Maintaining Oklahoma tax incentives after COVID-19
As businesses look to reopen and recover from the COVID-19 pandemic, they should be attentive to Oklahoma tax incentives previously awarded to them to ensure all requirements are met to continue to avail themselves of these incentives. To spur economic growth in the state, there are statutory provisions that provide for tax deductions, exemptions, credits, payment incentives, or other tax preferences for companies that relocate to the state, increase wages or hire new employees. Some of the statutory provisions creating these incentives specifically provide that the entity will no longer qualify for the incentives if the company experiences a decrease in payroll or number of employees.
Oklahoma Quality Jobs Program Act
The Oklahoma Quality Jobs Program Act, and related programs, provides for incentive payments based on a percentage of new payrolls for up to 10 years. To qualify, companies must achieve an average wage threshold and $2.5 million in new annual payrolls within three years of the date the company begins accruing benefits. Some companies may be in danger of a drop in their average annualized wages or annual payrolls.
The Quality Jobs Program Act and rules of the Oklahoma Tax Commission provide that the incentive payments will cease if a company’s gross payroll does not meet the required amounts within three years of the start date. The incentive payments may also be suspended if the average annualized wages fall below the statutory criteria.
Delinquent filings of payment of taxes
Companies in the program should also ensure that they do not become delinquent in the payment of their state taxes or filing of any tax returns during this hectic time. The Tax Commission rules provide that no incentive payments will be made if a qualified establishment is delinquent in the payment of any state tax or the filing of any state tax return.
Property tax exemption
The Oklahoma Constitution provides a property tax exemption for a period of five years for new, expanded or acquired manufacturing facilities of a “qualifying manufacturing concerns.” In order to continue to continue to qualify for the exemption, the tax code requires businesses to maintain or exceed the base payroll amount established for the calendar year its assets were first placed in service.
A failure to maintain or exceed the base payroll amount for any reason will disqualify the establishment for the balance of the exemption period. In disqualifying a manufacturer from the property exemption for failing to meet the payroll requirements after what has been called the Great Recession of 2008, the Tax Commission ruled that “ameliorating factors cited by the Protestant due to the current economic crisis are equitable in nature and are not grounds for waiver of the payroll requirements…”
Investment tax credit
Oklahoma allows an income tax credit for either an investment in depreciable property used in a manufacturing facility, qualifying aircraft maintenance facility, or qualified web search portal facility or for a net increase in average levels of employment in any of these facilities. The credit is allowed in the first year of investment or net increase in employees and four subsequent years.
For facilities claiming the investment tax credit based upon an increase in the number of employees, the credit is only allowed in the 4 subsequent years if the level of new employees is maintained. The Tax Commission will disallow the credit if the number of new employees determined by the monthly average number of full-time employees for the final quarter of the taxable year does not equal or exceed number of employees for the corresponding period of the prior taxable year.
Sales tax refund
A refund of sales and use taxes paid also exists for some purchases by qualified purchasers engaged in computer services, data processing or research and development. To qualify for the exemption, the Oklahoma Research and Development Incentives Act provides that the business must add and maintain, for a period of at least three years, at least 10 new full-time in-state employees with an average annual salary of $35,000. To qualify for the refund, the entity must provide proof of certification from the Oklahoma Employment Security Commission.
Requests for refunds will be denied and amounts refunded must be paid back if the number of new employees drops below the number prescribed at any time within three years of the date certification is issued by the Employment Security Commission.
This is a trying time for businesses who have suffered from the impact of the pandemic. As businesses begin to reopen and plan for the future, thought should be given to tax incentives currently enjoyed which are dependent on maintaining employment or payroll levels and the economic impact if those incentives are lost. Absent action from the Legislature, recovering businesses may suffer further in the future from the loss of tax incentives.