Significant Changes in Louisiana for Income/Franchise & Sales/Use Tax

As a result of a $900 million budget shortfall, Louisiana lawmakers have passed the following tax measures aimed at bridging the revenue gap.  Some of the more important changes are as follows:

Income/Franchise Tax Changes (effective 1/1/2017):

  1. Expansion of franchise tax:
    1. “Domestic Corporation” now includes partnerships, joint ventures, and LLCs electing to be taxed as C Corporations for federal income tax purposes.
    2. Expansion of franchise tax nexus for out of state taxpayers – nexus for corporations that own interest in partnerships with Louisiana operations.
  2. Net Operating Loss (NOL) Reduction – NOL deduction cannot exceed 72% of Louisiana taxable income.
  3. NOL Carryover ordering – must use loss carryovers starting with the loss for the most recent taxable year. Older NOLs may expire since taxpayers would have to first use newer NOLs.
  4. Modification of corporation income tax rate to flat rate of 6.5% (contingent).
  5. Addback of intercompany interest, intangible expenses and management fees unless certain exceptions are met.
  6. Modification of federal income tax deduction (contingent).

Sale/Use Tax Changes:

  1. Effective 4/1/16 through 6/30/2018, the legislation increases the sales tax rate by 1% (bringing the rate to 5%).  Referred to as the “Clean Penny” Legislation, the legislation includes its own set of exclusions and exemptions apart from the exclusions and exemptions that apply to the original 4% sales tax rate (referred to as “Old Penny”).
  2. Old Pennies (the original 4% sales tax) – law modifies the list of exclusions and exemptions, specifically as they relate to the 2% basic rate (sub component of the 4% tax).  It is important to note the inconsistencies between the exclusions and exemptions offered under the Clean Penny and Old Penny laws.
  3. Affiliate Nexus provisions – the legislations drastically expands the definition of a “dealer.”

For additional background regarding the legislation, please visit the tax foundation website.

Texas enacts permanent Franchise Tax rate reduction

Link: Read more

On June 15, 2015, Texas Governor Greg Abbott signed H.B. 32, which permanently reduces the Texas Franchise Tax (Margin Tax) rates by 25% to 0.375% of taxable margin for taxpayers primarily engaged in retail or wholesale trade and to 0.75% of taxable margin for all other taxpayers.  The reduction is applicable to tax reports originally due on or after January 1, 2016. Prior to H.B. 32, the 2016 report year tax rates were due to revert to their general rates of 0.5% for retail or wholesale trade businesses and 1% for all other taxpayers.  For reports due in 2015, the rates were temporarily reduced to 0.475% for retailers or wholesalers and 0.95% for other taxpayers. For reports due on or after January 1, 2016, H.B. 32 sets an EZ tax rate of 0.331% and allows a taxpayer to elect the EZ Computation if its revenue is no more than $20 million.  For reports due in 2015, the Franchise Tax imposes a rate of 0.575% for those entities with $10 million or less in total revenue electing the EZ Computation.

