The Louisiana Legislature called itself into a second extraordinary session to address several issues confronting the state. The Second Extraordinary Session, which began on September 28th, was called by the legislature, and not the governor, and will focus primarily on addressing the continuing negative economic effects of the coronavirus on Louisiana and the damage caused by the hurricane that struck the southwest portion of the state.  However, among the 70 topics that are included on the list of items to be addressed in the Extraordinary Session are several tax related issues including the state unemployment trust fund, sales and use tax imposed on items leased or rented for re-lease or re-rental, severance taxes, the classification of workers as independent contractors vs. employees, and business tax incentives and credits, including an inventory tax credit carryforward.

This will be the third legislative session in Louisiana for 2020.  The Regular Session ended on  June 1st and the First Extraordinary Session ran from June 1st until June 30th.[1]  In the first two sessions, the legislature enacted several tax changes including suspension of the capital stock portion of the corporation franchise tax for small businesses, imposition of a sales tax collection obligation on marketplace facilitators, and changes to several of the state’s procedural rules related to tax cases.  This article briefly discusses what we anticipate that the legislature will consider based on the Proclamation issued on September 21st and highlights a few significant tax developments in the prior two sessions.

Unemployment Insurance Trust Fund

The most immediate and pressing tax related concern of the Second Extraordinary Session is the need to address the anticipated shortfall in the state’s unemployment insurance trust fund.  Absent a change in the law, the significant increase in the state’s unemployment rate, and resulting claims, could trigger a surtax, i.e., an unemployment insurance trust fund solvency tax, on employers.  As in other states, Louisiana law requires employers to pay into an unemployment insurance fund to cover the cost of state unemployment benefits. The employer’s contribution is based on a rate that increases or decreases with the company’s experience with unemployment, i.e., how many of the company’s former employees claim unemployment benefits.

Prior to the pandemic, Louisiana’s unemployment insurance trust fund balance was significant, over a billion dollars, and had been projected to grow even more.  However, with the significant increase in state unemployment claims in 2020, as of September 25, 2020, the balance in the fund is was $49.4 million.  Because the balance in the fund is now below $100 million, the fund’s administrator is required by law to levy a solvency tax on employers.[2]

On September 24, 2020, Governor Edwards issued an executive order suspending the sections of Louisiana law that require the additional solvency tax through October 9, 2020.[3]  In a letter to the Senate President and Speaker of the House dated September 25, 2020, Governor Edwards also requested that the Louisiana Legislature reallocate $75 million in money unspent in the Main Street Recovery Grant Program to the unemployment insurance trust fund during the Second Extraordinary Session.  It is not yet clear whether the Legislature will honor the Governor’s request or whether an additional executive order suspending the solvency tax provision will be required.

Independent Contractors vs. Employees

Another issue affecting state and federal unemployment tax collections is the recent growth in the use of independent contractors.   If a company’s workers are independent contractors, the company does not have to withhold personal income taxes or pay into federal and state unemployment insurance funds on payments made to those contractors for services rendered. Legislation is being proposed that would significantly increase penalties for misclassifying employees as independent contractors, that is, if a business is found to have misclassifed employees for a second time, the penalty would be increased from a maximum of $250 per individual to a maximum of $10,000 per individual.

Sales Tax Exemption for Re-rentals

One of the issues that may be addressed in the upcoming Extraordinary Session is a unique tax imposition that has long created an unnecessary cost for some lessees of tangible personal property in the state.[4] Louisiana imposes sales and use tax on both the sale of tangible personal property and the rental of such goods.[5] Like other states that impose sales and use tax, Louisiana provides a resale exemption from tax for purchases of taxable goods that will subsequently be resold, with tax then being collected on the sale to the ultimate consumer.[6] This prevents pyramiding of tax when goods are sold multiple times prior to the final sale to the consumer.

However, Louisiana differs from most states in that it does not provide an exemption for the lease or rental of tangible personal property for re-lease or re-rental to a third party.[7] Thus, for example, if a company in the business of renting tangible property to third parties does not have sufficient equipment on hand to meets its customer’s needs and has to rent property from third parties to fulfill contracts, the company would have pay tax on its rental of the goods and then have to collect tax again from the customer on the rental payments for the re-rented property.  The lack of an exemption, comparable to the sale for resale exemption, unnecessarily increases the cost of renting tangible personal property by businesses in Louisiana and does not achieve any significant tax policy goals.  There is no reason for the legislature not to relieve these types of transactions from tax other than the loss of revenue, which may be enough to prevent the legislature from remedying the problem.

