United States: Louisiana Enacts Various Tax Provisions During Second Special

In an effort to close an estimated $600 million deficit in the FY 2017 budget, Louisiana Governor John Bel Edwards called for the Louisiana legislature to hold a Second Special Session during June 2016. Governor Edwards signed the various bills from this most recent special session into law by June 28, 2016. The most significant corporate income tax amendments include the adoption of single sales factor apportionment for most taxpayers, the use of a market-based method to source sales other than sales of tangible personal property, and the enactment of a throwout rule. Separate legislation was enacted to amend the net operating loss (NOL) deduction, inventory tax credit refunds, and the Louisiana Citizens Property Insurance Corporate assessment credit. Also, legislation limits the capital gains deduction for purposes of personal income tax. Significant sales and use tax legislation includes changes to the exemption for raw materials for further processing. Also, a number of personal charitable and medical exemptions from sales tax were restored that were lost during the First Special Session that was held earlier this year. Finally, a new health maintenance organization (HMO) tax has been enacted.

Corporate Income and Franchise Tax

Apportionment

Legislation from the Second Special Session made extensive changes to various apportionment provisions.1 These amendments apply to tax years beginning on and after January 1, 2016.

Single Sales Factor: Louisiana is changing to a single sales factor apportionment formula for most taxpayers. In the past, Louisiana required the use of different apportionment formulas depending on the taxpayer's industry, but the default formula was an equallyweighted three-factor formula. Specifically, as amended, a single sales factor formula is expressly adopted for taxpayers that primarily derive their income from: transportation by aircraft;2 transportation other than by aircraft or pipeline;3 a service business in which the use of property is not a substantial income-producing factor;4 or from transportation by pipeline, or from most other businesses.5 For service companies, the gross apportionable income from Louisiana sources includes the revenue from services sourced to (previously, performed in) Louisiana, and any other gross income derived entirely from sources within the state.6

Double-Weighted Sales Factor for Oil and Gas Companies: Louisiana is adopting a three-factor (property, payroll and sales) apportionment formula with a double-weighted sales factor for taxpayers that primarily derive their income from the exploration, production, refining or marketing of oil and gas.7 Because sales are counted twice, some sources are describing this as a four factor formula.

Market-Based Sourcing: Sales other than sales of tangible personal property are sourced to Louisiana if the taxpayer's market for the sale is in the state.8 The taxpayer's market is considered to be in Louisiana if the income from the sale, rental, lease or license of immovable property or rental, lease or license of tangible personal property relates to property located in Louisiana, or if the income is from a service delivered to a Louisiana location.9

For a lease or license of intangible property, including a sale or exchange of property where the receipts derive from payments that are contingent on the productivity, use or disposition of the property, the sales are sourced to Louisiana if and to the extent the property is used in the state.10 For the sale of other intangible property, where the property sold is a contract right, government license or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, the sale is sourced to Louisiana if and to the extent the intangible property is used in or otherwise associated with the state. Otherwise, sales of intangible property are excluded from the numerator and denominator of the apportionment factor.11

Special provisions apply to sourcing sales if the customer is an individual or if the customer is an entity that is unrelated to the taxpayer.12 If the service provided is a direct personal service to an individual, the sale is sourced to the state where the customer received the service.13 If the service is not a direct personal service, the sale is sourced to Louisiana if it is delivered to an individual customer with a Louisiana billing address.14 To the extent a service is provided to an unrelated entity and the service has a substantial connection to a specific geographic location, the income is sourced to Louisiana if the geographic location is in Louisiana.15 If the service receipts have a substantial connection to geographic locations in more than one state, the sales are reasonably sourced between those states.16 To the extent the service does not have a connection to a specific geographic location, the sales are sourced to the taxpayer's commercial domicile.17 If these sourcing methodologies do not clearly reflect the taxpayer's market in Louisiana, the taxpayer may make a reasonable approximation.18 The Secretary of Revenue is directed to promulgate rules to govern the sourcing of sales of services between related entities.19 Finally, a taxpayer subjected to different sourcing methodologies in Louisiana and other states is afforded the opportunity to engage in non-binding mediation with the Department and other state tax authorities.20

Throwout of Sales: If the taxpayer is not taxable in a state to which a sale is assigned or if the state of assignment cannot be determined or reasonably approximated, the sale is excluded from the numerator and denominator of the sales factor.21

NOL Deduction22

Under existing law, for returns filed on or after July 1, 2015, the NOL deduction is limited to 72 percent of the NOL carryovers to such year.23 Recent legislation clarifies that the limitation does not apply to an amended return filed on or after July 1, 2015 if there was a claim for the NOL deduction on an original return filed before July 1, 2015. In the absence of this provision, the reporting of federal taxable income adjustments to Louisiana may have resulted in loss utilization reductions and, therefore, tax payments.

