State and Local Taxation

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By Jason R. Brown

Over the last two or more years, the Louisiana Department of Revenue (the “Department”) has audited oil and gas producers operating in the state for severance-oil tax compliance.  Of the completed audits, a significant number have resulted in a formal assessment, and many of those assessments are the subject of current, ongoing litigation. The Department has advanced a number of theories of liability over the course of the audits and in support of the assessments, but the basic theory underpinning each assessment has been its determination that pricing formulas contained in industry-standard oil purchase agreements improperly include deductions or adjustments for transportation.

Recently, in separate cases, the Louisiana Board of Tax Appeals and Louisiana’s First Circuit Court of Appeal (on appeal from a Nineteenth Judicial District ruling in favor of the taxpayer), threw cold water on the Department’s theories, finding that the pricing formulas at issue were appropriate and that the taxpayers paid the appropriate amount of taxes on oil sales.  We have been made aware, however, that the Department will appeal the Louisiana Board of Tax Appeals’ decision and may seek the Louisiana Supreme Court’s review of the appellate court’s decision. Importantly, the Department has given every indication that it will continue ongoing audits and even initiate new audits under the theories of liability at issue in the cases.

If you are an oil producer currently under audit or likely to be audited, you will have the right to challenge any assessment through the Louisiana Board of Tax Appeals or state district court, but any challenge must be filed within sixty (60) days of the date of the assessment.  For information on your options contact Jason R. Brown at Kean Miller LLP at (225) 389.3733 or jason.brown@keanmiller.com.

By Carey J. Messina and Kevin C. Curry

Do you want to find out more information about the organization asking you for money?

The Internal Revenue Service has launched a new tool on IRS.gov that gives fast and easy access to information about exempt organizations.  The new tool is called the Tax Exempt Organization Search (“TEOS”).

You can now find the following information at TEOS:

  • TEOS provides images of an organization’s Forms 990, 990-EZ, 990-PF and 990-T filed with the IRS.  Initially, only 990 series forms filed in January and February 2018 will be available.  New filings will be added monthly.
  • TEOS is more friendly, which provides access to the search tool using smartphones or tablets.
  • Users can access favorable determination letters.  These are issued by the IRS when an organization applied for and met the requirements for tax-exempt status.  A limited number of determination letters will be available.  Eventually, determination letters issued since January 2014 will also be available.

You can determine whether an organization:

  • Is eligible to receive tax-deductible contributions.
  • Has had it tax-exempt status revoked because it failed to file required forms or notices for three consecutive years.
  • Has filed a Form 990-N annual electronic notice with the IRS; this applies to small organizations only.

Publicly available data from electronically-filed 990 Forms is still available through Amazon Web Services.

This can be a useful tool to determine whether or not your donation to an organization will be deductible for income tax purposes, and to some extent generally how an organization is using its contributions.

By Jaye Calhoun, Jason Brown, Willie Kolarik, Phyllis Sims, and Angela Adolph

The Louisiana Department of Revenue (the “Department”) has joined the ranks of cash-strapped states looking to raise additional corporate tax revenue through scrutinizing transfer pricing and proposing adjustments.  In transfer pricing audits, the Department looks at transactions between related parties (having common ownership) and seek to determine whether the transactions are priced as they would be if the parties were unrelated – i.e., whether the related-party transactions were made based on arm’s length standards. The current wave of arm’s-length transfer pricing audit activity in Louisiana is unusual, because Louisiana recently enacted an add-back statute and because the Department has been seemingly more active recently in attempting to assert the discretionary adjustment authority provided in La. R.S. 47: 287.480 to force related taxpayers to file combined returns.

During the past few years, the Department has worked with the Multistate Tax Commission’s (the “MTC”) transfer pricing initiative and Department personnel have received transfer pricing training from both the MTC and outside consultants.  The Department is also sharing information with other states and the Service.  The extent to which the Department is relying on outside consultants during the preparation of its quasi-transfer pricing study is not clear.

The Department’s recent arm’s-length transfer pricing adjustments rely on Louisiana’s transfer pricing statute (La. R.S. 47:287.480(2)), which tracks, verbatim, Internal Revenue Code Section 482 and permits the Secretary of Revenue to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among related businesses, if the Secretary determines that such distribution, apportionment, or allocation is necessary to prevent evasion of taxes or clearly to reflect the income of any of those businesses.  Historically, the Internal Revenue Service (the “Service”) relied on Code Section 482 to make a wide variety of adjustments to the federal tax returns of related taxpayers.  However, since the mid-1980s the Service has generally limited its application of Code Section 482 to arm’s-length transfer pricing adjustments for international transactions between related taxpayers. For its part, the Department appears to be targeting Louisiana taxpayers with intercompany royalty expenses for transfer pricing audits. But other intercompany transactions may trigger examinations as well.

The Department’s current arm’s-length transfer pricing audit approach relies on the comparable profits method,  In essence, Louisiana auditors are coming up with their own “transfer pricing studies” for targeted taxpayers.  The Department appears to be using the Compustat Global Database to identify comparable companies that engage in activities similar to the auditor’s understanding of the taxpayer’s activities and then attempts to locate those same companies in a proprietary third-party database that purports to compile royalty rates extracted from unredacted license agreements filed with the Securities and Exchange Commission. The Department also relies on largely undisclosed subjective and objective criteria to narrow the list of comparable entities, such as excluding any comparable entity with losses.

