New for 2003...

Legislation (HB 1356) passed during the 2003 legislative session directed pass-through entities to withhold Oklahoma income tax on distributions made to non-resident members.

GENERAL INFORMATION

Effective August 29, 2003, any pass-through entity that makes a distribution to a non-resident member is required to deduct and withhold Oklahoma income tax from each distribution being made with respect to Oklahoma source income. The amount of income tax withheld is to be 5% of the distribution.

The following types of entities are considered to be a pass-through entity:

• corporations that are treated as S corporation under the Internal Revenue Code;

• general partnerships;

• limited partnerships;

• limited liability partnerships;

• trusts; and

• limited liability companies that are not taxed as a corporation for federal income tax purposes

The following persons are considered to be a member if they are:

• a shareholder of an S corporation;

• a partner in a general partnership;

• a partner in a limited partnership;

• a partner in a limited liability partnership;

• a member of a limited liability company; or

• a beneficiary of a trust.

Organizations granted an exemption under Section 501 (c)(3) of the Internal Revenue Code are not subject to withholding under this section.

Also, entities exempt from Oklahoma income tax under 68 O.S. § 2359 (c); insurance companies subject to the Oklahoma Gross Premiums Tax, are not subject to withholding under this section.

A pass-through entity electing to be treated as a disregarded entity for federal income tax purposes is not required to withhold under this section.  A disregarded entity is an eligible entity that is treated as an entity that is not separate from its single owner.  Also, an entity that does not have a, or properly elects out of the, requirement to file a federal income tax return is not required to withhold under this section.

Pass-through entities making distributions of income not subject to Oklahoma income tax are not required to withhold on those distributions.

Pass-through entities that have withheld tax on royalty interest income under 68 O.S. Section 2385.25 et seq. are not required to withhold income tax under this section for any distribution of royalty income on which the 6.75% royalty interest income tax has already been withheld.

Pass-through entities making distributions to another pass-through entity are not required to withhold on those distributions.

A non-resident is any individual who is not a resident of or domiciled in this state. For more information on residency status of individuals, please see Oklahoma Tax Commission Rules 710:50-3-36.

Business entities that do not have their commercial domicile in this state, and trusts not organized in this state are also considered non-resident entities for purposes of pass-through entity withholding.

SPECIFIC INFORMATION

In the case of S corporations; general, limited or limited liability partnerships; and limited liability companies, withholding of five percent (5%) is required on the Oklahoma portion of the cash distribution or the Oklahoma net distributed income if determinable at the time of distribution.

In the case of S corporations paying the tax on behalf of non-resident shareholders (68 O.S. Section 2365) or partnerships filing composite returns on behalf of non-resident partners, the non-resident member withholding can be claimed on the return filed by the S corporation or the partnership.

For trusts, withholding of five percent (5%) is required on the Oklahoma portion of the cash distribution or the Oklahoma distributed net income if determinable at the time of distribution.

Pass-through entities that make distributions subject to Oklahoma withholding must register with the Oklahoma Tax Commission. Contact Taxpayer Assistance at (405) 521-3160 for a Form OW-11 "Oklahoma Withholding for Nonresident Members". The in-state toll free number is (800) 522-8165 extension 1-3160.

Pass-through entities that withhold on distributions are required to file an Oklahoma Tax Commission Form OW-9-C and pay the Oklahoma income tax withheld on a quarterly basis using the following schedule:

The pass-through entity is also required to provide non-resident members and the Oklahoma Tax Commission an annual written statement showing the name of the pass-through entity, to whom the distribution was paid, the amount of the distribution and the amount of Oklahoma income tax withheld. Further, the statement must also furnish the non-resident member’s name, address, and social security number or Federal Employer Identification Number. To accomplish this pass-through entities must provide nonresident members a copy of the Oklahoma Tax Commission Form 500-B, by last day of the second month after the end of its taxable year, showing their respective amount of income and tax withheld. Each non-resident member must enclose a copy of the Form 500-B to their Oklahoma income tax return as verification for this withholding. Copies of Form 500-Bs, along with the Oklahoma Tax Commission Form 501, must be sent to the Oklahoma Tax Commission by the same date.

Any non-resident member from whom an amount is withheld pursuant to the provisions of this section, and who files an Oklahoma income tax return is entitled to a credit for the amount withheld. If the amount withheld is greater than the tax due, the non-resident member will be entitled to a refund of the amount of the overpayment.