Highlights from Texas Franchise Tax Seminar

• Texas research exemption/credit
o 2013 Texas legislature provided for a sales tax exemption or a franchise tax credit (not both) for qualified research and development activities
o Texas Comptroller will allow taxpayers to switch between taking the exemption and credit; however need to amend the applicable returns and pay interest/penalties
 Taxpayers may need to consider the cost/benefit of doing so
o Sales tax exemption applies to depreciable TPP used in qualified research if sold/leased/rented/stored by person engaged in qualified research
 Taxpayers must register with Comptroller and receive a registration number before claiming the exemption
 Annual information reports are due on or before March 31st
o Franchise tax credit can’t reduce franchise tax by more than 50% and must be taken before any other applicable tax credits
 Qualified research expenses include:
• Wages directly related to the research activities
• Supplies directly consumed by the research activity
• Computer use (i.e., costs incurred to pay for right) to conduct qualified research
• Contract research expenses (outside consultants) to perform qualified research
• Revenue exclusion for real estate activities
o Two recent opinions (Titan Transportation and Newpark Resources) from 3rd Cir. App. in Texas that may affect reporting positions previously taken by taxable entities on 2008 – 2013 Texas franchise tax reports. Texas businesses may be eligible for refunds (unclaimed revenue exclusions or COGS deductions) for previously paid franchise tax in the following areas:
 Construction, improvement and remodeling
 Real property repairs & maintenance
 Trucking & transportation
 Highway repairs & construction
 Surveyors
 Oilfield services
 Oil well drilling contractors
 Exploration & production
 Pipelines
o Subcontractor payments are excluded from revenue when taxable entity has an agreement with subcontractor to provide materials, services, or labor in connection with real estate activities
 Titan Transportation v. Combs – Taxpayer win. Titan Transportation engaged in hauling and transporting aggregate. Court concluded that revenue exclusions allowed if there is a reasonable nexus between materials, service or labor provided and the actual/proposed design, construction, remodel, repair or location of boundaries of real property. No requirement/limitation for taxable entities to be “construction companies,” make a physical change to real property, tracing of payments, or written agreement referencing subcontractor will provide materials, labor, services to customer.
 2013 Texas legislature also made clarifying amendment on this issue (so likely can claim refund for prior periods) and specifically provided exclusion for aggregate haulers so they get exclusion for 2014 forward
o Overlapping provisions with COGS
• COGS deduction for real estate activities
o Taxable entity may claim COGS deduction when it doesn’t own/sell goods when it furnishes labor/materials to a project for construction, improvement, remodel, repair or industrial maintenance of real property.
o Texas Comptroller position – look at member basis to determine if eligible for COGS deduction, however:
 Combs v. Newpark Resources (2013) – Taxpayer win. NewPark and its subsidiaries (combined group) provided integrated oilfield services. One sub sold and injected drilling mud. One sub transported waste mud from drilling site and disposed. Court held that waste sub was component of larger group providing integrated services and eligible to claim COGS deduction because waste removal was necessary and essential to the continued construction and drilling of oil & gas well sites. Court rejected Comptroller’s position that taxable entity must be construction company or oil & gas well driller, making physical change to real property site in order to claim COGS deduction.
 Newpark – Court decision also implies 4% cap on overhead is calculated on a combined basis.
• Combined reporting and P.L. 86-272
o Texas combined reporting – requires taxable entities to be a part of an affiliated group engaged in a unitary business instead of reporting as separate taxable entities.
o Combined group chooses to either deduct COGS, compensation or 30% of total revenues; apportions its margin to Texas; computes and pays franchise tax as a single entity.
 Requirements for combination
 Taxable entity requirements
 Affiliated group requirements
 Unitary business factors
• Same general line
• Vertically integrated
• Functionally integrated
• Other unitary factors
o TX Supreme Court
o Non arm’s length prices
o Benefits from common activity
o PL 86-272 – uncertain as to whether franchise tax is limited by P.L. 86-272
 Supremacy doctrine – federal law supersede those of conflicting provisions found in state law, including Texas state law that expressly states that it is not an income tax and that P.L. 86-272 does not apply.
 Many commentators (including former Comptroller Strayhorn) believe the revised franchise tax is a net income tax.
• Management company issues
o Under Texas tax code, management company may exclude from its total revenue the reimbursement of specified costs in its active trade/business of a managed entity (including wages and cash compensation)
o Comptroller policy/rule imposes conditions beyond plain language of statute – to qualify as a management company, an entity must perform active and substantial management and operational functions; control and direct daily operations; provide services such as accounting, general admin, legal, finance and other similar services.
• Three-factor election issues (MTC)
o Texas is a signatory state to MTC
o Litigation/Comptroller position – Comptroller consistently rejected taxpayers’ request to use three-factor formula under premise that franchise tax is not a an income tax.
 Lead Texas case Graphic Packaging Corp v. Combs (case presently pending appeal before the 3rd Cir. App) Taxpayer lost at trial level.
• Oil and gas producing partnership
o Revenue exclusion for funds that taxpayer must distribute to others as a result of a fiduciary or statutory duty.
o Texas natural resources code requires operators to distribute to non-operating interest holds their respective shares from oil & gas leases
o Comptroller position – exclusion applies only to taxes
o Two cases pending in Texas courts may help resolve scope of this exclusion.
 Seltex v. Combs – addresses whether this provision allows a freight broker that serves as a limited agent for its customers to exclude the customer payments it flows through to haulers.
 BASA Resources v. Combs – addresses whether this provision allows a taxpayer that owns working interests in oil & gas leases and sells a net profits interest to another entity to exclude the net profits distributions it makes. Taxpayer sold 96% net profits interest in leases to another entity and excluded the amounts of its net profits distributions from total revenue and the Comptroller denied the exclusion. Comptroller settled the case before trial.
• Compensation deduction
o Includes wages and cash compensation paid and cost of all benefits paid to certain individuals:
 Employees, officers, owners, partners, directors but NOT independent contractors
 Also included is net distributive income: allowance for service businesses – (e.g., law and accounting firms) that compensate partner-employees in whole or in part through partnership distributions. Net distributive losses, taxable entity may be forced to reduce compensation by the loss (i.e., anti-abuse rules for net distributive income).
 Compensation cap 2014 and 2015 – $350,000
o Benefits – in addition to wages/cash compensation, Texas tax code allows an entity to deduct benefits as compensation. However, benefits not defined in statute or Comptroller rules.
 Winstead (March 2013) – district court case ruled that the working condition disallowance provision in Comptroller rule 3.589(e)(2)(D) is invalid to the extent it disallows deductions that are allowed for federal income tax purposes.
• Retail tax rate and installation labor
o Two common issues: 1) retailers and wholesalers subject to lower rate vs. other taxable entities pay higher rate and 2) whether installation labor should be included in COGS
o 2013 Legislature amended definition of retailer to include auto repair shops
o Arise with businesses that sells parts and mixed goods and services
o Autohaus v. Combs (2014) Taxpayer win. Court ruled that an auto dealer could include labor costs to install new and replacement auto parts in its cost of goods sold for Texas franchise tax purposes. This case is a big win for taxpayers that, if it becomes final, could allow many taxpayers to include labor costs in cost of goods sold that the Texas Comptroller previously denied.
• Medical exclusion issues in computing taxable margin
o Providers (e.g., physicians, clinics, physician assistants)
 100% revenue earned from qualified government programs such as Medicare/Medicaid excluded
o Institutions (e.g., hospitals, nursing homes, retirement homes)
 50% revenue earned from qualified government programs excluded
o Co-pays and deductibles under government programs and actual cost of uncompensated care may also be excluded
• Procedural issues
o Richmond Aviation v. Combs (2013) Taxpayer able to bring case to court without paying in Texas. Appellate court ruled that Texas Constitution imposed unreasonable financial barriers to court access even though the statute excused prepayment for indigent taxpayers.
o Could have implications in other states

