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.

WA provides tax guidance on the new nexus standards

An out-of-state wholesaler will have economic nexus if it has (i) more than $267,000 in gross income in Washington; (ii) more than $53,000 of payroll in Washington; (iii) more than $53,000 of property in Washington; or (iv) at least 25% of total property, payroll, or income in Washington.

Washington ~ Business and Occupation, Sales and Use Taxes: Changes to Nexus Standards Explained

The Washington Department of Revenue has provided excise tax guidance on the new nexus standards applicable to out-of-state taxpayers making wholesale sales and retail sales in Washington. Effective September 1, 2015, out-of-state businesses making wholesale sales into Washington will be liable for wholesaling business and occupation (B&O) tax on sales delivered into the state for the current year if they meet any of the economic nexus thresholds during the prior calendar year. An out-of-state wholesaler will have economic nexus if it has (i) more than $267,000 in gross income in Washington; (ii) more than $53,000 of payroll in Washington; (iii) more than $53,000 of property in Washington; or (iv) at least 25% of total property, payroll, or income in Washington. In order to determine whether a wholesaler exceeds the $267,000 threshold, both apportionable income attributable to the state and wholesale sales delivered to Washington are included.

Effective September 1, 2015, a click-through nexus standard has been adopted for retailing B&O tax and sales tax purposes. An out-of-state retailer will be presumed to have nexus with Washington if it (i) enters into agreements with Washington residents and pays a commission or other consideration for referrals via a website link or otherwise; and (ii) has more than $10,000 in sales into Washington during the prior calendar year due to these agreements. The presumption may be rebutted by showing that each in-state resident with whom the retailer had an agreement was prohibited from engaging in solicitation activities on behalf of the retailer and did not engage in such solicitation.

Tax Topics: New Nexus Standards for Wholesale and Retail Sales — Effective September 1, 2015, Washington Department of Revenue, August 18, 2015, ¶203-928

Chicago Adopts Highest Sales Tax Among Major Cities

 

July 16, 2015

When Cook County, Illinois adopted a one percentage point county sales tax increase yesterday, its county seat — Chicago — vaulted to the top of a dubious list: major cities with the highest sales tax. Including state, county, city, and public transit sales tax impositions, Chicago’s combined sales tax will return to its former high of 10.25 percent as of January 1.

I’ve received a number of calls and emails asking if Chicago’s pending rate represents the highest combined state and local sales tax in the nation. It won’t. That distinction goes to a handful of towns in Tennessee and one in Arkansas (with 12 percent combined rates), all with populations of a few thousand people or less. A smattering of small municipalities in Arizona, Louisiana, and Oklahoma also feature higher combined rates.

Tennessee, however, foregoes an individual income tax (except for on interest and dividend income), and thus leans heavily on the sales tax as a source of state revenue. While Arizona, Arkansas, Louisiana, and Oklahoma impose all of the major tax categories, they also lean disproportionately on the sales tax, with sales tax collections as a percentage of total state and local revenue ranging from 32.4 percent in Oklahoma to 39.3 percent in Louisiana, perhaps in response to low property tax collections. The national average is 22.7 percent reliance on the sales tax for state and local revenue.

Chicago stands out because it’s a high sales tax amidst a sea of high taxes, even with the partial sunsets of the 2011 Illinois tax hikes. Its rate as of January 1, 2016 will also stand out as the highest rate in a major city. You can quibble with definitions of what constitutes a major city, but by any possible measure, Chicago will impose the highest city rate as of 2016.

City Rate
Chicago, IL (2016) 10.25%
Birmingham, AL 10.0%
Montgomery, AL 10.0%
Macon, AL 10.0%
Mobile, AL 10.0%
Fayetteville, AR 9.75%
Santa Monica, CA 9.5%
Seattle, WA 9.5%
Tacoma, WA 9.5%
Chicago, IL (2015) 9.25%
Nashville, TN 9.25%
Chattanooga, TN 9.25%
Memphis, TN 9.25%
Knoxville, TN 9.25%
Glendale, AZ 9.2%
For more on state and local sales tax rates, see our midyear update.
Tax Topic