The Department’s arm’s-length transfer pricing adjustments contain two other significant flaws.  First, if the Department’s own audit adjustment determines that a taxpayer’s operating profit margin is within the arm’s-length interquartile range, the Department still creates an adjustment to increase the taxpayer’s operating profit to the median operating profit margin.  Second, the Department has attempted to apply its audit adjustments to one hundred percent (100%) of a taxpayer’s operating income, even if only a small portion of the taxpayer’s operating income relates to controlled transactions.

Implications

The current wave of Louisiana arm’s-length transfer pricing adjustments is cause for concern.  Indeed, not only have the obvious flaws in the Department’s transfer pricing methodology already resulted in significant inappropriate adjustments, but there is reason to believe the Department will refuse to correct those errors, preferring to litigate one or more test cases that will set a favorable precedent for its methodology.  Such a precedent could be damaging to any taxpayer that engages in related-party transactions and does business in Louisiana.

The Department’s recent approach to proposing arm’s-length transfer pricing audit adjustments reflect an attempt to apply a novel understanding of Code Section 482 transfer pricing concepts to Louisiana taxpayers.  The Department’s proposed audit adjustments also suggest that the Department will not accept a taxpayer’s third-party transfer pricing study, even if the Service accepted that study and agreed that the taxpayer’s federal taxable income was correctly reported.

Properly documenting intercompany transactions is key to achieving a good result in a transfer pricing audit.  Related taxpayers that engage in multi-state or international intercompany transactions should review their intercompany agreements and carefully document any intercompany transactions.  That documentation should include a determination of the functions performed and assets employed by each party to the transaction as well as any risks assumed related to the transaction.  Taxpayer’s should also regularly review and update their transfer pricing studies and internal transfer pricing methodology.

Because the Department is intent on pressing this issue, a taxpayer that has received an indication or a proposed assessment suggesting that the Department intends to raise a transfer pricing issue, should handle any response carefully. Once a proposed or formal assessment is issued taxpayers should take care to calendar all deadlines and strictly follow all procedural formalities for challenging/appealing disputed adjustments.  It is important not to miss any opportunity to contest a proposed transfer pricing adjustment, because, until the Department refines its approach, many of the adjustments we have seen do not appear to correctly reflect income and are subject to challenge.

For additional information, please contact: Jaye A. Calhoun at (504) 293-5936; Jason Brown at (225) 389-3733; Willie Kolarik at (225) 382-3441; Phyllis Sims at (225) 389-3717; or Angela  Adolph at (225) 382-3437

By Carey J. Messina and Kevin C. Curry

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “TCJA”). The TCJA enacts a number of important tax changes, including some significant changes to the federal gift tax and the federal estate tax that take effect in 2018. Specifically, the TCJA doubles the amount of the “applicable exclusion amount” for both gift tax and estate tax purposes (as well as the generation-skipping transfer tax exemption). Under prior law, the applicable exclusion amount in 2018 would have been $5,600,000 per person but it will now be approximately $11,200,000 per person. This increase in the applicable exclusion amount will serve to make the estate tax a “non-issue” for more individuals.

Any individuals who included formula bequests in their wills that were tied to the applicable exclusion amount should review the terms of their wills to make sure the increase in the applicable exclusion amount does not create unintended consequences (such as leaving too much money to trusts for children to the detriment of a surviving spouse). Also, the new applicable exclusion amount may allow spouses to structure their wills differently without estate tax consequences (such as simply leaving all property to a surviving spouse in full ownership rather than a usufruct or trust structure).

For those individuals who continue to have estate tax exposure after the TCJA, those individuals now have additional gift tax exemption and may consider making additional gifts to reduce their estate if they had otherwise used most of their applicable exclusion amount previously. The gift and estate tax changes by the TCJA will expire and revert back to the prior law on January 1, 2026 (unless extended in the future) so taxpayers with taxable estates may want to take advantage of the changes before the provisions expire or are changed by a later law.

 

 

Overview

On December 22, 2017, President Trump signed into law H.R.1, also known as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes the most significant and sweeping changes to the federal taxation of business and individuals in more than a generation.  Due to the unusual speed with which the TCJA went through the legislative process, the new law raises several technical issues and contains numerous drafting errors that are expected to be addressed in a 2018 technical corrections bill.

This blog post summarizes several of the TCJA’s most significant tax changes for businesses and individuals.  The Kean Miller Tax and Transactions Groups will post additional summaries of specific, identified provisions in the coming days.

Corporate Tax Changes

Reduced Corporate Tax Rate – The TCJA permanently reduces the corporate income tax rate from 35% to 21% for tax years starting in 2018.

Capital Expenditures – For the next five years (or, for certain property, six years) the TCJA allows corporations to fully expense the cost of “qualified property,” including tangible personal property and computer software.  This provision is phased out after five years and does not apply to property currently in use.  In addition, the TCJA alters the cost recovery period for certain real property and leasehold improvements.  The Section 179 expensing cap is increased from $500,000 to $1 million.

