" or is not required to collect sales and use tax despite the presence of a warehouse, distribution center or fulfillment center that is owned or operated by the vendor or an affiliated person is null and void unless it is specifically approved by the Oklahoma legislature.⁵

Annual Notice Requirement to Customers

A new statute provides that each retailer or vendor making sales of tangible personal property from outside Oklahoma for use in the state that is not required to collect use tax must, by February 1 of each year, provide to each customer to whom tangible personal property was delivered in the state a statement of the total sales made to the customer during the preceding calendar year.⁶ The statement must contain language substantially similar to the following: "You may owe Oklahoma use tax on purchases you made from us during the previous tax year. The amount of tax you may owe is based on the total sales prices of [insert total sales price] that must be reported and paid when you file your Oklahoma income tax return unless you have already paid the tax." The statement must not contain any other information that would indicate, imply or identify the class, type, description or name of the products purchased.⁷ The retailer or vendor may provide the statement by first-class mail, email or other electronic communication.

Compliance Initiative (Amnesty) for Out-of-State Retailers

The legislation amends and revives the retailer compliance initiative (tax amnesty) that previously was available prior to July 1, 2011.⁸ For the purpose of registration, collection, and remittance of sales and use tax owed pursuant to the Oklahoma Retail Protection Act of 2016, the Tax Commission is authorized and directed to establish an initiative for outof- state retailers.⁹ The Tax Commission will not seek payment of uncollected use tax from an out-of-state retailer who registers to collect and remit applicable sales and use tax on sales made to purchasers in Oklahoma prior to registration under the initiative, provided that the retailer was not registered in the state in the 12-month period preceding November 1, 2016.¹⁰ This initiative precludes assessment of uncollected sales and use tax together with the penalty or interest for sales made during the period the retailer was not registered in Oklahoma, provided registration occurs prior to May 1, 2017.¹¹

The relief is not available to a retailer with respect to any matter for which the retailer received commencement of an audit that is currently unresolved, including any related administrative and judicial processes.¹² Also, the relief is not available for use taxes already paid or remitted to the state or taxes collected, but not remitted, by the retailer. The relief is fully effective, absent the retailer's fraud or intentional misrepresentation of a material fact, as long as the retailer continues registration and continuous collection and remittance of applicable use taxes for a period of at least 36 months.¹³ Finally, this relief is applicable only to sales and use tax due from a retailer in its capacity as a retailer and not sales and use tax due from a retailer in its capacity as a buyer.¹⁴

The existing law that provides for the Tax Commission's outreach program to improve compliance and use tax collection is amended and expanded.¹⁵ Specifically, the program is expanded beyond Internet retailers to include other out-of-state retailers maintaining a place of business in Oklahoma. The program requires the Commission to contact retailers for a review of their business activities to determine if such activities may require the registration and collection of use tax and the providing of information.

Limitation of Refund Claims

Separate legislation shortens the statute of limitations for claiming refunds of sales and use tax overpayments.¹⁶ Under existing law, taxpayers generally have three years from the date of payment to file tax refund claims.¹⁷ Effective August 26, 2016, the period for filing sales and use tax refund claims is reduced to two years from the date of payment.¹⁸

Corporate Income Tax

Railroad Modernization Credit

The corporate income tax credit that equals 50 percent of an eligible taxpayer's qualified railroad reconstruction or replacement expenditures is reduced.¹⁹ Specifically, the credit is reduced by 25 percent for any taxable year beginning on or after January 1, 2016.²⁰ This reduction does not apply to tax credits carried forward from any prior tax year.

Child Care Services Credit

Legislation provides that the corporate income tax credit for eligible expenses incurred by entities primarily engaged in the business of providing child care services is only available for tax years ending before January 1, 2016 (previously, January 1, 2017).²¹ No credit otherwise authorized may be claimed for any event, transaction, investment, expenditure or other act occurring on or after January 1, 2016.

Investment/New Jobs Credit

For tax years beginning on or after January 1, 2016, and ending on or before December 31, 2018, the total amount of the corporate income tax credit for investment/new jobs is limited to $25 million per year.²² The Tax Commission must annually calculate and publish a percentage by which the credits will be reduced so the total amount of credits does not exceed the $25 million limit.