Taxing Times for Businesses with Operations or Customers in Louisiana

June 3, 2015
Legislative provisions targeting businesses are continuing to advance through the current Louisiana legislative session. While the legislature’s contemplated repeal of the Louisiana corporation franchise tax might be welcome, other provisions will make up for any slack in tax revenues from business taxpayers. No industry is left untouched by the tax implications in the current crop of bills as the legislature struggles to fill a large whole in the state budget. Regardless of the industry, all businesses should take the precautions necessary to implement revised taxing provisions, prepare for additional liabilities, and adhere to new procedures. Most of the bills are effective July 1 of this year, although there may be some relief provisions effecting certain credit exclusions and deductions enacted to help taxpayers filing returns after that date pursuant to timely filed extensions. The following is a summary of some tax bills moving forward in the current legislative session.
Phaseout of State Corporate Franchise Tax

As mentioned in our first alert, HB 828 proposes to phase out the franchise income tax. In the reengrossed version, the bill operates by decreasing the franchise tax rate for each taxable year beginning with tax years beginning on or after January 1, 2016. The phase out will be complete for tax years beginning on or after January 1, 2020, when the bill affirmatively states that no franchise tax shall be levied in the state. HB 828 was recently ordered to the Senate where, on June 1, it was referred to the Committee on Revenue and Fiscal Affairs.

Remote Vendor Nexus Bills

HB 355 and HB 555, which provide for the collection of sales and use taxes by remote dealers, are pending Senate Finance approval and scheduled for June 3, 2015. These bills expand the definition of “dealer” for sales and use tax purposes and require remote dealers to collect and remit sales and use tax and to electronically file Louisiana sales and use tax returns. As stated in prior coverage, if passed, the definition of “dealer” will also include manufacturers of tangible personal property; those who solicit business by compensating Louisiana-based referral sources (with a rebuttable presumption of dealer status if the person derives over $50,000 in cumulative gross receipts from sales of tangible person property to customers in Louisiana as a result of such referrals); those who sell the same or substantially the same line of products as a Louisiana retailer; those who solicit business and develop a market in Louisiana through the use and compensation of a Louisiana-based affiliated agent; persons holding a substantial ownership interest, directly or through a subsidiary, in a retailer maintaining sales locations in Louisiana; and persons who are owned in whole or substantial part by a retailer maintaining sales locations in Louisiana. The Senate Committee proposed an amendment which would allow taxpayers from whom dealers collect this tax to obtain a refund if the taxpayer either shows that the appropriate use tax return has been filed, along with proof of payment, or provides an affidavit affirming that the delivery and use of the property will be in a parish with no use tax imposed. The proposed law would apply to tax periods beginning on and after July 1, 2015.

Reduction of Exemptions/Exclusions impacting Manufacturing among others

There has not been any activity since our prior coverage of HB 768, which proposes to reduce numerous exemptions and exclusions from sales taxes by making them applicable to only 3% of the state’s 4% rate. A few of the many exemptions and exclusions affected include those allowed for separately-billed installation charges, rebates on new vehicles, manufacturing machinery and equipment, items consumed in the manufacturing process, sale for lease or rental, pollution control devices, various exemptions related to services, and annual sales tax holidays. There has been no activity with this bill since early May.

Sales and Use Tax Modernization Study Commission Authorized

HB 471: Members of the Louisiana legislature have realized that the current state and local sales tax system in Louisiana is rapidly becoming dated with the introduction of new types of business and sales platforms. HB 471 seeks to help Louisiana modernize its state and local sales tax statutes through creation of the Sales Tax Streamlining and Modernization Commission. This Commission will be comprised of 19 members consisting of a variety of individuals and stakeholders including members of the legislature, the Department of Revenue, and local taxing interests. The thrust of the Commission’s duty will be to conduct studies relating to how current Louisiana state and local sales tax policy affects the economy of the state in comparison to areas with similar demographics and economies. Specifically, the Commission will be tasked with studying how the introduction of a broad-based tax on services might impact revenue, the efficiency of Louisiana’s sales tax collection and audit procedures, and a comprehensive study of special tax treatment, including credits, deductions, exclusions, exemptions, and rebates. After a favorable vote in the House, on June 1, this bill was referred to the Senate Committee on Revenue and Fiscal Affairs.

