Annual Gross Revenues (Out-of-State)

Annual Gross Revenues (Out-of-State) refers to the proportion of a company’s total gross sales derived from customers located outside of Oklahoma, including any sales made to the federal government. In the context of Oklahoma’s research and development (R&D) incentives, this metric serves as a mandatory eligibility threshold for businesses seeking to qualify for state-level tax exemptions, credits, and refunds.

The detailed analysis of this term requires a sophisticated understanding of how Oklahoma’s tax code distinguishes between local service providers and “export-oriented” businesses that bring external capital into the state’s economy. While the primary state income tax credit specifically for R&D jobs was repealed in 2014, the concept of out-of-state revenue remains central to the state’s current incentive offerings, including the Investment/New Jobs Tax Credit, the five-year Ad Valorem Tax Exemption, and the Sales Tax Refund for Computer Services and Research and Development. To navigate this landscape, an entity must demonstrate that it functions as a net exporter of scientific knowledge or technological services. This is achieved through a rigorous calculation of revenue situs, where the location of the buyer or the contracting agency—specifically the federal government—is the determining factor in achieving the statutory 50% or 80% revenue thresholds.

Statutory Foundations of the Out-of-State Revenue Requirement

The architecture of Oklahoma’s incentive programs is built upon the principle that the most valuable economic activities are those that sell products or services to a global or national market while maintaining high-value operations within the state. This “export-based” model is codified across multiple chapters of Title 68 of the Oklahoma Statutes. The requirement for a specific percentage of “Annual Gross Revenues (Out-of-State)” is designed to ensure that state tax dollars are not used to subsidize businesses that merely compete for existing local market share, but rather those that expand the state’s economic footprint.

Historically, the Research and Development New Jobs credit (formerly found in 68 O.S. § 54006) was the flagship program for the scientific sector. However, since its repeal, the state has integrated R&D incentives into broader industrial and technological categories. For a facility to be classified as a “qualifying research and development facility” under current law, it must often align with the definitions of a “manufacturing concern” or a “computer services” provider, both of which are strictly gated by their out-of-state revenue performance.

The Federal Government Provision

One of the most critical aspects of Oklahoma’s definition of out-of-state revenue is the treatment of the federal government. According to 68 O.S. § 2902 and related provisions in the Investment/New Jobs framework, all sales to the federal government are considered to be sales to an out-of-state buyer for the purposes of determining eligibility. This is a strategic inclusion that acknowledges the heavy presence of federal defense and aerospace contracting in the state. For many R&D firms in the Oklahoma City and Tulsa corridors, the federal government may be their largest or only client. Without this provision, many high-tech firms would be unable to meet the 50% export threshold, effectively disqualifying the state’s most innovative sectors from regional competition.

The Evolution and Repeal of 68 O.S. § 54006

To understand the current application of out-of-state revenue, one must examine the vacuum left by the repeal of the dedicated R&D tax credit. The state R&D tax credit expired in 2013, with the official repeal of the underlying statute (68 O.S. § 54006) taking effect on January 1, 2014. This former credit was specifically aimed at incentivizing the creation of new, high-paying jobs in scientific and technological fields.

The legacy of the repealed credit still influences modern interpretations of the law. Many of the administrative rules that governed § 54006—specifically regarding what constitutes “qualified research”—have been mirrored in the newer Research and Development Rebate Program (SB 324) or adopted into the “computer services” branch of the Investment/New Jobs Credit. Consequently, while the specific job-based R&D credit is defunct, the administrative machinery for verifying out-of-state revenue remains highly active in the context of other incentives.

The 50% Threshold for Research and Development Facilities

The most common revenue hurdle for an R&D-focused entity in Oklahoma is the 50% threshold. This requirement is primarily found in the statutes governing the five-year Ad Valorem (property) tax exemption and the sales tax refund program for computer services and R&D activities.

For an establishment to be considered eligible under these provisions, it must demonstrate that at least fifty percent of its annual gross revenues are derived from the sale of a product or service to an out-of-state buyer or consumer. In the context of research, this often applies to:

• Contract research performed for national pharmaceutical companies.
• Engineering services provided to energy firms operating in multiple states.
• Software development and R&D for global tech corporations.
• Federally funded research grants and contracts from agencies like the NIH or the Department of Defense.

