Sales Tax Relief from Liability in Oklahoma

published in Council on State Taxation | April 9, 2020

Oklahoma statutes provide that the sales tax is to be paid by the consumer to the seller. The seller is specifically prohibited from absorbing or paying the tax on behalf of the consumer and is required to collect the sales tax “as trustee for and on account” of the state. 68 O.S. §1361. All sales are presumed to be taxable unless specifically exempted under the Sales Tax Code and sellers are liable for the sales tax collected as well as the tax that should have been collected. OTC Rule 710:65-7-6.

Consumers may claim an exemption based on who is purchasing the product (entity-based exemption), based on a specific use of a product (use-based exemption), or based on the type of product sold (product-based exemption). A common entity-based exemption would be a sale to another licensed retailer. A typical use-based exemption would be a sale of products to contractors for use in the performance of a contract with an exempt public entity. Oklahoma has few product-based exemptions such as the exemptions for the sale of prosthetic devices and prewritten computer software that is delivered electronically. This article gives guidance on the care that sellers should take to properly document any entity-based or use-based exempt sales.

Sellers are required to document any claim of an exempt sale to the Oklahoma Tax Commission. Sellers that properly document these exempt sales may be relieved of liability if it is later determined that the purchaser improperly claimed an exemption when purchasing the product. Section 1361 of Title 68 directs the Tax Commission to relieve sellers from liability for failure to collect sales tax if subsequent determination is made that the purchaser improperly claimed an exemption. Upon granting relief to the seller, the Tax Commission will hold the purchaser directly liable.

To be eligible for relief from liability, the seller must have obtained properly completed documentation of the claim for exemption from the purchaser in good faith and in a timely manner. The Tax Commission has promulgated rules to inform sellers of the required documentation to be obtained from purchasers. The most common entity-based and use-based exemptions are sales for resale, sales of items for use in manufacturing, items sold for agricultural purposes, and sales to contractors in the performance of contracts with exempt public entities (such as public schools, cities or counties) or churches.

In the case of sales for resale, the Tax Commission rules require written documentation containing the purchaser’s name, address, type of business, sales tax permit number issued by the Tax Commission, and the signature of the purchaser. It is recommended to obtain a copy of the purchaser’s resale permit if possible. Documenting this information will relieve the seller in cases where it is determined after the fact that the purchaser did not purchase the product for resale but for their own use. OTC Rule 710:65-7-8.

For sales of items for use in manufacturing or agriculture, the Tax Commission rules provide that the seller must obtain a copy of the purchaser’s manufacturer’s exemption permit issued by the Tax Commission or the name, address, and permit number of the purchaser. Similarly, for sales of items used for agricultural purposes, the seller must obtain a copy of the purchaser’s agricultural exemption permit issued by the Tax Commission or the name, address, and permit number of the purchaser. OTC Rules 710:65-7-9 and 710:65-7-11.

In the case of sales to contractors purchasing items for use in a contract with exempt public entities or churches, the seller must obtain a copy of the exemption letter or card issued to the exempt entity, documentation indicating the relationship between the contractor and the entity; and certification by the purchaser, on the face of each invoice or sales receipt, setting out the name of the exempt entity, that the purchases are being made on behalf of the exempt entity, and that the products purchased are necessary for the completion of the contract. OTC Rule 710:65-7-13 provides a complete list of exempt entities that contractors may purchase items exempt as necessary to fulfill the contract. Please note that purchases for contracts with federal and state government entities are not exempt under Oklahoma law.

A seller may obtain a “blanket exemption certificate” from a purchaser with which the seller has a recurring business relationship and still receive relief from liability. The seller may obtain the required information once from a recurring purchaser and is not required to obtain a completed exemption certificate or copy of the exemption certificate or permit for each and every sale. The statute defines a “recurring business relationship” as a relationship wherein a period of no more than 12 months elapses between sales to the same purchaser.

The statutes provide that the relief from liability does not apply if the seller did not act in good faith. Specifically, relief from liability is not available to:

  • a seller who fraudulently fails to collect tax,
  • a seller who solicits purchasers to participate in the unlawful claim of an exemption, or
  • a seller who accepts an exemption certificate from a purchaser claiming an entity-based exemption when:
    • the subject of the transaction sought to be covered by the exemption certificate is actually received by the purchaser at a location operated by the seller, and
    • the Tax Commission provides an exemption certificate that clearly and affirmatively indicates that the claimed exemption is not available in this state.

The Tax Commission will not relieve a seller for failure to collect and remit the tax unless the seller obtains the documentation within a timely manner. The statue provides that fully completed documentation is obtained in a timely manner if it is obtained within 90 days of the date of the sale.

However, if the seller failed to obtain the documentation within the 90-day time period the statute provides for another opportunity. The seller may still claim relief from liability by either showing that the transaction was not subject to tax by other means or by obtaining a fully completed exemption certificate from the purchaser, taken in good faith, within 120 days after a request for substantiation from the Tax Commission.

Advance planning and preparation to document claims of sales tax exemptions received from purchasers will prevent sellers from being liable when purchasers improperly claim an exemption. Consult your tax practitioner now to avoid problems in the future.