Out-of-State Buyers or Consumers (Revenue Test)

The out-of-state buyers revenue test is a statutory requirement that high-tech service establishments must derive a majority of their gross income from clients outside Oklahoma to qualify for manufacturing tax incentives. This legal mechanism allows entities engaged in research, development, and data processing to be classified as “manufacturers,” thereby accessing valuable investment and employment tax credits.

The implementation of this test represents a sophisticated intersection of tax policy and economic development strategy. In the state of Oklahoma, traditional manufacturing incentives were originally designed for physical factories producing tangible goods. However, as the global economy shifted toward knowledge-based services, the Oklahoma Legislature sought to capture high-value research and development (R&D) activities. By creating a “revenue test” based on the destination of sales, the state effectively redefined “manufacturing” to include the production of intangible knowledge, software, and data, provided that these “products” are exported to out-of-state markets. This ensures that the state’s tax subsidies are used to attract new capital into the Oklahoma economy rather than merely redistributing existing local wealth.

Statutory Origins and the Definition of Research as Manufacturing

The legal foundation for the revenue test is found primarily in Title 68 of the Oklahoma Statutes, specifically within the sections governing the Investment/New Jobs Tax Credit (68 O.S. § 2357.4) and the Five-Year Ad Valorem Tax Exemption (68 O.S. § 2902). To understand how a research laboratory or a computer services firm qualifies for these credits, one must examine the statutory definition of a “manufacturing facility”.

Historically, Oklahoma has utilized the Standard Industrial Classification (SIC) Manual and the North American Industry Classification System (NAICS) to categorize businesses. Under 68 O.S. § 2902, the term “manufacturing facility” is expanded beyond traditional industrial plants to include “establishments primarily engaged in computer services and data processing” and “research and development” entities, provided they meet specific revenue thresholds. The core logic is that an R&D lab “processes” information and “manufactures” a final report, a prototype, or a patent. However, to prevent every local IT support shop or small testing lab from claiming manufacturing status, the law imposes the out-of-state buyers revenue test as a qualifying filter.

The Tiered Revenue Thresholds

The percentage of revenue that must be derived from out-of-state sources is not uniform across all sectors. Instead, it is tiered based on the specific industry classification of the establishment. This reflects the state’s assessment of the mobility and economic impact of different service types.

Industry Type (SIC/NAICS)	Activity Description	Out-of-State Revenue Requirement	Statutory Citation
SIC 7372, 7373 / NAICS 5112, 5415	Computer Services & Prepackaged Software	Minimum 50%	68 O.S. § 1357(21)
SIC 7374 / NAICS 5182	Data Processing & Hosting Services	Minimum 80%	68 O.S. § 2902(C)
SIC 8731-8734	Research, Development, and Testing Labs	Minimum 50%	68 O.S. § 54003
NAICS 519130	Web Search Portals	Minimum 80%	710:65-13-650

For establishments classified under Industrial Group Number 7374—which covers computer processing and data preparation services—the burden of proof is significantly higher, requiring 80% of annual gross revenues to come from out-of-state buyers. This higher threshold is intended to ensure that large-scale data centers are truly serving a national or global market before they receive local property tax exemptions. Conversely, core research and development activities (SIC 8731-8734) generally fall under the 50% threshold, acknowledging the high costs and specialized nature of R&D which often involves a mix of local and national collaboration.

The Federal Government Provision: A Critical Nexus for R&D

A pivotal component of the revenue test, and one of the most beneficial for the aerospace and defense sectors in Oklahoma, is the treatment of the federal government. The law explicitly states that for the purpose of determining whether annual gross revenues are derived from sales to out-of-state buyers, all sales to the federal government shall be considered to be sales to an out-of-state buyer or consumer.

This provision is a legal fiction with significant real-world implications. In practice, a research laboratory located in Oklahoma City might perform 90% of its work for Tinker Air Force Base, which is physically located in Oklahoma. Under a strict geographic test, this firm would fail the revenue test because its client is “in-state.” However, the Oklahoma Legislature recognizes that federal spending represents an “export” of services to the national government. By classifying federal contracts as out-of-state revenue, the state ensures that its most innovative R&D firms—those serving the Department of Defense, NASA, or the Department of Energy—remain eligible for manufacturing-level tax incentives.