Twenty Percent Across-the-Board Reduction in Tax Benefits

HB 624 contains several different measures intended to increase revenue that all operate in the same manner. Specifically, this bill reduces the complete exclusion from certain taxes for credit unions, mutual savings banks, and electric cooperatives to an 80% exclusion. In addition, this bill reduces the complete exclusion from gross income for both interest received from Louisiana obligations and funds accrued by a corporation operating a public transportation system to an 80% exclusion. HB 624 also reduces a number of deductions from a complete deduction to an 80% deduction, including refunds of Louisiana corporate income tax receiving during the year, funds received by a corporation engaged in operating a public transportation system, interest on Louisiana obligations and securities, deductions related to certain casualty losses, certain dividends, and certain benefits provided for hurricane recovery. In addition to these deductions, this bill also proposes to reduce the net operating loss available for use in a given year to 80% of the Louisiana loss incurred in the preceding year. This bill also reduces the allowances and deductions related to depletion for oil and gas wells. While this bill experienced activity early in the legislative session, there has been no activity with respect to HB 624 since it was recommitted to the Senate Committee on Finance on May 19.

Unclaimed Property Law Tweaks

This bill proposes changes relating to the unclaimed property law impacting banks and financial institutions. Specifically, this bill expands the ways in which an owner can show “interest” in his property thereby interrupting the abandonment period. Under this bill, an indication of an owner’s interest in the property would be shown by a one-time or recurring electronic transaction authorized by the owner as well as accessing a deposit account through the website of the financial organization. This bill has moved from the House to the Senate, where it was reported on favorably by the Senate Committee on Finance. One June 2, this bill was referred to the Legislative Bureau.

Film Tax Credit Provisions

SB 105 and SB 106 are pending House final passage and scheduled for floor debate on June 4th, 2015. As explained in prior coverage, if passed, the bills will amend the motion picture investor tax credit under La. R.S. § 47:6007. SB 105 proposes to allow the Department of Revenue to recover the film tax credits from individuals who own interests in certain business entities that were created for the purpose of receiving or selling film tax credits. SB 106 provides for invalidation of motion picture investor tax credits if they were granted in violation of the applicable law or regulations or if an investor who was granted a film tax credit has been convicted of a criminal violation related to such credits, prohibits a motion picture production company from being owned in any part by a company or person who has been convicted of a criminal violation relating to the credits or who was granted such tax credits in violation of the applicable law or regulations, and exempts the application of such provisions to good faith transferees of the credits. Further, HB 604 also touches on the motion picture investor tax credit under La. R.S. § 47:6007, but is broader in scope and affects each of the five state tax credit programs related to the entertainment industry. Whereas each of those tax programs currently require cost reports of expenditures to be submitted to the Department of Economic Development (DED) for a determination of eligibility, certification, and the granting of the tax credits, HB 604 would require CPAs or tax attorneys retained by the DED (as opposed to the tax credit applicants themselves) to provide an independent verification report of the expenditures submitted by a production company. The proposed law also requires that tax credit applicants make all related records available to the CPA preparing the verification report and to pay a “verification report fee” not to exceed $25,000 to reflect the actual cost of the report. Only those expenditures which are confirmed as verified within the verification report submitted by the CPAs are eligible for tax credit certification under HB 604. This bill was reported favorably by the Committee on Ways and Means on May 19th and has since been referred to the Committee on Revenue and Fiscal Affairs for further debate.

Increase in Tax on Business Utilities

HCR 8 temporarily suspends the 0.97% tax exemption for all business utilities on the state sale and use tax levied on the sales of steam, water, electric power or energy, and natural gas. HCR 8 is drafted to be operative for only the period from its enactment to sixty days after final adjournment of the Louisiana Legislature’s 2016 Regular Session. This bill experienced activity early in the legislative session, including favorable reporting by the Committee on Revenue and Fiscal Affairs, but it was recommitted to the Senate Committee on Finance on May 19th and is currently under debate.