The application of this 50% rule is binary; an entity that achieves 49.5% out-of-state revenue is legally indistinguishable from one that achieves 0% for the purpose of these specific tax benefits. This underscores the importance of precise revenue tracking and the strategic selection of customers.

The 80% Threshold for Web Search Portals and Data Centers

A more stringent 80% out-of-state revenue requirement applies to specialized facilities categorized as web search portals or massive data center operations. These facilities, often classified under NAICS 518210 (Data Processing, Hosting, and Related Services) or 519130 (Internet Publishing and Broadcasting and Web Search Portals), are eligible for significant sales and property tax exemptions.

The rationale for the 80% requirement is based on the nature of these businesses. Large-scale data centers and search portals (such as those operated by major cloud providers or search engine giants) are infrastructure-heavy and serve global audiences. Oklahoma’s policy is to offer maximum tax relief only to those facilities that are almost entirely focused on external markets. For R&D teams within these organizations, the 80% rule applies to the facility as a whole, meaning that any internal research and development activity must be supported by a massive majority of out-of-state gross receipts.

Administrative Guidance from the Oklahoma Tax Commission (OTC)

The Oklahoma Tax Commission (OTC) provides the regulatory framework for implementing these statutory revenue requirements. Through the Oklahoma Administrative Code (OAC) and formal letter rulings, the OTC clarifies how “revenue” and “situs” are determined.

Interpretation of OAC 710:50-15-74

The administrative guidance for the Investment/New Jobs Credit is found in OAC 710:50-15-74. This section outlines how the credit may be calculated on either the investment in depreciable property or the net increase in employees. For an R&D facility to use this code, it must meet the definition of “processing” or be a “qualified facility.” The OTC has historically defined “processing” as the preparation of tangible personal property for market, which begins when the form, context, or condition of the property is changed.

In cases where an R&D facility produces a prototype, the OTC’s guidance suggests that this activity meets the definition of processing. However, the out-of-state revenue rule is then layered on top: the facility must prove that the prototypes or the scientific data generated are being “sold” to out-of-state entities to satisfy the 50% requirement for the ad valorem and sales tax counterparts of the credit.

Letter Rulings and Reliance

Taxpayers seeking clarity on their specific revenue mix often request letter rulings from the OTC. For example, Letter Ruling LR-24-003 clarifies the interaction between the Investment/New Jobs Credit and other programs like the Quality Jobs Program. While a letter ruling applies only to the taxpayer to whom it is issued, it provides a clear signal of the Commission’s current thinking: the “primary emphasis” of the business must not be local or retail in nature.

Compliance and the Form 506 Affidavit

The primary mechanism for certifying out-of-state revenue is the filing of an annual affidavit with the Oklahoma Tax Commission. This is typically done through Form 506, the Investment/New Jobs Credit form.

The compliance process involves several distinct steps:

• Affidavit Filing: The taxpayer must provide a sworn statement asserting that the facility qualifies for the credit, including a confirmation that the revenue thresholds are met.
• NAICS Verification: The facility must specify its industry classification to determine whether the 50% or 80% threshold applies.
• Oklahoma Income Tax Withholding: For credits based on new jobs, the employees must be subject to Oklahoma withholding, and their wages must meet the $7,000 annual minimum threshold.
• Manufacturer’s Exemption Permit (MEP): Most R&D facilities claiming these benefits must also hold a valid MEP, which serves as foundational proof that the entity is engaged in manufacturing or processing activities.

Failure to provide a properly completed Form 506 or a required affidavit will result in a delay or denial of the credit.

Ad Valorem Exemptions and the Constitutional Export Requirement

The five-year ad valorem tax exemption is arguably the most valuable benefit for an R&D facility in Oklahoma, but it is also the most legally complex. It is rooted in Article X, Section 6B of the Oklahoma Constitution and further defined by 68 O.S. § 2902.