Implications for Defense and Aerospace Research

The federal government clause acts as a catalyst for the “Defense-Research-Manufacturing” pipeline. Research laboratories engaged in the fabrication or modification of aircraft parts (classified under NAICS Industry No. 3364) often rely on this provision to bridge the gap between their R&D phases and their production phases. If a facility is “primarily engaged” in aircraft repair or rebuilding for the federal government, it qualifies as a manufacturing facility regardless of where the aircraft is physically situated during the repair.

Local State Revenue Office Guidance: The Oklahoma Tax Commission (OTC)

The Oklahoma Tax Commission (OTC) is the primary body responsible for administering the revenue test and verifying compliance. The Commission provides guidance through the Oklahoma Administrative Code (OAC) and through specific tax forms and instructions. These administrative rules translate the broad language of the statutes into specific procedural requirements for taxpayers.

Administrative Rule 710:50-15-74

Rule 710:50-15-74 governs the Investment/New Jobs Tax Credit, which is the cornerstone of Oklahoma’s R&D incentives following the repeal of the specific R&D New Jobs Credit in 2014. This rule clarifies that to be considered a “manufacturing or processing entity” that qualifies via the revenue test, the establishment must:

1. Be “primarily engaged” in the qualifying activity (e.g., R&D, computer services).
2. Maintain the requisite percentage of out-of-state sales (50% or 80%).
3. File a mandatory annual affidavit.

The OTC defines “primarily engaged” as having more than 50% of the facility’s activities dedicated to the qualifying industrial classification. If a firm performs both local retail services and out-of-state R&D, the OTC will look at the payroll distribution, the square footage of the facility, and the source of gross receipts to determine the “primary” nature of the business.

The Affidavit Process and Form 506

Compliance with the revenue test is established by filing a signed, sworn affidavit with the Tax Commission. This affidavit is not merely a formality; it is a legal attestation subject to review and audit. According to OTC guidance for computer services and research and development exemptions, the affidavit must include:

• The name, address, and Federal Employer Identification Number (FEIN) of the applicant.
• A complete description of the activities (e.g., the specific type of R&D or data processing) taking place at the establishment.
• A statement of the entity’s total annual gross revenues.
• The calculated percentage of gross revenues derived from out-of-state buyers and consumers, specifically identifying the portion attributed to federal government sales.

When an entity files its Oklahoma Income Tax return (Form 511 for individuals or Form 512 for corporations), it must claim the Investment/New Jobs Credit by attaching Form 506. If the entity is a service-based establishment, the lack of an accompanying revenue test affidavit will lead to an immediate denial of the credit.

Sales Tax Exemption Guidance (Rule 710:65-13-54)

Beyond income tax credits, the revenue test is essential for obtaining a sales tax exemption on the purchase of machinery and equipment. Under Rule 710:65-13-54, the OTC issues a “Letter of Certification” to qualified purchasers who meet the revenue test. This letter serves as a “Direct Payment Permit,” allowing the R&D firm to purchase specialized computers, lab equipment, and testing machinery without paying state or local sales tax at the time of purchase.

OTC Certification Step	Requirement	Documentation Needed
Step 1: Application	Request for manufacturing status	Narrative of R&D activities
Step 2: Revenue Proof	Meet 50% or 80% threshold	Financial statements and client logs
Step 3: Affidavit	Sworn statement under penalty of perjury	Completed OTC-approved affidavit form
Step 4: Certification	Issuance of exemption letter	Letter of Certification for vendors

The Letter of Certification is typically valid for twelve months, effective from July 1st following the end of the tax year in which the revenue was calculated. This necessitates an annual “look-back” where the firm must re-verify its out-of-state sales every year to maintain its sales tax-exempt status.

Application of the Law to Research and Development Entities

The application of the revenue test to R&D entities is unique because of the intangible nature of their work. Unlike a manufacturer of tires or furniture, a “Research Laboratory” (SIC 8731) produces “knowledge” or “technical data.” The OTC has historically used a broad interpretation of “processing” to include the manipulation of data and the scientific testing of materials, which allows these labs to enter the manufacturing incentive framework.

Determining the “Location” of the Buyer

For the sale of tangible goods, the destination of the shipment usually determines the location of the buyer. However, for R&D services, the OTC looks at the “benefit of the service” or the “delivery of the data.” If an Oklahoma R&D lab performs a study for a client in New York and emails the final report to New York, the sale is considered “out-of-state.”

There are nuanced exceptions in OTC guidance. For instance, if the client is an out-of-state company but has a physical branch in Oklahoma that “consumes” the R&D service, the OTC may challenge the out-of-state status of that revenue. This requires R&D firms to maintain detailed records not just of where their clients are headquartered, but where the deliverables are sent and utilized.