We got a bounded book that outlines these topics but no slides. I asked for slides and will forward on if I can get a copy.

Tram Le, CPA, J.D., LL.M.
State and Local Tax Consultant
Eide Bailly LLP
440 Indiana St., Ste. 200
Golden, CO 80401-5021

T 303.986.2454
F 303.980.5029

http://www.eidebailly.com

Experience the Eide Bailly Difference

SALT Webpage:
http://www.eidebailly.com/services/tax-services/state-and-local-tax/

March 31st Deadline for Montana Water’s Edge Election

The deadline to make or renew a Montana Water’s Edge Election for calendar year corporations is March 31, 2014. See below for specifics on election periods and requirements.

Montana’s corporate income tax regime requires members of a unitary business to report on a worldwide combined basis, unless a water’s-edge election is made. Under Montana law, taxpayers who elect water’s-edge reporting may exclude certain foreign affiliates from the combined return, in exchange for paying a higher tax rate. A water’s-edge group pays the tax at a rate of 7% on all taxable income for the taxable period as opposed to the regular rate of 6.75%.

A water’s-edge election made by a taxpayer is effective only if every affiliated corporation subject to Montana taxes consents to the election. Consent by the common parent of an affiliated group constitutes consent by all members of the group. An “affiliated corporation” is defined as a United States parent corporation and any subsidiary if more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent or by another subsidiary of the parent whose income and apportionment factors must be included in a return under a water’s-edge election. An affiliated corporation also includes any corporation that is unitary with the taxpayer and that is incorporated in a tax haven. The following are considered tax haven countries under current Montana law:

Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu.