Inventory Tax Credit Refunds24

In 2015, the Louisiana legislature limited property tax (ad valorem) credit refunds over $10,000 to 75 percent of the available credit in excess of tax.25 The balance was to be carried forward for five years. Under legislation enacted during the recent special session, taxpayers whose ad valorem taxes eligible for the credit did not exceed $500,000 for the tax year will be refunded 100 percent of the excess credit.26 For taxpayers whose ad valorem taxes eligible for the credit were more than $500,000 but less than or equal to $1 million for the tax year, 75 percent of the excess credit will be refunded and the remaining 25 percent will be carried forward for a period not to exceed five years.27 For taxpayers whose ad valorem taxes eligible for the credit were more than $1 million for the tax year, 75 percent of the first $1 million of excess credit will be refunded and the remaining amount of the credit will be carried forward for a period not to exceed five years.28 For purposes of the total amount of ad valorem credit claimed, the state will look to the total amount of credit requested by the taxpayer's total federal consolidated group, although the credits will continue to be requested on separate returns.29 These changes apply to original (not amended) claims filed on or after July 1, 2016.

Different rules apply to new business entities formed or first registered to do business in Louisiana after April 15, 2016.30 If these entities paid ad valorem taxes of less than $10,000, they will receive a refund of the excess credit.31 If these entities paid ad valorem taxes during the tax year of $10,000 or more, but no more than $1 million, they will be refunded 75 percent of the excess credit and the remaining credit may be carried forward for a period not to exceed five years.32

The legislation also enacts special rules that apply to manufacturers that have claimed an ad valorem exemption under Article VII, Section 21(F) of the Louisiana Constitution.33 For these manufacturers and their related parties, affiliates, subsidiaries, parent companies, or owners of such manufacturer for the inventory held that is related to the manufacturer's business, the excess credit is no longer refundable for claims filed after June 30, 2016, but may be carried forward for a period not to exceed five years.

Louisiana Citizens Property Insurance Tax Credit34

Effective January 1, 2016, the refundable Louisiana Citizens Property Insurance Corporate assessment tax credit is further reduced from 72 percent to 25 percent of the amount of eligible surcharges, market equalization charges or assessments paid by taxpayers on their insurance due to Hurricanes Katrina and Rita.35 Because the previously enacted sunset of this reduction also is removed, this reduction in the credit is made permanent. In 2015, the rate of this credit had been reduced from 100 percent to 72 percent, in addition to the lack of any carryforward of the disallowed portion of the credit.36

Personal Income Tax

For sales or exchanges of equity interests or assets that occur on or after June 28, 2016, legislation has been enacted that restricts the capital gain deduction from personal income tax for the sale of Louisiana domiciled, non-publicly traded, businesses that the taxpayer was employed in or materially participated in for five years and was held five years or more.37 The new deduction ranges from 50 percent for businesses held and domiciled in Louisiana for five to 10 years (zero for less than five years), up to a 90 percent deduction for those domiciled for 25 to 30 years. After 30 years of ownership, the full deduction is restored.

Sales and Use Tax

Limitation of Exemption for Raw Materials38

Effective June 23, 2016, legislation narrows the definition of "sale at retail" related to the state and local sales tax exclusion for the sale of materials for further processing into articles of personal property for sale at retail.39 The requirements for a taxable sale are not met when all of the following are true:

  • The raw materials become a recognizable and identifiable component of the end product;
  • The raw materials are beneficial to the end product; and
  • The raw materials are materials for further processing, and as such, are purchased for the purpose of inclusion into the end product.40

Furthermore, the purchase of raw materials for the production of raw or processed agricultural, silvicultural,41 or aquacultural products is not a taxable sale.42 Materials that are processed into byproducts are taxable.43 A byproduct is defined as "any incidental product that is sold for a sales price less than the cost of the materials."44

Restoration of Specified 3 Percent Exemptions45

Effective July 1, 2016, legislation restores 28 exclusions and exemptions applicable to 3 percent of the Louisiana sales and use tax.46 These include individual non-profit, charitable or medical expenditures largely defined in La. Rev. Stat. Ann. Sections 47:301 and 47:305. The isolated or occasional sales of tangible personal property exemption also has been reinstated.47 In addition, the purchase of fishing vessels and supplies for licensed commercial fishermen is again exempt.48 Further, sales of butane, propane or other liquefied petroleum gases for private, residential consumption regain their exemption.49

HMO Tax

Beginning January 1, 2016, the HMO annual license tax has been repealed.50 At the same time, a new tax is established at $550 of every $10,000 of gross premiums or 5.5 percent.51 Also, HMOs are exempted from the 5 percent insurance premium tax credit reduction enacted in the First Special Session earlier this year.52 Furthermore, beginning January 1, 2017, the types of investments that constitute a "qualifying Louisiana investment" that generate the credit have been expanded.53