Construction of Energy Efficient Residential Property Credit

The corporate income tax credit for the construction of energy efficient residential property (of 2,000 square feet or less) is limited to the time period beginning on or after January 1, 2006, and ending on July 1, 2016.²³ Previously, there was no sunset date for this credit. No credit otherwise authorized may be claimed for any event, transaction, investment, expenditure or other act occurring on or after July 1, 2016.

Personal Income Tax

For taxable years beginning on or after January 1, 2016, taxable income must be increased by the amount of state and local sales or income tax deducted under Internal Revenue Code (IRC) Section 164.²⁴ If the amount of the state and local taxes deduction on the federal return is limited, taxable income on the state return is increased only by the amount actually deducted after any such limitations are applied. The earned income tax credit provision also is amended.²⁵ Under existing law, if the credit exceeds the personal income tax, the excess amount is refunded to the taxpayer. The amendment limits the refund provision to tax years beginning before January 1, 2016.

Gross Production Tax

Effective July 1, 2016, the exemption from the gross production tax for an economically at-risk oil or gas lease is amended.²⁶ The exemption under current law allows the well operator or a designee to receive a refund of gross production taxes paid for production in the previous calendar year.²⁷ For production in the calendar year ending December 31, 2016, and each subsequent year, the refund must be claimed before July 1 of the year following the year of production. For production in calendar years ending on or before December 31, 2015, the refund may not be claimed until after July 1 of the year following the year of production.²⁸

Existing law provides that this exemption is limited to production from calendar years 2014 through 2020.²⁹ No refunds for the 2014 and 2015 calendar years may be claimed or paid more than 18 months after the first day of the fiscal year during which the refund is first available. For production in calendar years 2016 through 2020, no claim for refund filed on or after July 1 following the calendar year may be claimed or paid.

For oil and natural gas produced from qualifying leases in calendar years 2015 through 2020, the total amount of refunds for each calendar year may not exceed $12.5 million for all products combined.³⁰ If the amount of claims exceeds $12.5 million, the Tax Commission must determine the percentage of the refund which establishes the proportionate share of the refund which may be claimed by any taxpayer so that the maximum of the credit is not exceeded.

Enhanced Enforcement Efforts

New legislation has been enacted that directs the Tax Commission to enhance its efforts to enforce the proper reporting and payment of sales and use tax, income tax, and gross production tax.³¹ The enhancements are likely to include an increased audit staff and improved technology. According to the fiscal impact statement, the Tax Commission will spend over $4 million each year for these improved measures.³²

Commentary

Oklahoma has enacted a variety of tax laws addressing sales and use tax, corporate and personal income tax, and gross production tax to address the state's budget deficit. The Oklahoma Retail Protection Act of 2016 is the most significant legislation and substantially expands sales and use tax nexus standards. Similar to legislation enacted by other states, this legislation is designed to address lost sales and use tax revenue on sales of tangible personal property by remote sellers to residents in the state.

In 2010, Oklahoma was one of the first states to enact use tax affiliate nexus legislation and notice requirements.³³ The 2010 legislation added affiliate nexus standards by expanding the definition of "retailer" for purposes of use tax.³⁴ These existing nexus standards, which remain in effect until November 1, 2016, are based on: (i) substantial ownership;³⁵ (ii) controlled groups;³⁶ or (iii) a contract to perform installation or maintenance services.³⁷ The new nexus standards, added to the sales and use tax definition of "maintaining a place of business within the state" are much more expansive than the existing standards and no longer require an ownership relationship. As a result, out-ofstate retailers will need to consider the new provisions and determine whether they now have nexus with Oklahoma for sales and use tax purposes.

