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Tax Advisory: Oklahoma Budget Issues Impact Tax Reporting

The state of Oklahoma has budget issues.   The Oklahoma Tax Commission has engaged extra assistance in reviewing state sales tax reports to find unpaid taxes.  In addition, it can offer a penalty free opportunity to taxpayers with outstanding tax balances.

The auditors are reviewing property sales reported on income tax returns Form 4797 and Schedule D.   Using this information, the auditors are requesting sales tax forms, sales contracts and purchase price allocation related to the sales.  Sales of oil and gas properties and/or sales of a business reported as an asset sale are being closely reviewed. We suggest a review of your last five income tax returns.

OTC order 99-03-25-012 addressed the allocation of the sales price between different types of assets.  The seller allocated 21% of the purchase price on the sale of oil and gas properties to the equipment, collected the sales tax from the purchaser and paid it to the state.  The purchaser allocated the purchase price by its current value or approximately 10% of the purchase price and requested a partial refund from the state.  The commission ruled the allocation was not supported by an outside appraisal and the claim was denied.  (The commission also noted an allocation using net book value is not relevant.)

In the order, “OTC AUDIT SUPERVISOR, testified that the 21% Rule is used where there is not adequate other documentation to support a different value, including an allocation of the purchase price to tangible personal property in the sale and purchase agreement, an independent third party appraisal or information from the vendor indicating how the transaction was booked. …He further stated that there are no Tax Commission rules or regulations requiring an appraisal or adopting the 21% Rule.”  CAVEAT: This decision was NOT deemed precedential by the Commission.

In addition, the Oklahoma Tax Commission recently adopted the Administrative Law Judge’s (ALJ) recommendation for the computation of income on the sale of an S Corporation.  Though stock was sold, the transaction was reported as an asset sale.  The Taxpayer’s 2013 return was adjusted to include capital gains in apportionable income. The taxpayer failed to provide a factual and/or legal basis for treating goodwill generated from the sale of stock as a nonunitary asset or provide an alternative apportionment methodology that would be more effective than the standard three-factor formula.

Amnesty Program: H.B. 2380 authorized the Tax Commission to establish a voluntary disclosure initiative to encourage payment of unpaid mixed beverage tax, gasoline and diesel tax, gross production and petroleum excise tax, sales and use tax, income tax and withholding tax due to the state. Interest, penalties and collection fees will be waived upon collection.  This amnesty program is available from September 1 to November 30, 2017.  This is available to all taxpayers who have not been contacted by the Oklahoma Tax Commission or have other outstanding balances.

This summer could be busy for taxpayers.  Auditors versus Amnesty is an interesting combination and mutually excludable.    We suggest you review prior returns to determine your potential liability and options under the amnesty program.