Facility Eligibility for R&D

The law defines a qualifying manufacturing concern to include facilities “engaged in research and development” that meet specific requirements. To qualify for the property tax exemption, the facility must:

1. Be a new, expanded, or acquired facility.
2. Meet the 50% or 80% out-of-state revenue threshold.
3. For acquired facilities, meet the “twelve-month vacancy” rule, which requires the building to have been unoccupied for a year prior to acquisition.

Eligible Assets for the Exemption

Not all property within an R&D facility is exempt. The OTC applies a “directly and exclusively” test to determine eligibility.

This distinction is vital for R&D firms. A company may derive 100% of its revenue from out-of-state sources, but if its assets are used for “sales and delivery” rather than the R&D or manufacturing process, those assets will be excluded from the five-year exemption.

Sales Tax Refunds: The 75/50 Rule for R&D Entities

For many R&D entities, the most immediate cash benefit comes from the Sales Tax Refund program. This program is specifically designed for computer services, data processing, and research and development.

The “75/50 Rule” is the core of this incentive:

• The 75% Activity Test: At least 75% of the entity’s total annual gross income must result from computer services, data processing, or research and development activities.
• The 50% Export Test: At least 50% of the annual gross revenues must result from sales to out-of-state buyers (including the federal government).

If an entity meets this dual test, it can claim a refund for all sales tax paid on machinery and equipment used in its operations. This effectively reduces the cost of R&D capital investment by the combined state and local sales tax rate, which often ranges from 8% to 11% depending on the municipality.

The Research and Development Rebate Program (SB 324)

In 2024 and 2025, Oklahoma introduced a new mechanism for R&D support: the Research and Development Rebate Program (created by SB 324). This program reflects a modern shift in policy, moving from tax credits to cash rebates based on federal standards.

Eligibility and the Federal Link

The program provides a 5% rebate on “qualified research expenditures” (QREs) as defined by Internal Revenue Code (IRC) Section 41. To qualify, an establishment must:

• Have filed federal Form 6765 with its most recent tax return.
• Have performed the research activities within the state of Oklahoma.
• Be in good standing with the Oklahoma Tax Commission.

Funding and Priority

Unlike the Investment/New Jobs Credit, which is a statutory right for any qualifying taxpayer, the R&D Rebate Program is subject to legislative appropriation and a $20 million annual cap. Applications are processed on a first-come, first-served basis. As of the 2025 program year, while applications are being accepted, the legislature has not yet fully appropriated the Rebate Fund, meaning claimants must wait for legislative action to receive payment.

A Comprehensive Multi-Year Financial Example

To demonstrate the complex interaction of “Annual Gross Revenues (Out-of-State)” with Oklahoma’s various incentive programs, consider the following hypothetical scenario involving “Quantum Dynamics LLC,” an Oklahoma-based biotechnology R&D firm.

Company Profile and Investment

Quantum Dynamics LLC establishes a new facility in Tulsa to research advanced gene-editing techniques for pharmaceutical applications.

• Facility Cost: $25,000,000 (Land and Building).
• R&D Equipment: $15,000,000 (Sequencers, mass spectrometers, cleanroom).
• Workforce: 50 new researchers with an average annual salary of $110,000.
• NAICS Code: 541714 (Research and Development in Biotechnology).

Year 1 Revenue and Classification

The company’s gross revenues for the first year of operation are as follows:

Out-of-State Revenue Calculation:

($5,000,000 (Federal) + $3,000,000 (NY)) / $10,000,000 (Total) = 80%

Since the company’s out-of-state revenue (80%) exceeds the 50% threshold for R&D facilities, they proceed with the following incentive claims.

Application of Incentives

1. Five-Year Ad Valorem Exemption: Quantum Dynamics files with the Tulsa County Assessor and the OTC. Because their out-of-state revenue is 80%, their $25,000,000 facility and $15,000,000 in equipment are exempt from property tax for five years.
2. Sales Tax Refund: The company spent $15,000,000 on R&D equipment. At a 8.5% sales tax rate, they paid $1,275,000 in tax. Since 100% of their activity is R&D and 80% of their revenue is out-of-state, they file for and receive a $1,275,000 refund.
3. Investment/New Jobs Credit: On their Form 512 (Corporate Tax), they choose the Investment Credit.
   • Annual Credit: 1% × $40,000,000 (Total Investment) = $400,000 per year for five years.
4. SB 324 R&D Rebate: The company reports $10,000,000 in qualified research expenses on their federal Form 6765. They apply for the Oklahoma 5% rebate, which would equal $500,000, pending legislative appropriation.