Oklahoma also enacted notice requirements for out-of-state retailers in 2010 that remain in effect.³⁸ Under the existing notice requirements, out-of-state retailers or vendors that are not required to collect Oklahoma use tax, but make sales of tangible personal property that will be used in Oklahoma, must provide visible notification on their Internet Web site or retail catalog or invoices that use tax is imposed and must be paid by the purchaser.³⁹ The new Oklahoma notice provision further requires out-of-state retailers to provide an annual statement to customers of their total sales. Note that there is no minimum threshold of sales that must be made to a customer in order for the retailer to be subject to the notice requirement. Similar notice requirements enacted by other states are controversial and have been the subject of litigation. In Direct Marketing Association v. Brohl, the taxpayer lost its challenge of the Colorado notice requirements at the U.S. Court of Appeals' Tenth Circuit, but it has appealed the decision to the U.S. Supreme Court.⁴⁰

Out-of-state retailers that have not registered with the Tax Commission should seriously consider participating in the new compliance initiative. If the retailer registers by May 1, 2017, it will not be assessed for uncollected sales and use taxes together with penalties and interest for sales made during the period that the retailer was not registered.

Taxpayers also should be aware that separate legislation is reducing the statute of limitations for filing sales and use tax refund claims from two years to three years. Because this provision takes effect on August 26, 2016, taxpayers with refund claims between two and three years old should consider filing their claims before this effective date.

Footnotes

1 H.B. 2531, Laws 2016 (enacted on May 17, 2016). Note that section 7 of this legislation repeals the following sales tax statutes: OKLA. STAT. tit. 68, §§ 1354.1 (Intent of legislature – Sales tax); 1354.2 (Out-of-state vendors – Tax on sales within state); 1354.3 (Mail order or catalog out-of-state vendors – Tax on sales within state); 1354.4 (Solicitation permit – Fee); 1354.5 (Collection of sales or use tax by certain out-of-state vendors); and 1354.6 (Collection of sales or use tax – Reciprocal agreements).

2 OKLA. STAT. tit. 68, § 1352.13.a(1). This is a sales tax definition, but it also is adopted for use tax purposes. OKLA. STAT. tit. 68, § 1401.10. Under existing law, "maintaining a place of business in this state" means and includes having or maintaining in the state, directly or by subsidiary, an office, distribution house, sales house, warehouse, or other physical place of business, or having agents operating in the state, whether the place of business or agent is within the state temporarily or permanently or whether the person or agent is authorized to do business within the state.

3 OKLA. STAT. tit. 68, § 1352.13.a(2).

4 OKLA. STAT. tit. 68, § 1352.13.b.

5 OKLA. STAT. tit. 68, § 1352.13.c.

6 H.B. 2531, adding OKLA. STAT. tit. 68, § 1406.2.A.

7 Id. The law provides that this type of information is strictly confidential.

8 H.B. 2531, amending OKLA. STAT. tit. 68, § 1407.2.

9 OKLA. STAT. tit. 68, § 1407.2.A.

10 OKLA. STAT. tit. 68, § 1407.2.B.1.

11 OKLA. STAT. tit. 68, § 1407.2.B.2.

12 OKLA. STAT. tit. 68, § 1407.2.B.3.

13 OKLA. STAT. tit. 68, § 1407.2.B.4.

14 OKLA. STAT. tit. 68, § 1407.2.B.5.

15 OKLA. STAT. tit. 68, § 1407.3.

16 H.B. 3205, Laws 2016 (enacted on June 6, 2016).

17 OKLA. STAT. tit. 68, § 227(b)(1).

18 OKLA. STAT. tit. 68, § 227(b)(2).

19 H.B. 3204, Laws 2016 (enacted on May 24, 2016), amending OKLA. STAT. tit. 68, § 2357.104.

20 Presumably, for example, a taxpayer with $200,000 in qualifying expenses historically would receive a 50 percent credit that equals $100,000. As amended, the $100,000 credit would be reduced by 25 percent to $75,000.

21 S.B. 1605, Laws 2016 (enacted on May 24, 2016), amending OKLA. STAT. tit. 68, § 2357.27.

22 S.B. 1582, Laws 2016 (enacted on May 24, 2016), amending OKLA. STAT. tit. 68, § 2357.4; Letter Ruling 16-018, Oklahoma Tax Commission, June 6, 2016.