Other affiliated corporations which may be included are DISCs and FSCs, export trade corporations, foreign corporations which derive gain or loss from real property interests in the U.S., and corporations incorporated outside the U.S. but which have 50% of their stock owned directly or indirectly by the taxpayer and more than 20% of their average payroll and property assignable to a location inside the U.S.

A taxpayer must file a Form WE – ELECT in order to make or renew a water’s-edge election. The filing of returns and paying of tax under the water’s-edge election method without the filing of a Form WE – ELECT will not be accepted as a valid election. Furthermore, the election must disclose the taxpayer’s identity and a complete listing of all domestic and foreign affiliates owned in excess of 50%. The taxpayer must also provide detailed explanations of affiliates excluded from the water’s edge group.

Currently, a corporate entity may make a water’s-edge election for a three-year period. Form WE – ELECT must be filed within the first 90 days of the first tax year for which the election is to become effective. Thus, if a calendar year taxpayer files an election by March 31, 2014, tax year 2014 will be the first year of the three year election. If the first tax period for which the election is to become effective is less than 90 days, the taxpayer will have until the end of the tax period to file the election. Retroactive elections are not permissible. The election is binding for the entire three-year period unless the taxpayer obtains permission from the Montana Department of Revenue to change its election.

Upon receipt of the Form WE- ELECT, the Department will either approve or deny the election request by marking the appropriate box on the face of the form. The form will be sent back with a letter from the Department either providing additional information regarding a valid water’s edge election or an explanation as to why the water’s edge election request was denied. If confirmation is not received within two weeks of submitting the request or by the deadline to make a valid election, the Department recommends taxpayers contact them as there may be a problem with the request.

Same Sex Tax Guidence

The Tax Foundation has come out with a comprehensive summary on state guidance for same-sex couples  who are filing joint federal tax returns for 2013.
The summary can be found here:

States Provide Income Tax Filing Guidance to Same-Sex Couples

Voluntary Disclosure—What’s That?

What is a Voluntary Disclosure Agreement?

Voluntary disclosure agreements (VDAs) are legally binding contracts with taxing jurisdictions that are designed to mitigate and settle liabilities.

Benefits of Participating in Voluntary Disclosure Agreement Programs

  • Compliance with tax laws.
    • Client is allowed to honorably bring their company into compliance.
  • Cost savings on back taxes.
    • Most jurisdictions have limited look-back periods and forego penalties. (Some jurisdictions might even waive interest!)
  • Limited look-back period.
    • Generally, if a VDA is submitted and accepted, the taxing jurisdiction will not audit or require filings from the business prior to the look-back period.
  • Peace of mind.
  • Excellent for due diligence

Characteristics of Voluntary Disclosure Agreement Programs

  • Third party anonymously negotiates a settlement with the state.
  • Taxpayer responsible for outstanding tax and usually interest.
  • Penalties usually waived.
  • Limited look-back period (in most states).
  • Strict eligibility requirements.
  • Taxpayer agrees to file going forward.
  • Typically taxpayers do not waive their rights to an appeal or refund.

Voluntary Disclosure Information

  • General description of the taxpayer’s business.
  • Description of how products or services are marketed in the state and detail on other possible nexus-creating activities in the state.
  • Original date nexus or potential nexus occurred.
  • Report if sales tax was collected from customers but not remitted.
  • General description of purchases made that should have been subject to use tax.
  • Description of all previous contacts with the state, either initiated by the taxpayer or the state.

Recommendations

If you have a client who has revenue earned in states where it is not filing a return (either income/franchise or sales/use), consider whether a voluntary disclosure agreement is the best option to bring your client current and save money on penalties and back taxes.

Connecticut is Requiring E-File for Seven Taxes Beginning 2014

The following Connecticut taxes will have to be filed electronically for periods on or after January 1, 2014:

  • Corporation business tax
  • Sales and use tax
  • Withholding taxes
  • Admissions and dues tax
  • Business use tax
  • Room occupancy tax
  • Composite income tax.

For more information you can read the following:

Checkpoint_News