On October 16, 2020, the attorney representing the Louisiana Association of Tax Administrators presented a proposal for centralized local sales and use tax collection in Louisiana (the “Localities’ Proposal”) to the Centralized Sales and Use Tax Administration Study Group (the “Study Group”). The Study Group was created by the Legislature earlier this year (HR 31, 2020 1st Ext. Sess.) to make recommendations to the 2021 Legislature on the best method for centralizing local sales and use tax collection. The Study Group is required to submit a report to the speaker of the House of Representatives and the president of the Senate by November 1, 2020. The Localities’ Proposal was the first step in formulating a general framework to consolidate the current sales and use tax collection systems into a single collector system.
The Localities’ Proposal would create a new, yet to be named, single sales tax board (the “Sales Tax Board”) that would serve as a single point of electronic filing, registration (including a single registration number), payment, and policy advice. A de minimis exception to the electronic filing requirement would be included for certain small dealers that desire to continue to prepare and file paper returns or remit tax in person. The Sales Tax Board would be created through a constitutional amendment as a statewide political subdivision outside of the Executive Branch to recognize its status as a joint state and local authority. The proposed Sales Tax Board would consolidate currently existing sales and use tax authorities and mechanisms. Specifically, Parish E-File System and the Louisiana Sales and Use Tax Commission for Remote Sellers (the “Remote Sellers Commission”) would be relocated under the Sales Tax Board, and the Board would be vested with all statutory duties and obligations of the Louisiana Uniform Local Sales Tax Board.
The proposed Sales Tax Board would be composed of three divisions: (1) the Remote Sellers Division; (2) the State Division; and (3) the Local Division. The State and Local Divisions would have sole authority over state-only or local-only issues or guidance, such as state-only or local-only exemptions. The entire Sales Tax Board would be responsible for addressing issues or issuing policy guidance on issues that affect both the state and the localities. The Sales Tax Board would have the authority to promulgate rules and regulations under the Administrative Procedure Act, the power to issue binding policy advice to the Department and local collectors, to issue private letter rulings, to promulgate and develop rules and standards for a state-wide voluntary disclosure program, a single refund claim, and multi-jurisdictional audits. If the Louisiana Department of Revenue (the “Department”) or a local collector objected to policy advice the Board proposed to promulgate, the aggrieved party would have the right to appeal to the Louisiana Board of Tax Appeals. The proposed Sales Tax Board would also be permitted to procure the development of software and enter into agreements with the Louisiana Department of Revenue (the “Department”) and local collectors.
In addition to having the power to promulgate binding policy guidance, the proposed Sales Tax Board would develop and implement an electronic filing and remittance system similar in function to the existing Parish E-File system. The Sales Tax Board would not own taxes remitted to it by dealers. Rather, all taxes remitted to the Board would remain the property of the relevant taxing authority and would be distributed to the appropriate taxing authority daily. Local distributions would be disbursed on a parish-wide level. Data the Department and local collectors receive through the current electronic filing software systems would continue to be collected and would also be distributed to the relevant taxing authority daily.
Under the Localities’ Proposal, the Department and the local collectors would retain all of their collection and enforcement powers, including all audit rights (e.g., the right to determine which dealers are audited and who conducts the audit). Similarly, the Department and the local collectors would retain their existing powers to issue assessments or file summary or ordinary proceedings. Local collectors would also retain the responsibility for disbursing funds to the various sub-parish local taxing authorities.
In recognition of the fact that creation of the Sales Tax Board would be an inherently political process, the Localities’ Proposal intentionally avoided specifics regarding the composition of the proposed Sales Tax Board and its funding. However, for discussion purposes, the Localities’ Proposal outlined a seven member Board to be composed of the executive directors (or their proxies) of four local associations (the Louisiana Sheriff’s Association, the Louisiana Municipal Association, the Police Jury Association of Louisiana, the Louisiana School Board Association). Similarly, the proposal did not suggest the state sources of revenue to be used to fund the Sales Tax Board but did propose to use existing local sources of funding to fund the Proposed Board’s local activities.
The Localities’ Proposal also included several “other considerations” that were not relevant to the creation or mission of the proposed Sales Tax Board. Those considerations included abolishing the distinction between tax exemptions and tax exclusions in favor of only exemptions. The localities also proposed the elimination of optional exemptions. Finally, the proposal suggested that the Sales Tax Board be tasked with tracking the job creation and economic activity associated with tax exemptions to review an exemption’s effectiveness.