Dividends Received Deduction – The TCJA reduces the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50% for tax years beginning after December 31, 2017.

Repeal of the Corporate AMT – The Corporate AMT is repealed for tax years beginning after 2017 and taxpayers can claim a refund for previously paid AMT amounts.

Net Operating Losses (“NOLs”) – The deduction for NOLs is limited to 80% of taxable income for losses arising in tax years after 2017.  NOLs generated in tax years ending after 2017 may be carried forward indefinitely, but the two-year carryback provisions are repealed (with certain exceptions).

Interest Expense Limitation –  For tax years beginning after December 31, 2017, the deduction for interest expense is limited to 30% of earnings before interest, taxes, depreciation and amortization through 2021 and of earnings before interest and taxes beginning in 2022.

Section 451 Revenue Recognition – Under the TCJA, and for tax years beginning after 2017, an accrual-method taxpayer is required to recognize income that is subject to the all-events test no later than the tax year in which the income is taken into account on the taxpayer’s financial statements (except for certain income).  The deferral method of accounting for advance payments for goods and services in Revenue Procedure 2004-34 is codified.

Research and Experimental Expenditures – Amounts paid or accrued for Research &Experimental expenditures after 2012 are capitalized and amortized over five years (15 years for certain foreign research expenditures).

Section 199 Domestic Production Deduction – The Section 199 deduction is repealed for tax years beginning after 2017.

Entertainment Expenses and Fringe Benefits – The 50% deduction for entertainment expenses is repealed, as are deductions for qualified transportation fringe benefits.  Deductions for other fringe benefits are also reduced or eliminated.

Like-Kind Exchanges – Under the TCJA, like-kind exchanges will be tax free, but only for real property exchanges.

Cash Accounting Limit Raised – More businesses will be able to use cash accounting as the upper limit in average annual gross receipts (measured as of the prior three years) has been raised from $5 million to $25 million.

Self-Created Property – The TCJA amends Section 1221(a)(3) and excludes patents, inventions, models or designs (whether or not patented), and secret formulas or processes that are held by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property, from the definition of a capital asset.  This provision is effective for dispositions after December 31, 2017.

Affordable Care Act – While the TCJA reduced the Affordable Care Act (the “ACA”) individual penalty to zero for months beginning after December 31, 2018, the ACA’s employer mandate rules have not been repealed and remain in full effect.

International Tax Changes

The TCJA’s most significant changes are to the US international tax regime.  Those changes include implementing a quasi-territorial tax system, imposing a one-time transition tax on accumulated foreign earnings, and imposing anti-deferral and anti-base erosion rules.

Pass-Through Deduction

The TCJA creates new Section 199A, which permits an individual to deduct up to 20% of their “qualified business income” earned through a partnership, S corporation or sole proprietorship, and qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income.  This deduction expires on December 31, 2025.

Qualified businesses includes partnerships; S corporations; sole proprietorships; REITs; cooperative and master limited partnerships.  However, specified service trades or businesses with income over $315,000 of taxable income for joint filers or $157,500 for other filers (with the deduction phased out over the next $50,000/$100,000 of taxable income) are excluded, including:

  • Any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services; or
  • Any business where the principal asset of the business is the reputation or skill of one or more of its employees

Qualified business income includes the net amount of qualified items of income, gain, deduction, and loss of a qualified trade or business that is effectively connected with the conduct of a US trade or business.  Certain specified investment-related income, deductions, or losses, and an S corporation shareholder’s reasonable compensation, guaranteed payments, or—to the extent provided in regulations—payments to a partner who is acting in a capacity other than his or her capacity as a partner are excluded from the definition of qualified business income.

Qualified business income deduction is limited to the greatest of 50% of wages paid by the business to its employees or 25% of wages paid plus 2.5% of the cost (unadjusted basis) of certain qualified business property.  Taxpayers with less than $315,000 of taxable income (joint return) or $157,500 (other filers) are not subject to this limitation (the wage limitation is phased in over the next $50,000/$100,000 of taxable income).

Individual Income Tax Changes

The TCJA reduces individual tax rates for taxable years beginning January 1, 2018 and ending December 31, 2025.  The top marginal tax rate is reduced from 39.6% to 37% and bracket widths are modified.  The new tax brackets are summarized below:

Single Individuals:

  • 10% – $0-$9,525
  • 12% – $9,525-$38,700
  • 22% – $38,700-$82,500
  • 24% – $82,500-$157,500
  • 32% – $157,500-$200,000
  • 35% – $200,000-$500,000
  • 37% – $500,000+

Married Filing Jointly and Surviving Spouses:

  • 10% – $0-$19,050
  • 12% – $19,050-$77,400
  • 22% – $77,400-$165,000
  • 24% – $165,000-$315,000
  • 32% – $315,000-$400,000
  • 35% – $400,000-$600,000
  • 37% – $600,000+

In addition to temporarily reducing the individual income tax rates and modifying the bracket widths, the TCJA also increased the standard deduction for married individuals filing jointly from $12,000 to $24,000 and for single filers from $6,350 to $12,700.  The TCJA also imposes significant limits on certain itemized deductions and eliminates several other deductions.  Notably, the TCJA limits the state tax deduction to $10,000, limits the mortgage interest deduction to the first $750,000 in principal value, and eliminates the home equity debt deduction and the personal exemption.  The limitation on itemized deductions, which phased out 3% of a taxpayer’s itemized deductions once income exceeded a threshold, is also suspended through 2025.  The Alternative Minimum Tax (“AMT”) is retained but the exemption is increased.

