Worst-case fears that Oklahoma could be responsible for paying up to $500 million because a section of a capital-gains tax deduction was ruled unconstitutional were set aside Wednesday.
The Oklahoma Court of Civil Appeals, after granting a rehearing to the Oklahoma Tax Commission, upheld its earlier ruling that the deduction that treats out-of-state companies differently than Oklahoma firms is unconstitutional.
The appellate court directed that its ruling applies only to the 2008 tax return of the company that filed the appeal.
“Because our pronouncement addresses only the claims of the parties before us, we express no opinion on the timeliness or correctness of any other claims,” Judge Jane Wiseman wrote in Wednesday's opinion.
“They gave us guidance that they didn't give us in the previous one,” said attorney Thomas G. Ferguson Jr., of Oklahoma City, who represented the company, CDR Systems Corp. “It's the same decision.”
The Tax Commission estimated the state could have been responsible for paying up to $421.8 million to individuals and up to $61.2 million to corporations if the appellate court had ruled the deduction was available to others and retroactive to the last three years it has been in place.
Tax Commission attorneys were reviewing the opinion Wednesday and had no comment, said Paula Ross, an agency spokeswoman.
The Tax Commission could appeal the appellate court's ruling to the Oklahoma Supreme Court.
Finance and Revenue Secretary Preston Doerflinger, a key budget adviser for Gov. Mary Fallin, has been advised not to comment because the matter is subject to appeal, said a spokesman for Doerflinger's agency, the state Office of Management and Enterprise Services.
Rep. Scott Martin, chairman of the House of Representatives Appropriations and Budget Committee, said he is willing to work with the Tax Commission to change state law concerning the capital gains deduction.
“We anticipate this is probably going to be appealed to the state Supreme Court, but in the meantime ... we're certainly going to review the opinion to see what legislation might be needed in this coming session,” said Martin, R-Norman.
Wiseman's opinion states that provisions in state law that allow “disparate treatment of non-Oklahoma versus ‘Oklahoma' entities in regard to the sale of real or personal property located in Oklahoma of the kind involved in the present controversy are unconstitutional and cannot be upheld.”
The appellate court ruled in January that the capital gains deduction, which took effect Jan. 1, 2006, violates the commerce clause of the U.S. Constitution.
The court, in a 3-0 ruling, reversed an opinion by the state Tax Commission, which denied an appeal from CDR System stating it also should have received the deduction. Capital gains include money from the sale of real estate, stocks or personal property.
Oklahoma companies may claim the capital gain deduction if they own the assets being sold at least three years before the transaction. Out-of-state companies have to own the property for at least five years to claim the deduction, according to the law.
The appellate court found that the Oklahoma capital gains deduction discriminates against out-of-state companies because it affords state companies different treatment for similar taxable events.
CDR Systems Corp., formed in California with headquarters in Florida, claimed the Oklahoma capital gains deduction on its 2008 Oklahoma small business corporation income tax return. The company, which manufactured equipment for telephone, water and electric companies, had a facility in Waynoka.
CDR sold all of its assets to another company in 2008 and reported gains of $49.8 million. CDR claimed the Oklahoma capital gains deduction, resulting in an exclusion of $3.6 million from Oklahoma taxable income. The Tax Commission disallowed the deduction and CDR appealed.
Tax Commission attorneys argued the Legislature determined that having a company's primary headquarters in Oklahoma for at least three years amounted to a significant investment in the state that was sufficient to grant the deduction.