The Localities’ Proposal is endorsed by the Louisiana Sheriff’s Association, the Louisiana Municipal Association, the Police Jury Association of Louisiana, the Louisiana School Board Association, and the Louisiana Association of Tax Administrators.
During the Study Group meeting, the Localities’ Proposal was subject to vigorous questioning by Study Group members representing a variety of interests. Members representing the business community were concerned that the proposal retained the existing tax enforcement mechanisms, which can result in a taxpayer being continually subject to audit by different local collectors. Members representing localities were concerned about whether ceding the right to directly collect tax to the proposed Sales tax Board would impact a locality’s bond ratings. Concerns were also raised about the composition of the proposed Sales Tax Board, e.g., the number of members, and how funding would be divided between the state and the localities. Specific concerns related to the composition of the proposed Sales Tax Board revolved around whether the state would be willing to cede is regulatory authority to the Sales Tax Board, especially if local representatives made-up the majority of the Board’s members. Concerns were also raised regarding whether the proposed Sales Tax Board would actually result in a cost savings to the state and local taxing authorities.
The Localities’ Proposal appears to represent a good-faith effort by the local associations to work towards centralized sales and use tax collection. However, many obstacles remain in the path of a true centralized sales and use tax regime. In the past those obstacles have proved to be insurmountable but the fact that the local associations were able to agree on a proposed framework is a significant development.
As pointed out during the meeting, while the Localities’ Proposal does address the administrative issues related to filing returns and has the potential to result in more certainty through uniform guidance, it is only a partial solution and does not sufficiently address the most significant taxpayer concern: the lack of centralized enforcement and collections. As a result, even if the proposed Sales Tax Board were to come to fruition, a multi-jurisdictional taxpayer would still be subject to seemingly unending local audits, which oftentimes require legal representation and litigation to resolve. The cost incurred to defend multiple state and local audits can be significant and the threat of those audits is an impediment to doing business in the state. At a minimum a mechanism for streamlining the audit process should be considered. For example, as proposed during the meeting, when one taxing authority initiates an audit the Sales Tax Board could notify all other taxing authorities of the audit and give them a window for initiating an audit of the same taxpayer for the periods at issue. Under this proposal, a taxing authority that chose not to initiate an audit during this window would be prohibited from later auditing the same taxpayer for the same tax periods.
There are also significant political hurdles to overcome related to the composition of the proposed Sales Tax Board and its funding. As noted during the meeting, the state in particular may be unwilling to cede its regulatory authority to the Sales Tax Board if the Board’s membership is composed of a majority of local representatives. It is possible this hurdle could be overcome by lowering the bar for appeals to the Board of Tax Appeals by an aggrieved taxing authority. Under the current Uniform Local Sales Tax Board Rules, the Board of Tax Appeals may only overrule a proposed private letter ruling appealed by a local taxing authority if the “ruling is contrary to law or a controlling ordinance, conflicts with pre-existing jurisprudence, or otherwise is clearly arbitrary and capricious.” This standard is difficult for the aggrieved taxing authority to overcome and rarely results in a successful appeal.
The “other considerations” in the Localities Proposal, are not relevant to the Study Group’s mandate and appear to represent an attempt by the local taxing authorities to exert more control over exemptions and prejudice tax litigation in favor of the taxing authority. The proposal to abolish the distinction between tax exemptions and tax exclusions is particularly egregious. The taxing authorities are likely seeking to remove this distinction because the burden to prove taxability when an exclusion is at issue is on the taxing authority. In contrast, the taxpayer has the burden of proving an exemption applies. Because “exclusions” from tax are essentially those transactions which are not taxed in the first instance (for example, transactions involving sales of immovable property, sales of services or sales to governmental entities and the United States government), it is unclear how the distinction between exclusions and exemptions could be accomplished short of making all transactions taxable and subsequently exempting certain transactions from tax. This would be a significant departure from the current system in Louisiana and create substantial additional complexity in Louisiana’s already overly complex sales tax laws.
It is not certain that the centralization effort will ultimately be successful, or whether it will provide much needed certainty and uniformity to taxpayers and the business community, but the effort is a significant step forward because, historically, the localities refused to consider centralized collection in any form. While the proposal has been formulated with input from, and has been well received by, local government, it is clear that such a significant overhaul of the Louisiana sales and use tax system will require extensive coordination to facilitate the day-to-day operations and consolidation of the various taxing authorities collection operations. This will not be accomplished quickly.
For additional information, please contact: Jaye Calhoun at (504) 293-5936, Willie Kolarik at (225) 382-3441, or Michael McLoughlin at (504) 620-3351.
 La. R.S. 47:337.102(D)(3).