The Affordable Care Act required individuals not covered by a health plan that provided minimum essential coverage to pay a penalty with their federal tax return, unless an exception applied.  The TCJA permanently reduces that penalty to zero for months beginning after Dec. 31, 2018.

The legislation also permits distributions from retirement plans for persons who suffered losses as a result of the 2016 severe storms and flooding in Louisiana without penalty (but subject to tax, which may be spread over 3 years).  The distributions must be made before January 1, 2018.  Retirement plans may be amended to permit such distributions, and the amendment must be made by the last day of the first plan year beginning on or after January 1, 2018.  Also, distributees are permitted to repay such distributions within 3 years and treat them as rollovers.  This is an extension of the IRS guidance issued in 2016.

Implications

The TCJA is a significant and substantive, yet flawed revision to the US federal income tax regime.  The business tax consequences of the TCJA are only beginning to come into focus, but it is clear that most businesses should consider whether restructuring would make sense to maximize the tax benefits available under the TCJA.  In addition, certain provisions of the TCJA, such as the limitation on the interest expense deduction, could negatively impact certain businesses.  Those businesses should consider whether it is possible to restructure operations or financing to avoid or minimize the tax impact of the TCJA’s limitations on interest expense deductions.  For example, a highly-leveraged business could consider exploring alternative financing arrangements that do not generate interest expense.  Owners of flow-through entities that are not eligible for the 20% qualified business income deduction should also consider restructuring their operations in a manner that allows them to claim all or a portion of the deduction.

The TCJA will also have substantial state and local tax implications.  It is not clear at this time whether or to what extent states will conform to the provisions created by the TCJA.  But states like Louisiana that use federal taxable income as a starting point for computing state taxable income will certainly be impacted by the TCJA.

Kean Miller’s Tax and Transactions Group will continue to post updates as the implications of the TCJA for business and individual taxpayers become clearer.  For additional information, please contact:  Jaye Calhoun, Willie Kolarik, Jason Brown, Kevin Curry, Linda Clark, Bob Schmidt, and David Hamm.

By Angela W. Adolph

Construction Work in Progress (“CWIP”) is generally recognized as property that is in the process of changing from one state to another, such as the conversion of personal property from inventory to asset or fixture by installation, assembly, or construction.  See Valuation of Machinery and Equipment Construction in Progress (CIP), Pollack and Meier, Institute for Professionals in Taxation Property Tax Symposium.  Determining how a state treats partially-completed properties for purposes of ad valorem tax is an important question for any taxpayer, but it is particularly critical for an industrial taxpayer during the site location process.

There is no clear consensus among taxing jurisdictions as to whether or how CWIP is to be valued by a tax assessor on the applicable assessment date.   Many states, including Alabama, Missouri, and North Carolina, value CWIP based on the value or percentage of completion on the assessment date.  Kansas values incomplete construction based on the cost incurred as of the assessment date.  Florida, Maryland, Virginia, and West Virginia assess CWIP when the work has progressed to a degree that it is useful for its eventual purpose.  And in South Carolina, improvements are only assessed upon completion.

With the exception of a few errant assessments in the early 1930’s, Louisiana has never assessed CWIP for ad valorem tax purposes.  Rather, the completed property is added to tax rolls and assessed as of January 1 of the year immediately following completion of construction. La. R.S. 47:1952.   This comports with and complements Louisiana’s industrial tax exemption program, which exempts certain manufacturing property from ad valorem taxation for a specified number of years.  LAC Title 13, Part 1, §53(D).   Unfortunately, property on which ad valorem taxes have been paid is not eligible for participation in the exemption program.  LAC Title 13, Part 1, §515.  Thus, if ad valorem taxes are paid on property as CWIP, the property would no longer eligible for the industrial tax exemption and would remain on the taxable rolls subject to assessment each year.  Obviously, assessing CWIP in this manner would significantly diminish the value of the program to taxpayers and undermine its usefulness as an incentive tool by economic development agencies.

In 2016, a local assessor broke with established practice and initiated an audit that included CWIP on a major industrial taxpayer.  This audit raised statewide and local uniformity concerns (assessment of CWIP of a single taxpayer in a single parish) and jeopardized the taxpayer’s existing industrial tax exemption.  The taxpayer immediately filed an injunction action in district court, and the Louisiana Legislature took note of the situation during its regular 2017 legislative session.  Recognizing the need to formalize the exemption, the Legislature referred a constitutional amendment to codify CWIP’s exemption from assessment. Louisiana is one of 16 states that require a two-thirds supermajority in each chamber of the legislature to refer a constitutional amendment to the ballot, so their vote underscores the strong support among lawmakers to codify the exemption.

