The Oklahoma sales tax exemption for software allows businesses that utilize software at their Oklahoma-based locations to claim an exemption on software purchases that meet certain criteria. The experienced, detail-oriented and knowledgeable sales tax consulting team at Agile Consulting Group is uniquely qualified to help your business leverage this sales tax exemption to improve your cash flow.

According to Section 1354(A)(9) of Title 68 of the Oklahoma Statutes, “Computer hardware, software, coding sheets, cards, magnetic tapes or other media on which prewritten programs have been coded, punched, or otherwise recorded, including the gross receipts from the licensing of software programs” are subject to sales tax. Since prewritten computer software is subject to sales tax in Oklahoma, it is important to understand how the Oklahoma tax code defines this term. Per Section 1352(20) of Title 68 of the Oklahoma Statutes, prewritten computer software means, “‘computer software’, including prewritten upgrades, which is not designed and developed by the author or other creator to the specifications of a specific purchaser.” Prewritten computer software also includes the following:

• The combination of 2 of more prewritten software programs or prewritten portions
• Software designed and developed to the specifications of a specific purchaser by the author or creator, when it is sold to any person other than the specific purchaser
• Prewritten software that is modified or enhanced to any degree, unless there is a separately stated charge for the modifications

Even though prewritten computer software is subject to sales tax in Oklahoma, there are several types of software purchases that qualify for the Oklahoma sales tax exemption for software.

OKLAHOMA SALES TAX EXEMPTION FOR SOFTWARE: CUSTOM SOFTWARE

The Oklahoma tax code specifically exempts the sales of customized computer software programs from sales taxes. Sales of custom software programs qualify for the Oklahoma sales tax exemption for software because they are considered service transactions instead of sales of tangible personal property. According to Oklahoma Admin. Code 710:65-19-52(g), a software program is considered to be customized when the program is “prepared to the special order of a customer.” Based on this definition and the criteria regarding what is considered prewritten computer software, a software program will be considered customized when it can only be used by the customer for whom the program was developed and is useless to any other user. If a software program is developed for a specific purchaser, but has value for other customers and can be usable for other customers, then it will not meet the limited definition of custom software in Oklahoma and would be considered taxable prewritten computer software.

OKLAHOMA SALES TAX EXEMPTION: ELECTRONICALLY DELIVERED SOFTWARE

The Oklahoma sales tax exemption for software also applies to sales of software that is delivered electronically. Section 1357(32) of Title 68 of the Oklahoma Statutes provides this specific exemption for electronically delivered software. For the purposes of this exemption, the term “delivered electronically” means a method of delivery to the purchaser that does not occur through tangible storage media like a CD-ROM or USB.

SOFTWARE MAINTENANCE CONTRACTS

The Oklahoma sales tax exemption for software may also apply to software maintenance contracts, depending on whether the contract is mandatory or optional. According to Oklahoma Admin. Code 710:65-19-52(d)(1), the entire sales price of a mandatory maintenance contract sold with prewritten computer software is subject to sales tax. A mandatory computer software maintenance contract is defined in Oklahoma Admin. Code 710:65-19-52(a)(8) as, “a computer software maintenance contract that the customer is obligated by contract to purchase as a condition to the retail sale of computer software.” An optional computer maintenance contract, which is defined in Oklahoma Admin. Code 710:65-19-52(a)(9) as “a computer software maintenance contract that a customer is not obligated to purchase as a condition to the retail sale of computer software” is subject to tax when either of the following two conditions are met:

• The optional contract provides only updates and upgrades which including prewritten computer software delivered in a tangible media format
• The optional contract provides both updates or upgrades and support services, and the fee for support services is not separately stated

In other words, as stated in Oklahoma Admin. Code 710:65-19-52(d)(3), optional software maintenance contracts will qualify for the Oklahoma sales tax exemption for software if they provide only separately stated maintenance agreement support services. If the maintenance contract is sold with custom software or with prewritten computer software delivered electronically, then the contract will be exempt from taxation regardless of whether the contract is mandatory or optional.

HOW TO CLAIM THE OKLAHOMA SALES TAX EXEMPTION FOR SOFTWARE

Since the Oklahoma Tax Commission does not provide a specific exemption certificate for custom software programs or electronically delivered software on their website, any Oklahoma business making a qualifying exempt software purchase can submit a letter to their vendors that includes the following information:

• Name and address of the taxpayer (purchaser)
• Oklahoma sales tax permit number, if any, issued to the taxpayer
• The general character of the personal property sold, distributed, leased, or stored
• Statutory reason that the personal property sold, distributed, leased, or stored is exempt from sales tax
• Signature and Title from an authorized representative of the taxpayer stating that “I certify that I am authorized to sign this Certificate of Exemption and that, to the best of my knowledge and belief, it is true and correct, made in good faith, pursuant to the provisions listed in Title 68 of the Oklahoma Tax Code”

HOW TO RECOVER OKLAHOMA SALES TAXES ALREADY PAID

Oklahoma businesses that have already made a purchase of software which meets the exemption criteria listed above are entitled to refunds for purchases that were made within two years from the date the tax was paid by the claimant. There are two options available to Oklahoma purchasers to recover any sales tax overpayments on software. The first is to reach out to the original seller and request that they issue a refund or credit. The seller can accomplish this by amending their Oklahoma sales and use tax return from the period in which the original sale was billed. If the seller declines to issue the purchaser a refund or credit directly by amending their sales and use tax returns, then Oklahoma purchasers can file a claim for refund directly with the Oklahoma Tax Commission by completing and submitting Oklahoma Form 13-9. This 13-9 Application for Credit or Refund of State and Local Sales or Use Tax also allows purchasers to claim a refund with the Oklahoma Tax Commission for any self-assessed taxes that the purchaser realizes were incorrect at the time. The sales tax consultants at Agile Consulting Group have experience in recovering overpaid sales taxes from both sellers and the Oklahoma Tax Commission and can assist any Oklahoma business with this cumbersome process.

Have a question? Contact Aaron Giles, Agile Consulting

(888) 350-4TAX (4829) or via email at info@salesandusetax.com.