Solar Tax Credit Provision

HB 779 makes various changes to the state’s solar energy systems tax credit, including a repeal of the credit for solar thermal systems. The proposed law changes the effective period for solar tax credits for purchased systems, modifies when the tax credit may be claimed, and reduces the maximum amount of the credit allowed when such systems are installed during portions of the new effective period. Similar treatment is also given to leased systems, with the proposed law also adding a $10 million annual cap on the amount of tax credits available to those who install eligible solar systems through leasing, which cap is effective in calendar years 2015, 2016, and 2017. HB 779 also requires the submission of certain information when claiming a solar tax credit, regardless of whether the system was purchased or leased, such as proof of installation, information on the solar panels, the terms of any financing for the system, and forms for the sworn statements to be issued by the dealer and installer regarding the system’s size. HB 779 is currently committed to the Committee on Finance and has received little activity since being reported favorable by the Committee on Revenue and Fiscal Affairs on May 18th.

BTA Clean Up Bill

HB 338, which introduces a number of procedural provisions, primarily with respect to the Board of Tax Appeals (“BTA”), has been adopted in House concurrence. As explained in our prior coverage, key provisions of this bill include establishing the Local Tax Division of the BTA as an independent agency within the BTA and tweaking the local tax judge position; adding remedies for the collection of taxes by collectors, such as reconventional demand and third-party demand, in any court or before the BTA; providing additional circumstances in which prescription of both assessment and refunds may be suspended; establishing an Escrow Account for the BTA; and increasing notice requirements and allowing taxpayers to rely on the date of a notice of disallowance of a refund claim in determining timeliness of an appeal to the BTA.

 

Arizona’s 2015 TPT Amendments Have 99 Problems, but Origin Sourcing ain’t One

By Stephen P. Kranz, Diann Smith, Mark Yopp and Lauren A. Ferrante on January 29, 2015

Actually, there are really only two issues, but they are big issues.
Arizona’s Transaction Privilege Tax has always been an anomaly in the traditional state sales tax system. Contrary to some commentators, however, the recent amendments do not, and could not, impose an origin tax on Arizona retailers for remote sales delivered out-of-state. That is not to say that these amendments are benign. Oddly, the amendments provide incentives for Arizona residents shipping items out-of-state to purchase these items over the internet rather than visit Arizona retailers in person. Furthermore, these amendments create complexities for Arizona vendors shipping to foreign jurisdictions. Finally, these amendments create additional administrative problems for retailers that are difficult to address with existing software and invite double taxation problems that should not exist in a transaction tax world.

Background: Arizona Transaction Privilege and Use Tax
For retail sales, Arizona, like most states, has two complementary transaction-based taxes, but each tax is imposed on a different entity. The first tax, the Transaction Privilege Tax (TPT), is imposed directly on the retailer. Ariz. Rev. Stat. § 42-5001.13. A retailer will be subject to the TPT on the gross proceeds from a sale if “the location where the sale is made” is Arizona. Ariz. Rev. Stat. § 42-5034.A.9. A retailer subject to the TPT is allowed but not required to collect the amount of TPT it owes from its customers. Ariz. Admin. Code §§ 15-5-2002, 15-5-2210.

Click the link to continue reading: http://www.lexology.com/library/detail.aspx?g=12ec9044-1026-4012-bdcb-567d50fb347c

Sales and Use Tax ‘Gotchas’: A Taxpayer’s Guide to Navigating

I. Introduction
According to Merriam-Webster.com, a “Gotcha” is an unexpected problem or usually unpleasant surprise and fully defined as an unexpected usually disconcerting challenge, revelation or catch. 1 A “Gotcha” is also a colloquial expression meaning ‘I’ve got you.’ In sales tax circles, a “Gotcha” is an unexpected outcome usually from an audit that seems illogical and counterintuitive. And when compared to the typical treatment of similar transactions by other states or, to a lesser extent, other tax types, is something you don’t see coming.

1 http://www.merriam-webster.com/dictionary/gotcha.

Gotchas are exceptions to the general rule. They result from activities with a high probability of error caused by the many variables that must be considered to comply with the law. Gotchas are difficult to automate and difficult to incorporate into everyday compliance activities. They touch all areas of the organization from how companies sell to how companies pay sales and use tax and everything in between.

Click here to read more: Sales and Use Tax Gotchas