Slated to appear on the Oct. 14 statewide ballot, Act 428 would add an additional subsection to Article VII, Section 21 of the Louisiana Constitution, which lists property that is exempt from ad valorem tax assessment. The new language would read as follows:

(N)(1) All property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building, or other construction as a component part, including the type of property that may be deemed to be a component part once placed on an immovable for its service and improvement pursuant to the provisions of the Louisiana Civil Code of 1870, as amended. The exemption provided for in this Paragraph shall be applicable until the construction project for which the property has been delivered is complete. A construction project shall be deemed complete when construction is finished to the extent that the project can be used or occupied for its intended purpose. A construction project shall not be deemed complete during its inspection, testing, or commissioning stages, as defined by reasonable industry standards.

(2) Notwithstanding the provisions of Subparagraph (1) of this Paragraph, this exemption shall not apply to any of the following:

(a) Any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed.

(b) For projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use, or operational on the date the property is assessed.

(c) Any public service property, unless the public service property is otherwise eligible for an exemption provided by any other provision of this constitution.

If approved by voters, CWIP would be exempt from property taxes until construction is “completed.” The proposed amendment defines a completed construction as occurring when the property “can be used or occupied for its intended purpose.” The exemption would thus remain effective until the construction project (or a given distinct phase of the project) is ready to be used or occupied for its intended purpose or for occupancy.

Industrial Strength Graphic Only

By Jaye Calhoun, Phyllis Sims, and Willie Kolarik

Despite consideration of an Ohio-style gross receipts tax, a Michigan-style single business tax and various versions of flat taxes, the 2017 Regular Session of the Louisiana Legislature ended on June 8, 2017, without the enactment of any significant tax reform. Because the Legislature neglected to compromise on the budget issues raised in the Session, Governor John Bel Edwards called a Special Session to convene half an hour after the regular session ended. The issues that could be addressed in the Special Session, however, were limited to budget issues pursuant to the Special Session Call.

Nevertheless, some tax legislation of note squeaked out and will become law if either signed by the Governor or after the expiration of the requisite passage of time if the Governor takes no action (or, in at least one instance below, if the voters approve a Constitutional amendment). Please note that, for those pieces of legislation below identified by Act Number, the Governor has signed the legislation. As of this client alert, the remaining items have not yet been acted upon by the Governor so they are not final. The Governor has, at latest, until June 27, 2017 to act upon (sign or veto) the legislation, or to allow the legislation to go into effect without signature.

In the meantime, here are some relevant tax provisions that made it out of the 2017 Regular Session:

Sales and Use Tax

Establishing the Louisiana Uniform Local Sales Tax Board and the Louisiana Sales and Use Tax Commission for Remote Sellers and creating an optional concurcus proceeding for certain taxpayer’s involved in multi-parish audits

Act No. 274 (HB601), enacted June 16, 2017.

Act No. 274 creates two new entities: the Louisiana Uniform Local Sales Tax Board (the “Board”) and the Louisiana Sales and Use Tax Commission for Remote Sellers (the “Commission”). The Board, consisting of eight members and domiciled in East Baton Rouge Parish, is established for purposes of creating uniformity and efficiency in the imposition, collection, and administration of local sales and use taxes. Among its powers and duties, the Board may issue policy advice and private letter rulings on local sales and use tax issues. The Commission, composed of eight commissioners and domiciled in East Baton Rouge, is established for the administration and collection of sales and use tax imposed by the state and political subdivisions for remote sales. The Commission will have the power, duty, and authority to serve as the single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remotes sales.

Act. No. 274 also amended La. R.S. 47:337.86 to create an optional concurcus proceeding for a taxpayer that has received a formal notice of assessment from two or more Louisiana local collectors that have a competing or conflicting claim to sales and use tax on a transaction. In that instance, the taxpayer or dealer may file a concurcus proceeding before the Local Tax Division of the Louisiana Board of Tax Appeals. If a concurcus is filed, the taxpayer or dealer, as applicable, shall pay the amount of sales tax collected or, if no tax was collected, the amount of tax due at the highest applicable rate, together with penalty and interest into an escrow account for the registry of the Board of Tax Appeals. The proceeding shall name as defendants all parishes that are parties to the dispute. Special rules for appealing a decision of judgment of the Board of Tax Appeals in the concurcus proceeding are also provided. Any taxpayer involved in a multi-parish audit should consider whether it is appropriate to file a concursus proceeding.

Act No. 274 became effective on June 16, 2017.

You can view the legislation here.

Addition of Certain Construction Contracts Excluded from New Sales and Use Tax

Act No. 209 (HB 264), enacted June 14, 2017.

Act No. 209 amends and reenacts La. R.S. 47:305.11(A) to provide that no new or additional sales or use tax shall be applicable to sales of materials or services involved in fixed fee and guaranteed maximum price construction contracts. The current law excludes any new sales tax levy on materials and services for a lump sum or unit price construction contract.

The provisions of Act No. 209 are applicable for purposes of any additional state sales and use tax enacted on or after July 1, 2017. Therefore, it appears that fixed fee and guaranteed maximum price construction contracts may not be excluded from the levy or a new or additional state or local sales and use tax enacted before July 1, 2017.