Commentary

Louisiana has enacted considerable tax reform legislation during the past two years to address its budget deficit.54 The legislation amending the apportionment factor is likely the most far-reaching of the Second Special Session's income tax legislation. First, it shifts transportation companies including airlines and pipelines, as well as companies not assigned a specific apportionment formula, to calculate their apportionment factor on a single sales factor basis, and oil and gas companies move from an equally-weighed three factor to a double-weighted sales factor. Second, sales, other than sales of tangible goods, are sourced on a market basis rather than a cost of performance basis. What constitutes a "personal service" or "substantial connection," to determine where these sales are sourced, is, at best, subjective; and is all but guaranteed to leave taxpayers guessing. Third, further adding complexity and uncertainty to the apportionment factor is the required throwout of sales sourced to states where the taxpayer is not taxable (or where the source state cannot be reasonably identified). If a taxpayer previously had only modest sales in Louisiana and the remaining sales are to other states where it is not taxable, its Louisiana apportionment factor is now 100 percent after application of the throwout rule. Unlike the more familiar "throwback," throwout sales do not have to originate in Louisiana to be thrown out.

Historically, Louisiana has offered a 100 percent deduction for individuals selling their businesses. Now, the amount of the deduction will range from 0 percent to 100 percent depending on the length of time the Louisiana business has been held by the owner. Presumably, this is to prevent entrepreneurial individuals from selling their businesses and moving to a state without a personal income tax, such as Florida or Texas. Unique to Louisiana businesses, this provision also is constitutionally suspect because it favors instate taxpayers.

Sales and use tax has also changed significantly – again. In this round of changes, some of the more aggressive elimination of basic charitable and medical deductions was reversed, as well the legislative rejection of the Nelson Industrial case that previously exempted purchases of raw materials used to produce byproducts.55 Although the legislation reinstated the occasional sales exemption and sales by youth and exempt organizations, it did nothing for other industries and taxpayers that are facing double taxation such as the rental industry. Subjecting equipment purchased for rental purposes to sales tax and then also requiring the collection of sales tax on that rental stream is putting the rental industry at a disadvantage with the retail industry and other states that provide for the purchase or the rental stream to be exempt.

Footnotes

1 Act 8 (H.B. 20), Laws 2016 (Second Extraordinary Session).

2 LA. REV. SAT. ANN. § 47:287.95.A.(2).

3 LA. REV. SAT. ANN. § 47:287.95.C.(1)(b).

4 LA. REV. SAT. ANN. § 47:287.95.D.(2).

5 LA. REV. SAT. ANN. § 47:287.95.F.(2)(b)(ii).

6 LA. REV. SAT. ANN. § 47:287.95.D.(3).

7 LA. REV. SAT. ANN. § 47:287.95.E. For purposes of this provision, "exploration, production, refining, or marketing of oil and gas" is defined as any taxpayer whose income is primarily derived from the sale of unrefined oil and gas. Also, the term includes any taxpayer defined as an integrated oil company under Internal Revenue Code (IRC) Section 291(b)(4), or integrated oil companies that refine, produce and have marketing operations, whose Louisiana income is principally derived from the production and sale of unrefined oil and gas, and who also engage in significant marketing of refined petroleum products in the state. However, a taxpayer that does not engage in these activities will not be considered an integrated company for Louisiana tax purposes even if it is considered to be a "related party" or "member of the federal consolidated group" under the IRC.

