Oklahoma voters will have to resolve a complicated tax issue in November that state officials estimate could cost the state's county governments and schools up to $50 million in 2013.
But if voters don't widen a current tax exemption by voting yes on State Question 766, Oklahoma businesses fear they will be hurt badly by taxes on their intangible property — something that almost no other state taxes.
“It's not really a tax break as much as just a drawing back on the tax that I think is inherently unfair,” said Rep. David Dank, R-Oklahoma City. “To tax people on such things as trademarks and patents and customer lists and that sort of thing and you have just have those people who were centrally assessed being taxed on that, is unfair.”
Dank, who co-chaired a task force that studied the issue, said if the state does nothing, it will be a huge tax increase on virtually all of Oklahoma's major businesses.
Also pushing the issue is AT&T, formerly the Southwestern Bell Telephone Co.
The company sued the state Board of Equalization claiming that taxes it paid in 2005, 2006 and 2007 should have included exemptions for “intangible assets such as customer lists, customer relationships, assembled work force, databases, goodwill, employment contracts, patented technology, lease agreements, trademarks, and trade names, licensed software, an extensive advertising effort and the attendant copyrights on the advertising materials [and] technical documentation.”
The case went all the way to the Oklahoma Supreme Court, which ruled in September 2009 that those types of intangible properties were not exempt.
Voters had in 1968 passed a constitutional amendment defining exempt intangible property as cash on hand, gold, silver, bank drafts, certified checks, bank deposits, accounts and bills receivable, brokerage accounts, bonds, stocks and a variety of other specifically enumerated intangible assets.
AT&T spent the next two years lobbying state lawmakers on the issue.
The company reported to the Ethics Commission spending more than $7,000 on politicians and their spouses between September 2009, when the Supreme Court ruling was released, and June of this year. A company can only spend $100 per lawmaker per calendar year.
“A yes vote on SQ 766 will ensure that Oklahoma individuals and businesses won't face potentially the largest tax increase in state history,” said Tony Wyche, with AT&T public affairs. “Hunting leases, unused mineral rights, insurance policies, computer software, and even patents and inventions would all be subject to taxation without passage of SQ 766, and as one of the largest private investors in Oklahoma, AT&T stands with many Oklahoma families and businesses, large and small, who want to ensure that Oklahoma is poised for future jobs, investment, and economic growth.”
Bryan Gonterman, president of AT&T Oklahoma and a registered lobbyist for the communications company, also was a governor appointee to the Task Force on Comprehensive Tax Reform created by lawmakers during the 2010 legislative session. The task force held four public meetings to explore simplifying and creating fairness in the tax structure of the state.
The 21-member task force, which was comprised of lawmakers, business leaders, school officials and a county tax assessor, ultimately recommended a constitutional amendment be put before voters to expand the scope of the existing constitutional ad valorem exemption for specified intangible property.
The House and Senate approved Senate Joint Resolution 52, which brings the constitutional change to a vote of the people in November.
Court case fallout
Many Oklahoma business owners are concerned that by stating specifically in an opinion that intangible property like customer lists and databases weren't tax exempt, the Supreme Court opened the flood gates for local tax assessors to tax things that have never before been taxed in Oklahoma.
“Before I got involved in the task force, I really wasn't paying that much attention,” said Charles Mills, owner of Mills Machine Co. in Shawnee.
“I thought, oh Southwestern Bell, that's just the big guys.”
But Mills said once he learned that local assessors could start taxing his patents, copyrights and trademarks, he became concerned.
“The more I found out about it, the more disturbed I got about what it really is,” Mills said.
“To me, it seemed like they were trying to tax an idea. The whole term intangible tells you that no one can quite get their mind around what the value is of that. You think hard and you work hard, and you develop a product or a service. That's a free enterprise system. That's innovation.”
Mills said a tax on that brain power could be stifling to entrepreneurs.
Mills' drilling company has been around since 1908 and focuses on shallow drills for things like wells and utilities.
He said they have one domestic patent and four international patents on their drilling equipment that could be taxed under the Supreme Court's interpretation.
Dan Ramsey, president of Independent Insurance Agents of Oklahoma, the state's largest trade association, also served on the task force.
“The insurance industry could be impacted by this up to $100 million,” Ramsey said.
“That would be a tremendous hit, especially on businesses that are struggling right now.”
Ramsey said almost all of what insurance agents possess is “intangible.”
What is the value of the paper that insurance contracts are written on?
“It would just be crippling to anybody in the service-related industry,” Ramsey said.
Wade Patterson, the Garfield County assessor, said it would be nearly impossible for county assessors to start assigning value to intangible property.
He used McDonald's as an example.
“I value the building, the land, the kitchen equipment, but I don't value the intellectual property of the golden arches because it's so hard to determine a cost of that,” he said.
“If the state question does not pass, there would be a requirement for county assessors to pick up intangibles.”
But Patterson said the complications come when lawmakers include exempting all intangibles, such as public service companies that are centrally assessed by the Board of Equalization — like AT&T and Oklahoma Gas and Electric Co.
“We don't agree with that simply because no one knows what the impact is going to be,” Patterson said.
Currently those companies pay taxes based on a unit valuation of their company. With the change in the Oklahoma Constitution, they may start filing exemptions for their client lists and other intangible property to be subtracted off their current tax bills.
“We're not against the state question passing, but there was no measure there to make up the shortfall if this thing passes,” Patterson said.
“It becomes an unfunded mandate instantly.”
The money from those centrally assessed companies' property taxes is distributed to counties based on where the companies have their assets. Among the hardest hit would be Oklahoma, Tulsa, Rogers, Noble and Muskogee counties, according to officials with the Oklahoma Tax Commission.
About 65 percent of the centrally assessed ad valorem taxes go to common education.
“That's just kind of where you are walking on egg shells hoping it doesn't hurt too bad,” Patterson said.
“We know it's going to be a loss, but hopefully not too staggering a loss.”
The Tax Commission issued a report estimating a worst-case scenario cost to the state of $50 million in 2013 if voters approve the constitutional amendment.
But the impact to businesses in Oklahoma who aren't centrally assessed could be much greater, Patterson said.