Act No. 209 became effective on June 14, 2017.

You can view the legislation here.

Medical Devices Exemption

SB 180, not acted upon by the Governor as of June 22, 2017.

SB 180 creates a sales and use tax exemption, beginning July 1, 2017, for medical devices used by patients under the supervision of a physician.

You can view the legislation here.

Income/Franchise Tax Credits

2015/2016 Reductions to Certain Income & Corporate Franchise Tax Credits Made Permanent & Restoration of Tax Credit for State Insurance Premium Tax Paid

SB79, not acted upon by the Governor as of June 22, 2017.

SB 79 provides that certain tax credit reductions will no longer sunset on June 30, 2018, making the reductions permanent. Specifically the tax credit for employee and depend health insurance coverage, the tax credit for rehab of residential structures, the tax credit for qualified new recycling manufacturing or process equipment and service contracts, the tax credit for donations made to public schools, the angel investor tax credit program, the digital interactive media and software tax credit, the musical and theatrical production income tax credit, the green jobs industries tax credit, the technology commercialization credit, and the modernization tax credit. The majority of the changes are minor, mostly reducing certain income and corporation franchise tax credits. The bill does, however, restore the corporate income tax credit for state insurance premium taxes paid.

You can view the legislation here.

Modifications to Inventory Tax Credit

SB 182, not acted upon by the Governor as of June 22, 2017.

SB 182 changes the limitation on refundability of excess inventory tax credits for local ad valorem taxes paid on inventory to clarify that only taxpayers included on the same consolidated federal income tax return shall be treated as a single taxpayer, i.e., related or affiliated taxpayers that are not included on the same consolidated federal return are not regarded as a single taxpayer.

If enacted, SB 182 would apply to all claims for credits authorized pursuant to La. R.S. 47:6006 on any return filed on or after July 1, 2017, regardless of the taxable year to which the return relates, but would not apply to an amended return filed on or after July 1, 2017, if the credits authorized pursuant to La. R.S. 47:6006 were properly claimed on an original return filed prior to July 1, 2017.

You can view the legislation here.

Goodbye Tax Credits

SB 172, not acted upon by the Governor as of June 22, 2017.

SB 172 terminates certain tax credits such as the tax credit for contributions to education institutions and the tax credit for employment of first-time nonviolent offenders, among others, as of January 1, 2020. The tax credits for expenses incurred for the rehabilitation of historic structures and for the conversion of vehicles to alternative fuel usage would terminate beginning January 1, 2022. The final bill did not impact the inventory tax credit.

You can view the legislation here.

Say Goodbye to Even More Tax Credits

Act No. 323 (SB 178) effective June 22, 2017

Act No. 323 sets termination dates for various tax credits and incentive programs, including programs administered by the Louisiana Department of Economic Development, specifically: the Corporate Tax Apportionment Program (July 1, 2017), the Angel Investor Tax Credit Program (July 1, 2021), the Sound Recording Investor Tax Credit (July 1, 2021), and the tax credit for “Green Job Industries” (July 1, 2017). At this time, the termination dates are not intended to be hard dates for termination, but are intended to be review dates for these programs, such that the programs should be up for review at the Legislature prior to being terminated. These programs will be up for review prior to their sunset and could be legislatively renewed.

You can view the legislation here.

Extension of Enterprise Zone Tax Exemption

Act No. 206 (HB 237) , enacted June 14, 2017.

Act No. 206 extends the sunset for the Enterprise Zone Tax Exemption Program from July 1, 2017 to July 1, 2021.

Act No. 206 became effective on June 14, 2017.

You can view the legislation here.

Modifications, Terminations, and Extensions of Various Tax Incentives & Rebates

SB 183, not acted upon by the Governor as of June 22, 2017.

SB 183 modifies, terminates, and extends various tax incentives and rebates. Some of the highlights include the following:

  • University Research and Development Parks: No new contracts to be entered after July 1, 2017.
  • Enterprise Zone Program: No new advance notifications shall be accepted after July 1, 2021.
  • Mega-Project Energy Assistance Rebate: No cooperative endeavor agreements shall be entered into after July 1, 2017.
  • Quality Jobs Program: No new advance notifications shall be accepted after July 1, 2022.
  • Competitive Projects Payroll Incentive Program: No new contracts shall be approved after July 1, 2022.
  • Quality Jobs Program: Minimum benefit rate was lowered to 4% from 5% and per-hour compensation required by employers to receive benefit was increased to $18.00 per hour from $14.50 per hour; per-hour compensation to receive 6% benefit rate is now $21.66 per hour; employer must be located in parish within the lowest 25% of parishes based on income; added to the list of professions and services not eligible for the rebate; and increased gross payroll to $625,000 and new direct jobs to 15 for the third year rebate for large employers.

You can view the legislation here.

Changes to Solar Tax Credit

HBHB 187, not acted upon by the Governor as of June 22, 2017.

