I received a royalty payment for my invention licensing from my university in Oklahoma. I did not live in OK in 2020. Do I still need to file an income tax return for OK?

[rajmanivannan]

If yes, can i use this deduction? "Royalty income earned by an inventor from a product developed and manufactured in this state shall be exempt from
income tax for a period of seven years as long as the
manufacturer remains in this state"

[ColeenD3]

Yes.

Nonresident Except as otherwise provided for in the Pass-Through Entity Tax Equity Act of 2019, every nonresident with Oklahoma source gross income of $1,000 or more is required to file an Oklahoma income tax return. A nonresident partner may elect to be included in a composite partnership return, see Rule 710:50-9-1.

If there is at least $1,000 of gross income from Oklahoma sources, such as Oklahoma rental or royalty income, complete the Oklahoma Form 511NR according to the “Select Line Instructions”.

"Royalty income earned by an inventor from a product developed and manufactured in this state shall be exempt from
income tax for a period of seven years as long as the manufacturer remains in this state."

How is this true if you were not living there? Are you going to remain in the state?

[rajmanivannan]

@ColeenD3 

This invention was made as part of my PhD work at my Univ in Oklahoma when I was there. I am listed as an inventor in the project along with my professor. This one-time royalty (more than $20,000 total amount) was given by my PhD project funders (licensee) to the university (licensor) in 2020 and I was given 25% of the total royalty amount. The university has complete ownership and copyright of this work. The university is in Oklahoma. I was wondering if I can consider the university as the "manufacturer" in Oklahoma and claim the deduction below for my part of the royalty. The licensee company that paid the royalty is also in Oklahoma. 

"Royalty income earned by an inventor from a product developed and manufactured in this state shall be exempt from income tax for a period of seven years as long as the manufacturer remains in this state."

Another question is, for federal tax filing, should this income be treated as investment income (Schedule E) or business income (Schedule C)? I received a 1099-MISC for this royalty payment. As I mentioned earlier, the university has complete ownership and copyright of this work.

[ColeenD3]

Whether the University has ownership or not, you received the income and should report it for Federal purposes. Since the OK provision is unclear, even though you are one of the inventors and the manufacturer is the University, I would just call the state with a hypothetical and have them clarify.

Report it on Schedule E.

A royalty property is a right to income from natural resources like oil, gas, or mineral properties.

This might also include royalty payments you'd get from copyrights and patents, but only if you are not in the business of creating such works. 

An example of this might be a patent you purchased in order to collect fees by licensing the patent.

If you regularly create intellectual property such as a copyright or patent (for example, you're a professional author), you should report income from this self-created property as Business Income, not as investment royalties.

[rajmanivannan]

@ColeenD3 Thank you very much! This is very helpful. 

I have two a follow-up questions.

I am a resident alien for tax purposes. I am filing my taxes jointly with my wife and she does not have SSN/ITIN. I am sending my federal return with W-7 for ITIN to the Austin location listed in ITIN form. Do I need to do anything special with respect to my wife's ITIN for my 511NR for Oklahoma? Can I just send the printed federal return copy along with my Oklahoma 511NR without my wife's ITIN?

[ColeenD3]

I can't see anything in OK Department of Revenue that references ITINs, except for dependents. To be on the safe side, follow the same procedure that you do for Federal. This might be a case where more is better.