First 2020 Extraordinary Session

Suspension of capital stock stack for small businesses

Act 15 (S.B. 6), 2020 1st. Ext. Sess., effective July 13, 2020, enacted La. R.S. 47:601.1, which suspends corporation franchise tax on small business corporations. However, based on the changes to the original bill made by the legislature this suspension will likely not have a significant impact on taxpayers.  Effective July 1, 2020, the corporate franchise tax levied on small business corporations is suspended, including the initial tax levied on corporations or other entities for the first accounting period in which the entity becomes subject to the corporation franchise tax.[8] This suspension applies to small business corporations for taxable franchise periods beginning between July 1, 2020 and June 30, 2021.

This Act defines a “small business corporation” as a business exercising its charter, or qualified to do business or actually doing business in Louisiana, or a business-owning or using any part of all of its capital, plant or any other property in the state of Louisiana. The business must be subject to the corporation franchise tax and have taxable capital of $1,000,000 or less to qualify as a small business. The franchise tax is imposed at a rate of $1.50 for each $1,000, or major fraction of the first $300,000 of taxable capital.[9] The legislation originally called for the suspension of the capital stock tax for all taxpayers but the revenue impact was determined to be too substantial and, ultimately, the provision was watered down prior to enactment.

2020 Louisiana Regular Session

Marketplace facilitators

Act 216 (S.B. 138), 2020 Reg. Sess., effective July 1, 2020, required marketplace facilitators to collect sales and use tax.  Beginning July 1, 2020, Louisiana requires a “marketplace facilitator” to register with the Louisiana Sales and Use Tax Commission for Remote Sellers and to collect and remit applicable sales and use tax for sales delivered into Louisiana. This brings Louisiana into line with other states that impose sales tax and have acted to require marketplace facilitators such as Amazon and E-Bay to begin collecting state taxes after the Supreme Court’s decision in Wayfair[10] which overturned the physical presence requirement for nexus set out in Quill.[11] A “marketplace facilitator “is defined in the new law as any person that facilitates a sale for a marketplace seller through a marketplace by doing either of the following:

  1. Offering for sale through a marketplace seller, tangible personal property or services for delivery into Louisiana; or,
  2. Collecting payment from the purchaser and transmitting all or part of the payment to the marketplace seller, regardless of whether the facilitator receives compensation or other consideration in exchange for facilitating the sale.

A “marketplace seller” is defined as a person who sells or offers for sale tangible personal property or the sale of services for delivery into Louisiana through a marketplace that is owned, operated, or controlled by a marketplace facilitator. Marketplace facilitators are required to register and collect and remit state and local sales and use tax on all taxable remote sales for delivery into Louisiana that the marketplace facilitator transacts on its own behalf or facilitates on behalf of a marketplace seller.

An exception is provided for marketplace facilitators with fewer than 200 sales or less than $100,000 of gross sales into Louisiana for the prior or current calendar year. All remote sales into Louisiana, including exempt sales, are considered in determining if either of these thresholds are met. Once a threshold is met, however, the registration, filing and collection obligations commence and a marketplace facilitator is required to register within 30 days of meeting the threshold and to begin collection of sales and use tax within 60 days. Marketplace facilitators are relieved from any liability for failure to collect sales and use tax if the failure is due to insufficient information from the marketplace seller in which case the marketplace seller will then be liable for any tax due.

This effort to force marketplace facilitators to be tax collectors in Louisiana presents several potential problems.  It appears that under the proposed definitions of “marketplace,” “marketplace facilitator,” “marketplace seller” a third-party that does not have any control over the sales proceeds or knowledge of the terms of a transaction could nonetheless be considered a dealer and required to remit tax, even though it may not have access to the necessary information to do so.  The legislation also places significant administrative burdens on both marketplace sellers and marketplace facilitators.

For example, it appears each party has the responsibility for making a taxability determination (for both state and applicable local taxes) and the parties may disagree as to what is properly taxable.  This could create issues where a marketplace facilitator rejects a marketplace seller’s characterization of a transaction as an excluded isolated or exempt sale.  Because the marketplace facilitator has an incentive to take a conservative position and would likely have significantly more power than the marketplace seller, a marketplace facilitator could, in theory, adopt a position that all sales are taxable, regardless of information provided by the marketplace seller. The legislation provides no method for dealing with such differences in interpretation.

The class action provision in the legislation appears to be designed to mitigate this issue to some extent but because Louisiana state and local sales and use tax laws can be difficult to interpret, it is not clear how effective the class action provision would be in motivating the marketplace facilitator and marketplace seller to reach an agreement on taxability.  Further, it now appears that both the marketplace seller and the marketplace facilitator must maintain documentation to support the taxability of transactions on audit.