23 S.B. 1603, Laws 2016 (enacted on May 27, 2016), amending OKLA. STAT. tit. 68, § 2357.46.

24 S.B. 1606, Laws 2016 (enacted on May 24, 2016), adding OKLA. STAT. tit. 68, § 2358.E.24.

25 S.B. 1604, Laws 2016 (enacted on May 27, 2016), amending OKLA. STAT. tit. 68, § 2357.43.

26 S.B. 1577, Laws 2016 (enacted on June 6, 2016), amending OKLA. STAT. tit. 68, § 1001.3a. Oklahoma imposes a gross production tax on asphalt, ores, oil and gas, and royalty interests. OKLA. STAT. tit. 68, § 1001. The definition of "economically at-risk oil or gas lease" is amended. The existing definition, providing that the term means any oil or gas lease operated at a net loss or at a net profit which is less than the total gross production tax remitted for such lease during the previous calendar year, only applies prior to January 1, 2015. On or after January 1, 2015, the term means any oil or gas lease with one or more producing wells with an average production volume per well of 10 barrels of oil or 60 MCF of natural gas per day or less operated at a net loss or at a net profit which is less than the total gross production tax remitted for such lease during the previous calendar year. OKLA. STAT. tit. 68, § 1001.3a.A.

27 OKLA. STAT. tit. 68, § 1001.3a.C.

28 Id.

29 OKLA. STAT. tit. 68, § 1001.3a.I.

30 OKLA. STAT. tit. 68, § 1001.3a.D.

31 S.B. 1579, Laws 2016 (enacted on May 24, 2016).

32 Fiscal Impact Statement for S.B. 1579, Oklahoma House and Senate, May 4, 2016.

33 H.B. 2359, Laws 2010.

34 OKLA. STAT. tit. 68, § 1401.9.

35 OKLA. STAT. tit. 68, § 1401.9.b. Prior to November 1, 2016, a retailer is deemed to be engaged in the business of selling tangible personal property for use in the state if (i) the retailer holds a substantial ownership interest in, or is owned in whole or substantial part by, a retailer maintaining a place of business within the state; and (ii) the retailer sells the same or a substantially similar line of products as the related Oklahoma retailer and does so under the same or a substantially similar business name, or the Oklahoma facilities or employees of the related Oklahoma retailer are used to advertise, promote or facilitate sales by the retailer to consumers. Also, a retailer is deemed to be engaged in the business of selling tangible personal property for use in the state if the retailer holds a substantial ownership interest in, or is owned in whole or substantial part by, a business that maintains a distribution house, sales house, warehouse or similar place of business in the state that delivers property sold by the retailer to consumers.

36 OKLA. STAT. tit. 68, § 1401.9.d. Prior to November 1, 2016, an out-of-state retailer is presumed to be engaged in business in Oklahoma if it is part of a controlled group of corporations that has a component member that is a retailer engaged in business in Oklahoma.

37 OKLA. STAT. tit. 68, § 1401.9.e. Prior to November 1, 2016, any retailer making sales of tangible personal property to purchasers in Oklahoma by mail, telephone, the Internet or other media that has a contractual relationship with an entity to provide and perform installation or maintenance services for the retailer's purchasers within Oklahoma is included within the definition of "retailer."

38 H.B. 2359, Laws 2010.

39 OKLA. STAT. tit. 68, § 1406.1; OKLA. ADMIN. CODE § 710:65-21-8.

40 U.S. Court of Appeals, 10th Circuit, No. 12-1175, Feb. 22, 2016. For a discussion of this case, see GT SALT Alert: Federal Court of Appeals Upholds Colorado's Sales and Use Tax Notice and Reporting Requirements. Colorado has enacted three types of notice requirements on "non-collecting retailers:" (i) sending a "transactional notice" to Colorado purchasers letting them know that they may be subject to Colorado's use tax; (ii) sending an "annual purchase summary" to Colorado purchasers who buy more than $500 in goods from the retailer; and (iii) filing an annual "customer information report" with the Colorado Department of Revenue listing their customers' names, addresses, and total amounts spent. COLO. REV. STAT. § 39-21-112(3.5); 1 COLO. CODE REGS. § 39-21-112.3.5.

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