HBHB 187 reduces the eligible time period for tax credit claims paid for solar energy systems purchased and installed in a new home from before January 1, 2018 to January 1, 2016. It also adds a three-year structured payout provision that authorizes tax credit claims on systems purchased on or before December 31, 2015 and caps the maximum amount of credits paid out at $5M each fiscal year, exclusive of interest. HB 187 also increases the amount of tax credits for leased solar energy systems installed on or after January 1, 2014 and before July 1, 2015 to 38% of the first $25,000 of the cost of purchase, from 30% of the first $20,000 of the cost of purchase.

You can view the legislation here.

Research and Development Tax Credit Changes

HB 300, not acted upon by the Governor as of June 22, 2017.

HB 300 makes a number of changes to the research and development tax credit program including extending it for three years, reducing the amount of the credits, and allowing for transferability of the Small Business Innovation Research Grant credit.

You can view the legislation here.

Inventory Tax Credit for Movables Held by Persons Engaged in Short-term Rentals

HB 313, not acted upon by the Governor as of June 22, 2017.

HB 313 addresses, in part, the duplicative (triplicative) tax burden on lessors and lessees of heavy equipment, making changes to the tax credit for local inventory taxes paid by expanding the definition of inventory to include any item of tangible personal property owned by a retailer that is available for or subject to a short-term rental that will subsequently or ultimately be sold by the retailer. “Short-term rental” is defined as a rental of an item for a period of “less than three hundred sixty-five days, for an undefined period, or under an open-ended agreement.” The bill also adds to the definition of retailer to include a person engaged in short-term rental of tangible personal property classified under NAICS codes 532412, e.g., a person in the construction, mining, oil field or oil well rental industry, and 532310, e.g., general rental centers and rent-all centers, and that is registered with the Department of Revenue.

In enacted, HB 313 would be effective retroactively to tax periods beginning on and after January 1, 2016.

You can view the legislation here.

Changes to Rules Regarding Tax Credits Concerning vessels in OCSLA Waters

HB 425, not acted upon by the Governor as of June 22, 2017.

HB 425 takes away the restriction that taxes paid under protest were ineligible for the tax credit for ad valorem taxes paid with respect to vessels in Outer Continental Shelf Lands Act Waters. The bill requires that a taxpayer who pays ad valorem taxes under protest provide notification to the Louisiana Department of Revenue, including copies of the payment under protest and the filed lawsuit and provides a mechanism for the Department to recapture the a credit related to an amount paid under protest if the taxpayer does not prevail. Special rules apply to challenges to the legality, as opposed to the correctness, of the property tax on vessels in Outer Continental Shelf Lands Act Waters.

If enacted, the HB 425 would apply to income tax periods beginning on and after January 1, 2017, and corporation franchise tax periods beginning on and after January 1, 2018.

You can view the legislation here.

Changes to Angel Investor Tax Credit

HB 454, not acted upon by the Governor as of June 22, 2017.

HB 454 extends the sunset for the Angel Investor Tax Credit Program until July 1, 2021. The bill sets the rate of the credit at 25% of the amount of investment divided equally over three years and reduces the overall limit per business to $1.44 million.

If enacted, the effective date for the extended sunset of the Angel Investor Tax Credit Program would become effective on July 1, 2017. The remaining portions of HB 454 would become effective July 1, 2018.

You can view the legislation here.

Oil and Gas Fees/Taxes

Changes to Oilfield Site Restoration Statute

HB 98, not acted upon by the Governor as of June 22, 2017.

HB 98 decouples the definitions of “oil,” “condensate,” and “gas” in the Oil Field Site Restoration Fund fee statute from the severance tax statutes. Currently, in addition to severance taxes, there is a set fee on the production of oil, condensate, and gas. The proceeds of that fee are to be used for the oilfield site restoration program in the Department of Natural Resources. The bill states that the full production rate fee shall include all production from oil and gas wells except for production from reduced rate production wells. The bill also repeals the provision that sets the fee for full-production wells in proportion to the rate of severance tax collected. The bill does not change the proportional fee for reduced rate production wells (i.e, stripper wells and incapable wells).

If enacted, the provisions of HB 98 would become effective on July 1, 2017.

You can view the legislation here.

Changes to Severance Tax Exemptions for Bringing Inactive and Orphan Wells back into Production 

HB 461, not acted upon by the Governor as of June 22, 2017.

HB 461 changes the length and amount of severance tax exemptions for bringing certain inactive and orphan wells back into production. The bill changes the exemption from a 5-year exemption to a 10-year exemption. Bringing back inactive wells will entitle the taxpayer to a 50% rate reduction and bringing back an orphan well will entitle the taxpayer to a 75% reduction on the severance tax. To qualify for the reduced rate, the production must be produced from the same perforated producing interval or from 100 feet above and 100 feet below the perforated producing interval for lease wells, and within the correlative defined interval for unitized reservoirs, that the formerly inactive or orphaned well produced from before being inactive or designated as an orphan well. The bill caps the program at $15 million per fiscal year.

If enacted, the provisions of HB 461 would become effective August 1, 2017.

You can view the legislation here.

Other Tax Updates

Electronic Filing of Tax Returns

Act No. 150 (HB HB 333), enacted June 12, 2017.