8 LA. REV. SAT. ANN. § 47:287.95.L.(1).

9 LA. REV. STAT. ANN. § 47:287.95.L.(1)(a)-(c).

10 LA. REV. STAT. ANN. § 47:287.95.L.(1)(d).

11 LA. REV. STAT. ANN. § 47:287.95.L.(1)(e).

12 LA. REV. SAT. ANN. § 47:287.95.L.(2), (3).

13 LA. REV. SAT. ANN. § 47:287.95.L.(2)(a).

14 LA. REV. SAT. ANN. § 47:287.95.L.(2)(b).

15 LA. REV. SAT. ANN. § 47:287.95.L.(3)(a).

16 Id.

17 LA. REV. SAT. ANN. § 47:287.95.L.(3)(b).

18 LA. REV. SAT. ANN. § 47:287.95.L.(2)(c), (3)(c).

19 LA. REV. SAT. ANN. § 47:287.95.L.(3)(d).

20 LA. REV. SAT. ANN. § 47:287.95.L.(5).

21 LA. REV. SAT. ANN. § 47:287.95.M.

22 Act 2 (H.B. 47), Laws 2016 (Second Extraordinary Session).

23 LA. REV. SAT. ANN. § 47:287.86.A.

24 Act 4 (S.B. 6) and Act 5 (S.B. 10), Laws 2016 (Second Extraordinary Session).

25 Act 133 (H.B. 805), Laws 2015, amending LA. REV. SAT. ANN. § 47:6006.B.

26 LA. REV. SAT. ANN. § 47:6006.B.(1)(a).

27 LA. REV. SAT. ANN. § 47:6006.B.(1)(b).

28 LA. REV. SAT. ANN. § 47:6006.B.(1)(c).

29 LA. REV. SAT. ANN. § 47:6006.B.(2).

30 LA. REV. SAT. ANN. § 47:6006.B.(3).

31 LA. REV. SAT. ANN. § 47:6006.B.(3)(b).

32 LA. REV. SAT. ANN. § 47:6006.B.(3)(c). The standard provisions discussed above apply to new businesses that pay ad valorem taxes that exceed $1 million in the tax year.

33 LA. REV. SAT. ANN. § 47:6006.B.(3). Note that both S.B. 6 and S.B. 10 add new provisions as LA. REV. SAT. ANN. § 47:6006.B.(3). "Manufacturer" means one of the following: (a) a person engaged in the business of working raw materials into wares suitable for use or which gives new shapes, qualities, or combinations to matter which already has gone through some artificial process; or (b) a person who meets the above definition and has claimed an ad valorem exemption under Article VII, Section 21(F) of the Louisiana Constitution during the taxable year in which the local inventory taxes were levied. LA. REV. SAT. ANN. § 47:6006.C.(3). The new provision for manufacturers only applies to manufacturers as defined by (b).

34 Act 9 (H.B. 25), Laws 2016 (Second Extraordinary Session).

35 LA. REV. SAT. ANN. § 47:6025.A.(1).

36 H.B. 629, Laws 2015.

37 Act 11 (H.B. 50), Laws 2016 (Second Extraordinary Session), amending LA. REV. STAT. ANN. § 47:293(9)(a)(xvii).

38 Act 3 (H.B. 27), Laws 2016 (Second Extraordinary Session). Note that this legislation is intended to clarify the original intent of the statute providing that "sale at retail" does not include the sale of materials for further processing into articles of tangible personal property for sale at retail. This legislation is retroactive and applicable to all refund claims submitted or assessments of additional taxes due that are filed on or after June 23, 2016. However, this legislation is not applicable to any existing claim for refund filed or assessment of additional taxes due issued prior to June 23, 2016 for any tax period prior to July 1, 2016, which is not barred by the statute of limitations.

39 LA. REV. SAT. ANN. § 47:301(10)(c)(i)(aa).

40 LA. REV. STAT. ANN. § 47:301(10)(c)((i)(aa)(I).

41 Silviculture is the care and cultivation of forests.

42 LA. REV. STAT. ANN. § 47:301(10)(c)((i)(aa)(II).

43 LA. REV. STAT. ANN. § 47:301(10)(c)((i)(aa)(III)(aaa).

44 Id.

45 Act 12 (H.B. 51), Laws 2016 (Second Extraordinary Session).

46 LA. REV. STAT. ANN. §§ 47:302.AA; 47:321.1.F.(66). The 3 percent tax is comprised of the 2 percent tax imposed by LA. REV. STAT. ANN. § 47:302 and the 1 percent tax imposed by LA. REV. STAT. ANN. § 47:321.

47 LA. REV. STAT. ANN. § 47:301(10)(c)(ii)(bb).

48 LA. REV. STAT. ANN. § 47:302.AA.(26).

49 LA. REV. STAT. ANN. § 47:302.AA.(27).

50 Act 1 (H.B. 35), Laws 2016 (Second Extraordinary Session), repealing LA. REV. STAT. ANN. § 22:270.

51 LA. REV. STAT. ANN. § 22.842.B.

52 Act 7 (H.B. 24), Laws 2016 (Second Extraordinary Session), amending LA. REV. STAT. ANN. § 22:832(A)(3).

53 LA. REV. STAT. ANN. § 22:832.C.(6).

54 For a discussion of the legislation that was enacted in 2015, see GT SALT Alert: Louisiana Enacts Income and Franchise Tax Changes Which May Require Taxpayer Action by June 30, 2015. For a discussion of the legislation that was enacted earlier this year during the First Special Session, see GT SALT Alert: Louisiana Enacts Broad Range of Tax Increases During Recent Special Session. For a discussion of the sales tax notice requirements that were enacted earlier this year during the regular legislative session, see GT SALT Alert: Louisiana Enacts Sales and Use Tax Notice Requirements on Remote Retailers.

55 Bridges v. Nelson Industrial Steam Co., Louisiana Supreme Court, No. 2015-C-1439, May 3, 2016.

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