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Focus on State & Local Taxation: New Oklahoma Tax Enacted

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Recently, the state of Oklahoma enacted a business activity tax (BAT) that will be in effect for tax years beginning in 2010, 2011, and 2012. In conjunction with the new BAT, Oklahoma has put a moratorium on their currently imposed franchise tax.
December 16, 2010

Recently, the state of Oklahoma enacted a business activity tax (BAT) that will be in effect for tax years beginning in 2010, 2011, and 2012. In conjunction with the new BAT, Oklahoma has put a moratorium on their currently imposed franchise tax.

Why has Oklahoma enacted the new BAT?

The enactment of the Oklahoma BAT was a reaction to the Oklahoma Supreme Court’s September 2009 ruling in the Southwestern Bell Telephone Co. v. Oklahoma State Board of Equalization case, which extended the ad valorem tax to additional intangible property. For many taxpayers, this ruling results in a potentially large tax increase. In an effort to create time to analyze and react to the ruling, Oklahoma has temporarily created the BAT, which is intended to be in lieu of ad valorem taxes on intangible personal property.

Who is subject to the Oklahoma BAT?

All persons doing business in Oklahoma, except public service corporations, air carriers and railroads, are subject to the BAT. Entities subject to the BAT include, but are not limited to, natural persons, partnerships, limited liability companies, trusts, estates, and corporations.

The following “economic nexus” standards will be used when determining whether or not the “doing business” definition is met:

  • The entity has property in Oklahoma with an aggregate value of at least $50,000 The entity has annual payroll in Oklahoma of at least $50,000
  • The entity has annual sales in Oklahoma of at least $500,000
  • The entity has 25% of either property, payroll, or Sales in Oklahoma The entity is domiciled in Oklahoma
  • The entity otherwise has nexus under the US Constitution
  • The entity owns or uses capital in the state of

Oklahoma How is the BAT calculated?

The BAT has two components: a flat tax of $25 and a 1% tax on the net revenue allocated or apportioned to Oklahoma. For the 2010, 2011, and 2012 years, the 1% tax on net revenue is equal to the franchise tax liability for the tax period ending December 31, 2009.

For newly taxable entities (entities never subject to Oklahoma franchise tax), the 1% tax on net revenue is not applicable. As the net revenue calculation is not applicable to the calculation of the actual BAT, it is only necessary for the additional required information report, it is discussed below.

When is the first BAT return due?

For individuals, the BAT is due with their annual income tax returns (calendar year taxpayer returns will be due on April 15, 2011). For all other entities, the BAT is due July 1, following the close of the tax year, with no penalties imposed if paid before September 15 (first report due in 2011).

Other Observations:

  • Whether or not an entity is subject to the Oklahoma BAT has no correlation to Oklahoma corporate income tax. There are also differences regarding nexus standards and apportionment among the different types of tax.
  • In addition to creating a new tax, the imposition of the BAT also contains a caveat requiring taxpayers subject to BAT to file an information report. The report requires, among other things, declaration of Oklahoma net revenue, current officers, and activity classification. Net revenue is defined as total revenue less all ordinary trade or business expenses other than interest, income taxes, depreciation and amortization. Total revenue includes all revenue included in a Federal tax return, excluding interest, dividends and distributions received from corporations, distributive or proportionate share of total receipts and income from pass-through entities, real estate rentals, royalty interests or working interests in mineral rights, net capital gains and employee compensation. Net revenue is apportioned using a 3 factor formula, weighted in the following manner – 80% total revenue, 10% property, and 10% payroll.
  • A nonrefundable credit against Oklahoma income tax is allowed for the $25 fee.
  • The BAT is currently scheduled to expire and, if not updated, will not apply to tax years beginning after December 31, 2012.
  • The BAT is in addition to the Oklahoma corporate income tax and the privilege tax of financial institutions.

You can read the full text of the bill here.

 

Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.

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