Oklahoma tax laws & practices: Pro-business reforms needed

January 23, 2019

By Brent Watson, CPA

The Oklahoma State Chamber is supporting four legislative proposals, all dealing with sales taxes, that will make Oklahoma a more business-friendly state. The support of tax professionals can aid in the passage of these bills.

1. SB 662 – Sales Taxes – Exemption Certificates Good Faith Provision Protection for Sellers: Current Oklahoma Tax Commission (OTC) regulations concerning sellers’ responsibilities for acceptance of exemption certificates contain outdated language that places undue hardship and exposure upon sellers. These regulations require buyers to certify on the face of the invoice that the buyer is purchasing the items for the specific exempt purpose and to provide acceptable exemption documentation. This is required for purchases claimed to be exempt because they are purchases for resale, agricultural usage or animals for resale. However, these requirements are not practical. Many purchases are made electronically by multistate companies that do not face such requirements elsewhere.

Additionally, auditors are imposing assessments of tax on sellers on an unreasonable basis. For example, if a seller uses the parent company’s (the company acting as a paymaster to pay bills for itself and subsidiary LLCs that neither the seller nor most of the business world even know exists), name in an AP system instead of a subsidiary to which a sale was made, auditors say the exemption certificate is not legitimate and assess tax. In one case, the facility to which items were sold and delivered had to have a separate LLC in order to qualify for a manufacturer’s sales tax exemption permit (MSEP). Although the purchaser properly provided the MSEP with the LLC’s name to the seller, the exemption was still denied.

The good faith acceptance standards of the laws dealing with exemption certificates need to be strengthened.

 

Suggested reform: The Oklahoma law (68 O.S. Section 1361) that governs exemption certificate documentation should be amended for clarification because current requirements appear to exceed statutory authority. Specific recommendations include:

  • Eliminate the requirement that purchasers must certify on the face of invoices that the items purchased are used in an exempt manner;
  • Eliminate the requirement that the certificate must be supplied to the taxpayer (vendor) within 90 days of the sale. In the event of an audit, if a certificate is found to be less than satisfactory, the taxpayer should be allowed 60 days to obtain a corrected certificate (following Texas law and practice in this regard);
  • The good faith doctrine should be clarified and strengthened; and
  • Add a section stating the certificate will not be disallowed because of a minor defect when the intention of the certificate, including the identity of the purchaser/issuer, the identity of the vendor and the basis of the exemption is clear.

2. SB 680 – Statute of Limitations (SOL) Restoration: The legislature enacted a law to limit the SOL for refunds to two years, while the SOL for underpayments is three years. This is facially unfair to businesses.

Suggested reform: The SOL should be restored to the law as it had always previously been, with the SOL period to be equalized for credits and assessments. No other state has such an unfair arrangement. Kansas enacted a similar unequal treatment a few years ago, but pressure from the business community caused this law to be rescinded in short order.

3. SB 680 – Interest Rate Reform: An interest rate of 15 percent is charged against taxpayers for underpayments, while no interest is paid for overpaid taxes. This high penalty rate is the second highest in the nation. It was implemented in the 1980s when inflation rates were as high as 20 percent This is a heavy handed additional penalty that can be used to hammer taxpayers into submission to accept aggressively assessed taxes when taxpayers settle audits in exchange for waiver of penalties.

Suggested reform: Reduce the interest rate for underpaid taxes to a rate that is based on the prime rate (LIBOR) plus 3 percent. This is similar to laws in many other states. Implement an interest rate for overpaid tax to be equal to the prime rate. Such tax shall be payable on all overpayment claims that are not paid within 120 days of the filing date of the claim with the OTC.

4. SB 652 – Sales Taxes Provision to Exempt Casual Sales of Business Assets: Oklahoma sales tax is levied on all sales not otherwise exempt. No exemption is provided for casual or occasional sales, except for certain transfers of property in corporate and partnership organizations, re-organizations and liquidations. Similarly, the state’s use tax provides no exemption for occasional, isolated or casual sales.

This burdens businesses that sell or purchase assets and poses special problems for sellers of oil and gas leases. These properties are sold as units, meaning the sales price covers the sale of surface equipment, minerals to be extracted and downhole equipment, some of which is considered to be tangible personal property (rods, tubing, downhole pumps, etc.), and some of which (casing) should be considered to be real property (not taxable). In 1988, the OTC suggested to a taxpayer in a letter (not an official letter ruling) that the taxpayer could report tax using a 21 percent allocation of the total purchase price as the value of personal property, but no legal authority exists for this or any other safe harbor allocation.

Suggested reform: A provision of a general occasional sale exemption would be desirable to eliminate this antibusiness tax. If such an exemption is s not provided, the provision of a safe harbor by which the seller has the option of valuing the tangible personal property included in the sale of developed oil and gas leases as either (1) 10 percent of the value of developed properties or (2) the determination of the fair market value of such property based on some other reasonable method.

The OSCPA will keep you up-to-date on efforts to make state tax laws and practices more probusiness.