Blitz USA, Inc. v. Oklahoma Tax Com'n
| Decision Date | 13 May 2003 |
| Docket Number | No. 96,883.,96,883. |
| Citation | 2003 OK 50,75 P.3d 883 |
| Parties | BLITZ U.S.A., INC., Protestant/Appellant, v. OKLAHOMA TAX COMMISSION, Respondent/Appellee. |
| Court | Oklahoma Supreme Court |
Robert O. O'Bannon and Hal Wm. Ezzell, Phillips McFall McCaffrey McVay & Murrah, P.C., Oklahoma City, OK, for Appellant.
Douglas B. Allen, General Counsel and J.L. Miller and Lyn Martin-Diehl, Assistant General Counsel, Oklahoma Tax Commission, Oklahoma City, OK, for Appellee.1
¶ 1 The sole issue tendered on certiorari is whether the state income tax exemption for royalty earned by an inventor extends to a company's net income from the sale of products it also invents and manufactures. We answer in the negative.
¶ 2 Blitz U.S.A., Inc. (taxpayer or the company) is a closely-held corporation located in Miami, Oklahoma. It has elected for federal and state income tax purposes Subchapter S tax status under the United States Internal Revenue Code.2 As a Subchapter S corporation, taxpayer's corporate earnings are reportable and taxable as the personal income of its three individual shareholders. After filing its original income tax returns for fiscal years 1993 through 1995, taxpayer came to believe that a portion of its previously reported net distributable income in each of those years was in fact exempt as royalty earned by an inventor within the meaning of 74 O.S.1991 § 5064.7.A.1.,3 one of two tax incentive provisions contained in the Inventor's Assistance Act (the Act).4 To take advantage of this exemption, taxpayer in 1998 filed amended state income tax returns for fiscal years 1993-1995. The company similarly claimed the inventor's royalty exemption in its original return for fiscal year 1996, also filed in 1998.
¶ 3 The Audit Division of the Oklahoma Tax Commission (the Commission) disallowed the exemption. Taxpayer timely filed a protest, which was heard before an Administrative Law Judge (the ALJ) on 28 June 2000. The Audit Division at the hearing challenged (1) the capacity of a corporate taxpayer to claim the status of inventor under the Act5 and (2) the right of taxpayer to apply the inventor's royalty exemption to the company's net income from the sale of products it develops and manufactures.
¶ 4 The ALJ initially issued Findings of Fact, Conclusions of Law, and a Recommendation in favor of taxpayer on both issues, but upon the Audit Division's motion, the ALJ reconsidered and ruled that, although taxpayer qualifies as an inventor under the Act,6 its net income from the sale of products it also invents and manufactures is not eligible for the inventor's royalty exemption. The ALJ recommended that taxpayer's protest be denied. The Commission agreed, adopted the ALJ's reconsidered Findings, Conclusions, and Recommendation, entered its order denying taxpayer's protest, and declared its ruling to have precedential value for the agency.7
¶ 5 Taxpayer appealed and the Court of Civil Appeals, Division I, reversed, holding that the word "royalties" as defined in the Act8 is broad enough to include net income from the sale of products invented and manufactured by the same company. We granted certiorari upon the Commission's petition and now hold that a company's net income from the sale of products it also invents and manufactures does not constitute royalty earned by an inventor within the meaning of § 5064.7.A.1. of the Act.
¶ 6 The dispositive issue in this case is whether taxpayer's net income from products it invents, manufactures, and sells is exempt from state income tax as royalty earned by an inventor. Resolution of the pivotal issue calls for ascertaining the meaning of the phrase "royalty earned by an inventor" as used in the text of 74 O.S.1991 § 5064.7.A.1.9 Statutory construction presents a question of law.10 The Commission's legal rulings, like those made by a district court judge, are on review subject to an appellate court's plenary, independent and nondeferential reexamination.11 We hence review de novo the Commission's attribution of meaning to the critical part of the statutory text.12
¶ 7 Prominent among the various services and benefits bestowed by the Act are tax incentives for inventors and for in-state businesses that manufacture a product developed in this state by an inventor. As originally enacted in 1987, the tax incentive for inventors, § 5064.7.A.1., stated:
¶ 8 In 1988 the Legislature amended this provision by modifying the introductory clause and by replacing the word "income" with the word "royalty" in subsection 1. Accordingly, throughout the fiscal years relevant to this case, the tax incentive afforded inventors stated:
¶ 9 As originally enacted in 1987, the tax incentive for businesses that manufacture a locally invented product, 74 O.S.1991 § 5064.7.A.2., granted manufacturers a tax incentive similar to that afforded inventors. It stated:
This provision was also amended in 1988 to abolish the exemption for income and replace it with a limited exclusion for depreciable property directly used in the manufacture of locally invented products. Accordingly, throughout the fiscal years relevant to this case, the tax incentive for manufacturers stated:
¶ 10 Although the Commission does not dispute that taxpayer, in its capacity as the manufacturer of locally invented products, is entitled to the tax incentives available under this provision,13 we quote it here because the Commission contends that the 1988 amendment to the manufacturer's tax incentive bears on the meaning of the inventor's tax incentive.
¶ 11 The Legislature also defined the term "royalties" in the 1987 version of the Act and has left that definition substantially unchanged since then. As originally enacted, the Act's substantive provisions did not use the singular form of the word, but only the plural form—"royalties."14 The singular form of the word—"royalty"—was added to the substantive provisions of the Act in 1988 when the Legislature substituted "royalty" for "income" in the amendment to § 5064.7.A.1. The statutory definition of royalties provides:
"`Royalties' means all things of value received by an inventor in connection with the licensing, rental or sale of a product patented, in patent pending, or trademarked pursuant to federal law."15
¶ 12 Taxpayer urges that § 5064.7.A.1. and the Act's definition of the pivotal term "royalties" are clear and unambiguous, plainly authorizing taxpayer to treat as exempt its net income from the sale of manufactured articles that originated as taxpayer-created inventions and were subsequently patented. According to taxpayer, net income from the sale of taxpayer-invented products meets each and every condition of the Act's definition of royalties. It is a(a) thing of value (b) received by an inventor (c) in connection with the sale (d) of patented products. Taxpayer urges that its identity as the inventor of the products at issue and its identity as their manufacturer is inseparable so that when it receives payment from its customers for the manufactured products, it is as an inventor, and not just as a manufacturer and seller, that the payment is received.
¶ 13 The Commission posits several reasons why taxpayer's...
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