Oklahoma Supreme Court Holds Capital Gains Deduction Statute Does Not Violate Commerce Clause

In a 5-4 decision, the Oklahoma Supreme Court has reversed the Oklahoma Court of Civil Appeals and held that the state's capital gains deduction statute does not violate the Commerce Clause of the U.S. Constitution.1 Specifically, the statute imposes a shorter holding requirement to receive the capital gains deduction upon companies with their primary headquarters in Oklahoma versus companies with their primary headquarters outside Oklahoma. The Court held that there is no discrimination against interstate commerce to which the Commerce Clause applies. Furthermore, the Court held that even if the Commerce Clause applied to this case, the deduction does not facially discriminate against interstate commerce, does not have a discriminatory purpose and has no discriminatory effect on interstate commerce.

Background

The taxpayer, CDR Systems Corporation (CDR), which was doing business in Oklahoma and headquartered in Florida, entered into a stock purchase agreement, selling all of its assets, which it had owned for more than three years. Following the asset sale, CDR filed its 2008 amended Oklahoma corporation income tax return, claiming the Oklahoma capital gains deduction for the gains from the sale of its assets. The Oklahoma Tax Commission denied the deduction, applying a five-year holding period requirement to CDR because it was not considered an "Oklahoma company" pursuant to the capital gains deduction statute. CDR timely filed a protest, arguing that the three-year holding period applicable to an "Oklahoma company" created an unconstitutional disparity between the treatment of in-state versus out-of-state entities. Based on the Administrative Law Judge's recommendation, the Commission denied the protest and CDR subsequently appealed the matter directly to the Court of Civil Appeals.

In its initial decision,2 the Court of Civil Appeals determined that the longer holding period requirement for out-of-state companies to take the capital gains deduction than companies with Oklahoma headquarters violated the Commerce Clause of the U.S. Constitution.3 The Court reached this result by concluding that the capital gains deduction was discriminatory on its face, and was "per se invalid" due to the different holding period requirements based on the location of the company's headquarters. Further, the Court found that the law did not survive a "strict scrutiny" analysis with respect to why the differential treatment should be allowed. However, the Court's initial decision did not state a specific remedy to cure the unconstitutional defect in the statute.

Upon rehearing,4 the Court of Civil Appeals reconsidered and affirmed its prior decision, but the second opinion elaborated on the appropriate remedy for the taxpayer claiming the constitutional violation and similarly situated taxpayers, allowing retroactive relief. The Commission appealed to the Oklahoma Supreme Court.

Capital Gains Deduction

Under Oklahoma law, a capital gains deduction is provided if there is a sale of real property or tangible personal property located in the state that is owned by a corporation for at least five years prior to the date of the...