Definition of Final Determination

Act 234 (S.B. 205) 2020 Reg. Sess., effective January 1, 2021, amended  La. R.S. 47:287.614(C) to add a new provision that provides helpful guidance to taxpayers who are audited by the Internal Revenue Services (“IRS”) and must report any audit findings to the Department.  New section La. R.S. 47:287.614(C)(2) provides a legal definition for the term “final determination” of the IRS as used in subsection C(1), which requires the taxpayers to file an amended state tax return within 180 days of the final determination of any adjustments made by IRS to their federal tax returns.  A final determination is defined as:

  • the taxpayer’s execution of federal Form 870, or its equivalent, agreeing to the final and complete disposition of all outstanding issues;
  • the expiration of the statutory period to petition the United States Tax Court for a redetermination;
  • the execution of a signed closing agreement between the taxpayer and the IRS that results in a final determination of all items in the federal audit;
  • the issuance of a final, non-appealable decision of the United States Tax Court, the United States Court of Federal Claims, a United States District Court, a United States Court of Appeals; or a decision of the United States Supreme Court; or
  • the filing by the taxpayer of an amended federal income tax return that changes state taxable income.

This provision is welcome as it adds clarity to an issue that has caused confusion for taxpayers.

Local sales and use tax adjudication

Act 309 (S.B. 164), 2020 Reg. Sess., effective July 1, 2020, amends La. R.S.  47:337.61 to limit the use of summary proceedings by local tax collectors to situations in which:

(1) The collection of a tax assessment that has become final, a bankruptcy receiver has been appointed for the taxpayer, or the taxpayer self-assessed the amount shown due on the return;

(2) A jeopardy assessment has been or could be issued against the taxpayer;

(3) A rule to cease business has been or is concurrently brought against the taxpayer;

(4) The matter involves the collector’s authority to enforce collection of taxes collected from others; or,

(5) A taxpayer or dealer has failed to make and file any required return or report where the collector estimates the tax due to be less than $100,000.

In addition, Act 309 amended R.S. 47.337.51(A)(2) to extend from 30 days to 60 days the time period in which a nonfiler that receives an assessment may either pay an assessment outright or pay the assessment under protest and contest the determination.  It also permits a remote vendor that has never filed a return in a parish and is assessed over $100,000 dollars to file a petition with the Board of Tax Appeals under R.S. 47.337(A)(1) rather than have to pay the amount of an assessment under protest. In addition, Act 118 (S.B. 283), 2020 Reg. Sess., effective January 1, 2021, extends the time for a nonfiling taxpayer to respond to a local notice of determination from 15 to 30 days. Also, all taxpayers now have 60 days instead of 30 to take action after the local collector issues a notice of assessment issued under R.S. 47.337.51(A)(1).

Net operating losses

House Committee Resolution (“HCR”) 76 of the Regular Session was aimed at any future 2020 extraordinary sessions and requested that the governor include in the call for any future 2020 session changes to the state net operating loss (“NOL”) carryback provisions of the corporate income tax similar to the changes to the carryback provisions of NOL deduction adopted in the federal CARES Act.[12] Even though Louisiana a federal conformity state, it has not adopted the federal NOL provisions of IRC Section 172. Thus, the CARES act changes to Section 172 are not automatically adopted. The House resolution requests that appropriate changes to the Louisiana carryback provisions be included in any proclamation convening an extraordinary session of the legislature in 2020 to help businesses with losses due to the pandemic. However, none of the 70 items included in the Proclamation announcing the second extraordinary session appear to address NOLs.

For additional information, please contact: Jaye Calhoun at (504) 293-5936; Willie Kolarik at (225) 382-3441, or Mike McLoughlin at (504) 620-3351.

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[1]  Because it is an even-numbered year, tax increases or exemptions cannot be addressed in a Regular Session of the legislature and an Extraordinary Session must be called La. Const. Art. 3 section 2.

[2] La. R.S. 23:1536(E)(1).

[3] 129 JBE 2020, Section 2(b) (September 24, 2020).

[4] See, Gulf Coast Rental Tool Service v. Collector of Revenue, 98 So 2d 704 (1957).

[5] La. R.S. 47:302(A).

[6] La. R.S. 47:301(10)(A).

[7] La. R.S. 47:301(7).  In St. Gabriel Industrial Enterprises, Inc. v. Broussard,  602 So 2d 1087  (1992), the court held that the tax on the re-rental of tangible personal property did not apply to intercompany transactions. A specificexclusion is provided for the lease or rental for the purpose of re-lease or re-rental of casing, tools, pipe, drill pipe, tubing, etc., used in connection with the operating, drilling, completion, or reworking of oil, gas, sulphur, or other mineral wells. La. R.S. 47:301(7)(b).

[8] La. R.S 47:611(A).

[9] La. R.S. 47:601(A)

[10] South Dakota v. Wayfair Inc., 138 S. Ct. 2080 (2018).

[11] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[12] P.L. 116-136, 03/27/2020.