Industry Insights

Oklahoma has enacted a new Business Activity Tax (BAT) for the 2010–2012 tax years while suspending the franchise tax for periods beginning July 1, 2010, and ending before July 1, 2013. Unlike the franchise tax, the BAT applies to all entities doing business in the state, including but not limited to sole proprietorships, single member LLCs, partnerships, corporations, S corporations and joint ventures.

The BAT is a response to a 2009 Oklahoma Supreme Court ruling that could have greatly expanded the state’s ad valorem tax base by including intangible property. The BAT is intended to be revenue-neutral and provide the Oklahoma legislature time to address the issues created by the court ruling. 

Entities that were subject to the franchise tax will pay an amount equal to their June 30, 2010, franchise tax. Entities not previously subject to the franchise tax will pay a $25 fee, which is offset by a credit either on the entity’s Oklahoma income tax return or with the Secretary of State on the entity’s annual report filings.

The BAT is separate from any Oklahoma income tax regime and has its own definitions, nexus standards and apportionment rules. An entity is considered to be doing business in Oklahoma if any of the following conditions are met:

• It is domiciled in Oklahoma
• It owns or uses any capital in Oklahoma
• It has, at any time during the year, property in Oklahoma with an aggregate value of at least $50,000
• It has, during the calendar year, payroll in Oklahoma of at least $50,000; sales in Oklahoma of at least $500,000; or at least 25 percent of total property, payroll or sales in Oklahoma
• It otherwise has nexus in Oklahoma to an extent that the entity is required to remit tax under the U.S. Constitution

An entity’s BAT liability is equal to $25 plus 1 percent of net revenue, though the 1 percent tax is suspended through 2012 to accomplish revenue neutrality. Taxpayers are still required to compute and report net revenue each year, so that the Oklahoma Tax Commission can study the BAT’s revenue impact and give legislators the estimated revenue data they need to proceed.

On tax returns, net revenue for the BAT does not necessarily equal revenue less expenses from the federal or state tax return. BAT revenue does not include interest, dividends, distributions, real property rental, mineral rights, net capital gains or compensation. Expense does not include interest, income taxes, depreciation, amortization or deductions allocable to tax-exempt income, i.e., rental or mineral expenses. Adjustments also are made for businesses operating in multiple states.

The BAT is filed and collected on two distinct tax forms:  the 511-BAT and BT-190. The 511-BAT is an attachment to the state individual tax return, Form 511, used by farmers or sole proprietorship (schedule C) owners who have not formed any type of formal business entity. The BT-190 is used by all other entities including corporations (both C and S), partnerships, trusts and LLCs.  Not-for-profit entities do not need to file the BT-190 or pay the corresponding tax.

The BAT is due for individuals doing business in the state on the same date as their individual tax returns, including any extensions. For all other filers, the tax is due on July 1 following the close of the taxable year. Penalties, however, are not imposed if the return is filed and tax is paid prior to September 15. 

For more information on how this new tax could affect your business, contact your BKD advisor.