Act No. 150 authorizes the Secretary of the Department of Revenue to require that tax payments be made by electronic funds transfer and that returns be filed electronically. It also contains a penalty for failure to comply with electronic filing requirements equal to the greater of $100 or 5% for the tax.

Act No. 150 became effective on June 12, 2017.

You can view the legislation here.

Proposed Constitutional Amendment: Property Tax Exemption for Property Delivered to Construction Site

SB 140

SB 140 is a proposed constitutional amendment to exempt from ad valorem tax all property delivered to a construction project site for the purpose of incorporating the property into any tract of land, building, or other construction as a component part, including the , including the type of property that may be deemed to be a component part once placed on an immovable for its service and improvement. This exemption would apply until the construction project is completed (i.e., occupied and used for its intended purpose). The exemption would not apply to (1) any portion of a construction project that is complete, available for its intended use, or operational on the date that property is assessed; (2) for projects constructed in two or more distinct phases, any phase of the construction project that is complete, available for its intended use, or operational on the date the property is assessed; (3) certain public service property.

A constitutional amendment does not require action by the Governor. This constitutional amendment will be placed on the ballot at the statewide election to be held on October 14, 2017.

You can view the legislation here.

For questions or additional information, please contact: Jaye Calhoun at (504) 293-5936, Phyllis Sims at (225) 389-3717, Jason Brown at (225) 389-3733, Angela Adolph at (225) 382-3437, or Willie Kolarik at (225) 382-3441.

 

labor

By Jaye Calhoun and David Hamm

It’s time to amend the governing documents of flow-through entities taxed as partnerships to address recent federal legislative changes impacting all such entities.  Failure to amend now could result in unfavorable tax consequences.  Section 1101 of The Bipartisan Budget Act of 2015 (the “BBA”) substantially changes how the Internal Revenue Service may conduct audits of flow through entities taxed as partnerships.  Due to the increased popularity of limited liability companies, most taxed as partnerships, the Internal Revenue Service has been chafing under the relatively restrictive rules governing audits found in the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”).  The BBA eliminates many of the provisions of TEFRA that made IRS’ job of policing compliance by partnerships with the tax laws more difficult and replaces them with new centralized partnership audit rules, effective for returns filed for partnership tax years beginning after Dec. 31, 2017. In order to implement the new rules, IRS has re-released proposed regulations on June 13, 2017 and has invited comments in anticipation of a hearing on the proposed regulations currently scheduled for September 18, 2017.  The proposed regulations were initially released on January 18, 2017, but were withdrawn on January 20, 2017 in light of the Trump Administration’s freeze on all new and proposed federal rule making.

As a result of BBA, and as fleshed out in the proposed regulations, the new partnership audit rules provide that, among other things:

  • Out with the TMP and in with the PR – There is no longer a “tax matters partner/member,” but, instead, partnerships must designate a “partnership representative,” who will have the sole authority to act on behalf of the partnership (including, under certain circumstances, to decide which partners will pay any deficiency) and who is not required to be a partner.  If the partnership fails to designate the partnership representative, the IRS will designate a partnership representative for it.
  • Partnership Itself May be the Taxpayer – Unless certain partnerships makes an election to “push out” additional taxes owed as a result of an audit to the audited (“reviewed”) year partners, such additional taxes will now be paid by the partnership;
  • Annual Election Out Available to Certain Partnerships – The new rules apply to all partnerships except for those that are both qualified to “elect out” (generally partnerships with under 100 partners, none of which can be a disregarded entity or another partnership), and which make an annual election that the new rules do not apply.

The significant changes brought about by the BBA and the proposed regulations (likely to become final in substantially similar form) require substantive amendments to governing documents of all entities taxed as partnerships to address these issues and others. Of note, Louisiana does not currently tax partnerships, as partnerships, and will have to adopt rules to adapt to the federal changes.  In the meantime, the January 1, 2018 effective date of the BBA is approaching. Thus, the time for providing notice and counsel to your clients is quickly running out.

  • This article originally appeared in the New Orleans Bar Associations Tax Law Committee Blog.

Louisiana

By William J. Kolarik, II

On April 25, 2017, State Representative Sam Jones requested that the Louisiana House Committee on Ways and Means voluntarily defer HB628, which would have imposed a commercial activity tax upon many business organizations doing business in Louisiana.  The Committee’s vote to voluntarily defer the bill means that the proposed commercial activity tax is likely dead for the 2017 legislative session.  The proposed commercial activity tax was the centerpiece of Louisiana Governor Edwards’ tax package and the deferral of the proposed bill means that Governor Edwards and Louisiana legislators will need to resolve Louisiana’s current budget crisis through other means.  The Kean Miller State and Local Tax team is reviewing proposed Louisiana tax legislation and will update its blog when our review is complete.

la house of reps

By William J. Kolarik, II

On April 17, 2017, the legislation that composes the centerpiece of Governor Edwards’ proposed tax reforms was filed in the Louisiana House of Representatives.  House Bill 628, introduced by state Rep. Sam Jones, contains the legislation that would establish the commercial activity tax.  The Kean Miller State and Local Tax team is reviewing the proposed legislation and will update its summary of the proposed Louisiana tax reform package after our review is complete.