The Role of NAICS Code 5417

The modernization of the Oklahoma tax code has increasingly relied on NAICS codes rather than the older SIC codes. Establishments primarily engaged in “Research and Development in the Physical, Engineering, and Life Sciences” (NAICS 5417) are eligible for the 50% revenue test. This includes:

• Biotechnology research.
• Electronics and aerospace prototyping.
• Agricultural and bioscience experimentation.

For these firms, the “product” is often a patentable invention or a set of clinical trial results. As long as the primary funding or the “buyer” of those results is located outside Oklahoma (or is the federal government), the firm is treated as a manufacturer. This grants them a 5-year state income tax credit equal to 1% of their investment in new laboratory equipment or a $500 credit per new job created (which doubles to $1,000 in certain Enterprise Zones).

Comprehensive Revenue Test Example: Orion Aerospace R&D LLC

To provide a concrete example of how the revenue test applies to an R&D entity, we can model a scenario for Orion Aerospace R&D LLC, a specialized testing facility in Tulsa.

Scenario Background

• Industry: Aerospace materials testing and prototyping (SIC 8734).
• Facility: New lab expansion worth $10,000,000.
• Employees: 20 new high-wage research engineers.
• Qualifying Threshold: 50% out-of-state sales (as per SIC 8734 / NAICS 5417).

Annual Revenue Breakdown

In its first year of operation, Orion Aerospace R&D LLC records $5,000,000 in gross revenue. Its clients are as follows:

1. Oklahoma Defense Contractor A: $1,000,000 (The client is in Oklahoma, but the project is a sub-contract for the U.S. Army).
2. NASA (Direct Contract): $1,500,000.
3. European Space Agency (ESA): $1,000,000.
4. Local Tulsa Manufacturing Firm: $1,500,000 (Testing of local commercial parts).

Legal Analysis of the Revenue Test

The OTC auditor must determine which of these revenues count toward the “Out-of-State” numerator:

• NASA: $1,500,000 – Counts. All sales to the federal government are out-of-state.
• European Space Agency: $1,000,000 – Counts. The buyer is located outside of Oklahoma and the United States.
• Oklahoma Defense Contractor A: $1,000,000 – Potentially Counts. If the contract is structured as a direct sale to the federal government where the local contractor acts as a pass-through, or if the OTC interprets the “buyer” as the federal government under the specific R&D statutes. However, typically, direct sales to the federal government are the primary beneficiaries. If Orion is a sub-contractor to a local firm, this revenue may be classified as “in-state” unless Orion can prove the federal government is the “consumer” of the R&D service. For this example, we will conservatively treat it as In-State.
• Local Tulsa Manufacturing Firm: $1,500,000 – In-State. Both the buyer and the consumer of the test result are in Oklahoma.

Calculation

Total Out-of-State Revenue = $1,500,000 (NASA) + $1,000,000 (ESA) = $2,500,000
Total Gross Revenue = $5,000,000
Revenue Test Percentage = $2,500,000 / $5,000,000 = 50%

Compliance Result

Orion Aerospace R&D LLC exactly meets the 50% threshold. The entity will:

1. File the mandatory affidavit with the OTC certifying its 50% out-of-state status, specifically highlighting the NASA contract.
2. File Form 506 to claim the Investment/New Jobs Credit.
3. Choose between a 1% investment credit on its $10M expansion ($100,000 per year for 5 years) or a $500 per job credit ($10,000 per year for 5 years). Naturally, it will choose the investment credit.
4. If the facility is located in an Enterprise Zone or a county with less than 75,000 people, the credit amounts could double or have lower payroll requirements.

The Future of R&D Incentives: SB 324 and the Rebate Shift

A significant evolution in Oklahoma R&D policy occurred with the passage of SB 324 in 2025. This bill created the Oklahoma Research and Development Rebate Program, which represents a shift away from traditional income tax credits toward a more liquid cash rebate system.

The Mechanism of SB 324

Unlike the Investment/New Jobs Credit (which requires the revenue test to prove manufacturing status), the new SB 324 rebate is based on Qualified Research Expenditures (QREs) that occur within Oklahoma.

• Benefit: A 5% rebate on QREs as defined by federal Form 6765.
• Cap: $20,000,000 per fiscal year for all qualifying establishments.
• Requirement: Establishments must be in good standing with the OTC and have filed all required Oklahoma tax returns.