Year 6: The Cliff Effect

In Year 6, the company wins a massive $10,000,000 contract from an Oklahoma-based hospital system. Their revenue becomes:

• In-State: $12,000,000
• Out-of-State: $8,000,000
• Percentage: 40%

Because they have dropped below the 50% threshold, they would no longer be eligible for new property tax exemptions on any expansions, and they would no longer qualify for sales tax refunds on new equipment purchases. This illustrates why R&D firms must carefully balance their local vs. national client portfolios.

Comparative Threshold Analysis for Different Business Models

The burden of proof and the revenue threshold required for eligibility depend heavily on how a business is structured and which industry code it adopts. The following table summarizes these requirements.

This table shows that an integrated manufacturing and R&D facility has more flexibility under the Investment/New Jobs Credit (which does not have a hard out-of-state percentage for manufacturing) than a standalone R&D service firm, which must meet the 50% export rule to access the same property and sales tax benefits.

The Future Outlook of Oklahoma R&D Incentives

The landscape of R&D incentives in Oklahoma is currently in a state of transition. The shift from the repealed 2014 credits to the new SB 324 rebate program indicates a desire to align state incentives more closely with federal R&D standards (IRC § 41). However, the continued reliance on “Annual Gross Revenues (Out-of-State)” for the most valuable property tax exemptions suggests that the “export-based” economic model remains the state’s dominant strategy.

Future developments will likely focus on:

• Appropriation of the Rebate Fund: The effectiveness of the SB 324 program depends entirely on whether the legislature provides the $20 million annual funding.
• Expansion of NAICS Codes: As new technologies like blockchain and AI-driven R&D emerge, the legislature may update the codes in 68 O.S. § 2902 to ensure these firms can meet the 50% or 80% thresholds.
• Digital Service Situs: As more R&D is delivered via the cloud, the OTC will need to provide clearer guidance on how to determine the “location” of a buyer for intangible digital services, a process currently managed through case-by-case letter rulings.

Strategic Implications for Practitioners

For tax professionals, accountants, and corporate executives operating in Oklahoma, the “Annual Gross Revenues (Out-of-State)” metric is the most important variable to manage in an incentive strategy. It requires a cross-departmental effort:

• Sales/Contracting: Must be aware that local sales have a “cost” in the form of potential lost tax exemptions.
• Accounting: Must maintain detailed ledgers that flag the situs of every customer and specifically track federal vs. commercial contracts.
• Legal/Compliance: Must ensure that the annual Form 506 and related affidavits are filed with precision to avoid the “delay of refund” warned about in OTC instructions.

By maintaining a robust out-of-state revenue stream, especially through federal contracting, Oklahoma R&D entities can effectively lower their total cost of operations to a level that is competitive with any other tech hub in the United States.

Final Thoughts: Synthesizing Revenue, Research, and Policy

The Oklahoma tax framework for research and development is a complex but rewarding system that hinges on the successful demonstration of “Annual Gross Revenues (Out-of-State).” Through the various statutory mechanisms—ranging from the Investment/New Jobs Credit to the constitutional Ad Valorem exemption—the state consistently rewards those entities that look beyond Oklahoma’s borders for their primary revenue while anchoring their high-value scientific operations within the state.

The inclusion of the federal government as an out-of-state buyer is the “engine” that powers the Oklahoma research sector, enabling a high degree of synergy between private innovation and national defense. As the state continues to refine its R&D support through new programs like the SB 324 rebate, the fundamental requirement for export-oriented growth will remain the defining characteristic of Oklahoma’s economic development philosophy. For any R&D entity seeking to maximize its return on investment in the Sooner State, the mastery of revenue situs and the diligent tracking of out-of-state gross receipts are not merely administrative tasks, but core components of a successful long-term business strategy.