Oklahoma carves out new sales and use tax exemptions

Exemption for affordable housing

House Bill 1935 creates an exemption for sales of tangible personal property or services (used solely for construction and remodeling projects) to a tax-exempt organization. The organization must meet all of the following requirements:

• Its primary purpose is to construct or remodel and sell affordable housing and provide homeownership education to qualifying Oklahoma residents (those with an income below 100% of the Family Median Income guidelines)
• It conducts its activities to serve public or charitable purposes rather than commercial purposes
• It receives funding and revenue and charges fees that don’t incentivize it or its employees to act other than in the best interests of its clients
• It compensates its employees in a manner that doesn’t incentivize them to act other than in the best interests of its clients

The bill also creates an exemption for sales of tangible personal property or services to qualifying tax-exempt nonprofit entities established before January 1, 2022, whose principal function is assisting “natural persons” following a disaster caused by chemical accidents, explosions, severe weather, or “other events causing damage to property on a large scale.” Qualifying nonprofits should focus on building, repairing, or restoring single-family residential dwellings.

Exemption for disadvantaged children

Starting November 1, 2021, Oklahoma sales tax will not apply to sales of clothing to any Oklahoma Chapter of a tax-exempt national organization that distributes clothing to disadvantaged children through Operation School Bell. This exemption will expire December 31, 2024.

Exemption for internet service providers

The sale, lease, rental, storage, use, or other consumption of qualifying broadband equipment by providers of internet service (or subsidiaries) is exempt from Oklahoma sales and use tax with the enactment of House Bill 2946. However, the exemption applies only when “the property is directly used or consumed by the provider or subsidiary in or during the distribution of broadband internet service.”

Rather than occurring at checkout, the exemption will be administered as a rebate — and only if the exemption services its purpose. No rebate claim will be approved unless the following conditions are met:

• The equipment was purchased to “establish or expand broadband services in underserved or unserved areas”
• The claimant establishes that the equipment purchase led to “net growth in the number of potential customers served in the underserved or unserved areas”

To qualify for the rebate, eligible equipment must “be purchased and placed in service between January 1, 2022, and December 31, 2023.” Rebate claims for purchases made in 2022 must be filed with the Oklahoma Tax Commission by September 1, 2023, and rebate claims for purchases made in 2023 must be filed by September 1, 2024. The Tax Commission must process all claims by March 1, 2025. Additional details, including qualifying purchases and the rebate cap, are available in the text of the bill.

The COVID-19 pandemic may serve to accelerate a growing trend to exempt broadband equipment in other states where it’s currently subject to tax. When businesses and schools required employees and students to work and attend classes remotely, people living in areas with sluggish or nonexistent internet connectivity were put at a great disadvantage. Thus, in addition to Oklahoma, Arkansas and Michigan also considered tax incentives for broadband equipment this session.

The failed Arkansas measure (Senate Bill 605) sought to exempt broadband equipment capable of providing high-speed internet access to customers in rural areas, defined as an unincorporated part of an Arkansas county or a municipality/town with fewer than 2,500 residents. Michigan Senate Bill 46 was less clear-cut. It would have provided an exemption for “eligible broadband equipment” to extend service in areas with slow or no terrestrial internet access. The bill was vetoed by Governor Gretchen Whitmer, who supports expanding high-speed internet services but believes the state’s assessors lack “the information or expertise to determine whether equipment in fact resolves a lack of broadband services.”

Exemption for library lovers

Sales to persons in a public contract with city-county libraries will be exempt from sales tax as of November 1, 2021. The enactment of Senate Bill 265 is expected to have “no revenue impact,” as there are currently just four city-county libraries in Oklahoma, and only one has “previously entered into a contractual agreement with contractors/subcontractors to perform a building project.” Furthermore, “another sales-tax-exempt entity purchased all building materials and other items necessary to complete the contract.”

So, why bother? No explanation is provided in the bill or revenue statement.

Exemption for museums

Similarly, sales of tangible personal property or services to a museum are exempt on and after November 1, 2021, provided the museum:

• Is not accredited by the American Alliance of Museums
• Operates on an annual budget of less than $1 million
• Operates as part of a tax-exempt organization

According to the bill’s revenue impact statement, approximately 138 museums in the state would qualify for the exemption. If all take advantage of it, state sales tax collections could drop by about $145,951 in fiscal year 2022, and by $253,204 in fiscal year 2023.

Exemption for tree farming and logging businesses

A variety of commercial forestry service equipment will be exempt from Oklahoma sales and use tax starting January 1, 2022, until January 2027. This exemption applies only to the following items when purchased by businesses engaged in logging, timber, and tree farming:

• Bunchers
• Delimbers
• Fellers
• Forwarders
• Hydraulic excavators
• Skid steer loaders
• Soil compactors
• Track skidders and wheeled skidders

While Oklahoma lawmakers didn’t hesitate to carve out exemptions for special interests this year, they were less willing to back broader sales tax exemptions.

Sales tax to stay in the grocery cart

For example, a proposed sales tax exemption for grocery foods failed to gain traction. Introduced during the final weeks of the session, House Bill 2844 sought to exempt food items sold by grocery stores, convenience stores, and gasoline stations with convenience store items. Had it been enacted, Oklahoma sales and use tax would have continued to apply to candy, carbonated soft drinks, and ice, as well as “food items sold in a manner subject to a tax levied in lieu of sales tax by other provisions of law.”

Oklahoma is one of few states to tax groceries at the full rate of sales tax, though it does provide a Sales Tax Relief Credit, sometimes called the grocery tax credit. In theory, this can help offset the tax for Oklahomans with the following income levels:

• $50,000 per year for filers who are elderly, have a physical disability, or claim a dependent; or
• $20,000 per year for everyone else.

The credit doesn’t afford much relief, as the rebate is capped at $40 per household member.

No exemption for the hard of hearing or women veterans

A proposed sales tax exemption for certain hearing aids also stalled, as did bills seeking to:

• Broaden an exemption for U.S. military personnel overseas serving in a combat zone to all active U.S. military personnel, veterans, military personnel family members, and Gold Star family members
• Create an exemption for nonprofit museums pertaining to the aviation, rocketry, and other vehicles capable of escaping Earth’s gravity to gather information about the solar system
• Establish exemptions for sales to organizations of women veterans

These or other exemptions could be back on the table next year. 

It’s always interesting to study the politics behind exemptions. Most of the measures discussed above were backed by Republicans, which stands to reason in such a solidly red state. However, Democrats introduced the adopted exemption for libraries, as well as the proposed exemption for air and space museums and women veterans. The bill to exempt hearing aids was sponsored by a member of each party, as was the bill exempting clothes for disadvantaged children.

Since it failed to pass, one might assume the proposed exemption for groceries was sponsored by Democrats. It wasn’t. The idea has strong support among some Republicans, including former Governor Mary Fallin, who tried (and failed) to eliminate the state sales tax on groceries back in 2017. At the time, it was estimated repealing the tax would save a family of four between $350 and $676 annually — quite a bit more than the $40 rebate currently available to Oklahomans.

Fallin also wanted to expand sales tax to numerous services but was unable to secure support for her plan in her own party, much less among Democrats. Four years later, state lawmakers are still more interested in carving out new exemptions than eliminating them.