While the rebate program is currently awaiting legislative appropriation, it demonstrates a new approach: rather than asking “Where are your customers?”, the state is asking “Where are your researchers?”. However, the out-of-state revenue test remains vital for firms seeking the 5-year property tax (ad valorem) exemption, which can be even more valuable than the 5% rebate for capital-intensive R&D facilities.

Interaction between Rebates and Credits

Firms should be aware that the state generally prohibits “incentive stacking.” Participation in certain rebate programs, such as the Quality Jobs Program, precludes participation in the Investment/New Jobs Credit. The new SB 324 rebate program also carries restrictions; for example, a company cannot claim the R&D rebate if it utilized the (now repealed) sales tax refund for the same period.

Administrative Challenges and Audit Risks

The “Out-of-State Buyers” revenue test is a frequent area of contention in Tax Commission audits. Because a facility’s eligibility can hinge on a single percentage point, R&D firms must be meticulous in their accounting and categorization of sales.

Common Audit Pitfalls

1. Revenue Recognition: If an R&D project spans multiple years, the firm must ensure the revenue is recognized in the tax year that aligns with the investment or job creation being claimed. The OTC requires the revenue test to be met for the “most recently completed income tax year”.
2. In-State “Consumers” of Out-of-State Sales: If an R&D deliverable is sold to a company in Texas, but that company then ships the deliverable back to a branch in Oklahoma for use, the OTC may argue that the “consumer” is in-state, thereby disqualifying that portion of the revenue.
3. SIC/NAICS Misclassification: If a firm claims a 50% threshold under an R&D classification (SIC 8731) but the OTC determines that the firm is actually a “Data Processing” facility (SIC 7374), the threshold jumps to 80%. This can result in a retroactive denial of credits and exemptions, along with interest and penalties.
4. Leased Employees: For the New Jobs portion of the credit, the OTC allows leased employees (from a Professional Employer Organization) to count, but only if an employer-employee relationship exists and the establishment itself meets the revenue test.

Documentation Best Practices

To survive an OTC audit of the revenue test, an R&D firm should maintain a “Tax Credit Substantiation File” containing:

• Client Location Logs: Invoices showing the billing address and the “ship-to” address for all deliverables.
• Federal Contract Copies: Explicit documentation showing the U.S. Government as the primary contracting party.
• Annual Affidavits: Copies of all sworn affidavits filed with the OTC and the Department of Commerce.
• Form 6765: If applying for the new rebate, a copy of the federal R&D tax credit form used to calculate QREs.

Economic and Third-Order Insights

The revenue test is more than a tax hurdle; it is a manifestation of the “Import-Export” theory of economic growth. By favoring out-of-state sales, Oklahoma is incentivizing firms to become “Base Industries.”

The Multiplier Effect

Incentivizing R&D firms that sell to out-of-state buyers creates a “multiplier effect” in the local economy. When a lab in Norman, OK, receives $1,000,000 from a client in Japan (an out-of-state buyer), that “new” money is used to pay local scientists, who then spend their salaries at local grocery stores and on local housing. If the same lab received $1,000,000 from a client in Moore, OK, no new money enters the state ecosystem; it is simply recirculated. The revenue test is the state’s way of ensuring its tax incentives are used to grow the “pie” rather than just slice it.

Strategic Geographic Positioning

The revenue test also influences where firms choose to locate within the state. Because the Investment/New Jobs Credit can double in “Enterprise Zones” or counties with low populations, R&D firms that are already “export-oriented” (meeting the revenue test) have a massive incentive to locate in rural Oklahoma or disadvantaged urban areas. This allows the state to use high-tech R&D as a tool for regional revitalization.

Final Thoughts

The Out-of-State Buyers or Consumers Revenue Test is the essential regulatory bridge that allows Oklahoma’s research and development sector to access the state’s manufacturing tax incentive framework. By requiring a 50% or 80% threshold of out-of-state sales—while generously including federal government contracts in that calculation—the law ensures that Oklahoma’s tax subsidies are reserved for “basic industries” that drive genuine economic growth through the importation of external capital.

For the professional tax practitioner or corporate researcher, navigating this test requires a precise understanding of NAICS/SIC classifications, a disciplined approach to annual affidavit filings, and a proactive strategy for documenting the geographic destination of R&D deliverables. As the state moves toward the new SB 324 rebate program, the revenue test will remain a cornerstone for the ad valorem property tax exemptions that anchor long-term capital investment in the state. Understanding this test is not merely a matter of compliance; it is a strategic requirement for any innovative firm looking to maximize its footprint in Oklahoma’s evolving high-tech landscape.