Making the intangible tangible: Oklahoma Task Force looks at problematic precedent, and tough taxation issues

Thorny issues of “intangible property” taxation and the broader structure of Oklahoma’s tax system are the focus of a major task force of legislators and private citizens. They are facing a year’s-end deadline to outline a way forward for the state in terms of adequate taxation to finance government that leaves room for a vibrant and growing economy.

The task force meets this week in Tulsa.

While there is some agreement among policy analysts and members of the two political parties on the need to limit the potential economic harm flowing from a legal interpretation of state taxes on intangibles, there is striking diversity on how other parts of the tax code should be treated, and what are adequate or fair levels of taxation.

While the item taxed may be theoretically “intangible,” the response and worry over the impact of such taxation has been tangible, indeed, for the past two years. Prior to a controversial judicial decision, so-called intangible personal property was taxed only via “unit valuations.”

However, the outcome in the state Supreme Court case of “S.W. Bell vs. State Board of Equalization” (2009) triggered the possibility that localities might begin to tax intangible property in other ways.

Ultimately that legal decision has led to a range of analysts tackling the tax system of Oklahoma, including the state’s two leading multi-issue public policy “think tanks.”

In a presentation last month to the task force at its state Capitol meeting in Oklahoma City, Michael Carnuccio of the Oklahoma Council of Public Affairs argued that intangible personal property should be exempt from ad valorem taxes. He said the state Constitution should be amended to restore the exemption that existed before the Supreme Court decision.

The conservative “think tank” executive pointed out that no surrounding states tax intangible personal property and, in fact (according to the Tax Foundation) only ten states do so. Carnuccio said allowing such taxation to take effect would put Oklahoma “at a significant disadvantage” for business location decisions, and lead many companies to relocate out of the state.

Carnuccio echoed other analysts in arguing that “the volatile, subjective and constantly changing nature” of such taxation would make it difficult to administer. Such taxes penalize and stifle research, innovation, development and capital generation, he said.

OCPA is the state’s leading free market research organization, with a mission to promote policy ideas “consistent with the principles of free enterprize, limited government, and individual initiative.”

In his presentation at the September hearing, David Blatt of Oklahoma Policy Institute warned doing away with “taxation of intangible property for centrally assessed entitles” could yield revenue loss and make assessments difficult. However, he said, expansion of the tax on locally-assessed entities might lead to substantial tax hikes and make assessment more difficult.

Blatt said the best outcome, on the “intangible” issue, would be a state constitutional amendment to restore “the status quo ante,” i.e. to limit intangible property taxation to centrally-assessed entities.

Oklahoma Policy Institute describes its mission as providing “independent, data-driven information, analysis and ideas on state policy issues.” The group is regarded as a progressive or liberal think tank.

Roots of the current discussion among the policy groups and across the broad spectrum of thought in the Legislature can be traced directly to the 2009-10 Legislature, and that hugely controversial state Supreme Court decision in the S.W. Bell case.

The September 2009 High Court ruling concluded that only items specifically listed in Article 10, Section 6A of the state Constitution are exempt from “intangible” property tax levies.

The state Chamber, in a set of talking points circulated at the state Capitol in 2010, made the case for what became S.J.R. 61 (and the current task force). The Chamber contended that the Court edict meant “that such things as trademarks, software, patents, licenses, contracts, customer lists, goodwill, etc.; are now taxable as intangible personal property.”

Implementation of the court decision had the potential negatively to impact Oklahoma's business climate, as no locally assessed companies then paid such taxes. The Chamber, working with legislative leaders, relied on state constitutional provisions that allow “in lieu of” levies to lay the basis for a temporary alternative.

As The Chamber memo contended at the time, “Presently Oklahoma businesses are liable for a state franchise tax. By creating a small business activity tax that would be paid in lieu of ad valorem tax on intangible personal property, we can eliminate the current franchise tax and save Oklahoma businesses from a large tax increase that will inevitably result from the State Supreme Court’s ruling.”

The Chamber argued that its solution would “in the end … neither increase or decrease taxes. It is designed to be revenue neutral.  As such, there will be no effect on education, counties or others that are recipients of ad valorem taxes.”

Then-Senate President Pro Tem Glenn Coffee of Oklahoma City, the first Republican pro tempore in state history, crafted Senate Joint Resolution 61 to address the Oklahoma Business Activity Tax (BAT) code and create a way out of the widely-perceived crisis created by the court decision.

S.J.R. 61 required a levy “to be paid in lieu of any taxes on intangible personal property.” However, most businesses and individuals received an equal, corresponding tax credit, with exceptions for “S” corporations and general partnerships.

The Chamber memo said the law would focus on “the potential problem of assessment of ad valorem tax on intangible property” and require “businesses to calculate a tax of 1 percent of net revenue to be reported to the Oklahoma Tax Commission for data collection purposes only for tax years 2010, 2011 and 2012.”

In sum, the “BAT” was created in lieu of intangible personal property taxes for the years 2010-12, suspended the franchise tax, and capped the BAT at 2010 franchise tax amounts.

Perhaps of greatest significance, the bill created “a task force to review the different types of taxes imposed on businesses and individuals in Oklahoma and develop recommendations and proposed legislation to provide increased simplification and fairness to the state’s tax structure. The task force shall also have the responsibility of recommending amendments to the Oklahoma Business Activity Tax Code. The task force shall submit its report on or before January 1, 2012.”

Creation of the task force was an important achievement in Coffee’s latter days as Senate President Pro Tempore.

The panel resulting from that law met last month in Oklahoma City, and is gathering in Tulsa this week.

The Task Force on Comprehensive Tax Reform is chaired by state Sen. Mike Mazzei of Tulsa and state Rep. David Dank of Oklahoma City, both Republicans. This week’s session is Thursday (October 20) at the Spirit Bank Center, located at 105th and Memorial in Tulsa.

The intangible tax examination has led to a broader and at times introspective look at the way Oklahoman's are taxed, and how state and local government in the Sooner State are financed.