By Jaye A. Calhoun, Jason R. Brown, and William J. Kolarik, II

In Smith v. Robinson, La. S. Ct., Dkt. No. 2018-CA-0728 (Dec. 5, 2018), the Louisiana Supreme Court held that the Texas franchise tax (also known as the “Texas margins tax”) was an income tax for purposes of Louisiana’s credit for tax paid to another state and held that a 2015 law that limited the credit was unconstitutional because it impermissibly discriminated against interstate commerce.  In Smith, the Louisiana Supreme Court struck down Act 109 of the 2015 Regular Legislative Session, which amended La. Rev. Stat. Ann. 47:33 (the “Credit Statute”).  Louisiana law taxes residents on income earned both within and without Louisiana but, prior to revision, the Credit Statute allowed a credit against Louisiana tax for “net income tax” paid to another state.  The credit prevented Louisiana taxpayers from being subject to income tax more than once on the same income.  The relevant portions of Act 109 limited the credit in two ways.  First, Act 109 provided that the credit was only available against taxes paid to another state if the other state offered a reciprocal credit to the state’s own residents transacting business in Louisiana.  Second, Act 109 capped the credit so that it could not exceed Louisiana income taxes paid.  The invalidation of Act 109 may present a refund opportunity for certain Louisiana resident individuals that either (1) had their credit limited by the cap in Act 109; or (2) paid Louisiana income tax on revenue from a flow-through entity that was subject to the Texas margins tax.

In Smith, the taxpayers were Louisiana residents who owned interests in several flow-through entities, specifically, limited liability companies and subchapter S corporations, with operations in Texas, Arkansas, and Louisiana.  The entities were subject to the Texas margins tax.  The taxpayers paid Louisiana individual income tax on the portion of each entity’s income that was subject to tax in Texas under protest and filed a lawsuit against the Louisiana Department of Revenue (the “Department”) seeking recovery of the tax.

In district court, the taxpayer filed a motion for summary judgment and asserted that Act 109 was unconstitutional because the Texas margins tax was a tax on income and, absent Act 109, the taxpayer would be entitled to a credit for the amount of Texas margins tax paid.  The taxpayer also asserted that Act 109 violated the dormant Commerce Clause because it resulted in a double tax on interstate income but not intrastate income.  The Department opposed the taxpayer’s motion for summary judgment, arguing that the Texas margins tax was not a tax on income because it contained both a net income component and a net capital component, which are not divisible.  The Department denied that Act 109 burdened interstate commerce because it was within the state’s power to regulate state income tax.  The district court granted the taxpayer’s motion of summary judgment and concluded that Louisiana First Circuit Court of Appeals decision in Perez[1], which held that the old Texas franchise tax was an income tax under Louisiana law, was dispositive of the income tax issue, and that the U.S. Supreme Court’s decision in Wynn[2] was dispositive of the constitutional issue.  The Department appealed to the Louisiana Supreme Court.

The Court first considered whether the Texas franchise tax was a net income tax within the meaning of the Credit Statute and held that it was, relying in part on the reasoning in Perez.  The Court also noted that the Department of Revenue had acquiesced in the Perez decision (LDR Statement of Acquiescence No. 03-001, Sep. 10, 2003) and had not revoked nor modified its acquiescence despite the 2006 revisions to the Texas franchise tax law.  In so holding, the Court also concluded that the calculation of taxable margin was essentially an income tax.

With respect to the dormant Commence Clause, the Court also agreed with the trial court that Act 109 violates the Dormant Commerce Clause, specifically, the fair apportionment and discrimination prongs of Complete Auto.[3]  The Court held that Act 109 violated the external consistency test developed to analyze fair apportionment because Act 109 operates to ignore where a taxpayer’s income is generated and does not take into account whether the income has a relationship to the state.  The Court agreed with the taxpayers that Act 109 failed to apportion out-of-state income.  The Court also held that Act 109 discriminated against interstate commerce because it exposes one hundred percent of the interstate income of Louisiana residents to double taxation and because the cap on the credit caused a portion of the taxpayer’s out-of-state income to be subject to double taxation.

Implications

Any Louisiana resident individual that was previously subject to the limitations on the credit for taxes paid to other states should consider filing a refund claim.  In addition, any Louisiana resident individual doing business in Texas through a flow-through entity that paid Texas margins tax should review their returns and consider whether a refund claim is warranted.

While the case is not yet final, the recent decision in Bannister Properties[4], may limit the taxpayer’s ability to file a refund claim if a court concludes that the Department’s interpretation of the Texas margins tax was a mistake of law arising from the misinterpretation by the Department.  In that instance, it is possible that the Louisiana First Circuit Court of Appeals decision in Bannister Properties could limit the taxpayer’s ability to pursue the refund claim.

The issue in Bannister Properties was whether a taxpayer could file in the Board of Tax Appeals (“BTA”) for review of the Department’s denial of a refund claim arising from a mistake of law by the Department.   In Bannister Properties, the taxpayer filed a refund claim and a claim against the state for franchise taxes that were not paid under protest.  The taxpayer and the Department reached a settlement on the claim against the state but the legislature refused to appropriate the funds to pay the refund, so the taxpayer attempted to force the Department to pay the refund through the refund claim.  The refunds at issue were attributable to the invalidation of the Department’s regulation in UTELCOM.[5]  La. R.S. 47:1621(f) (the “Refund Statute”) appears to create a bar to a refund related to a mistake of law by the Department unless the taxpayer paid the tax under protest and filed suit to recover, or by appeal to the BTA in instances where such appeals lie.  According to Bannister Properties the phrase “appeal to the BTA in instances where such appeals lie” is limited to claims against the state and does not apply to appeals related to the denial of refund claims.  Bannister Properties will likely be appealed to the Louisiana Supreme Court because it has the potential to severely limit a taxpayer’s ability to obtain a refund for the overpayment of taxes caused by a mistake of law on the part of the Department.

While the scope of Bannister Properties is not yet clear and it is likely the decision will be appealed, the Department has indicated that it will not issue a refund claim related to the Smith case if the amount was not paid under protest.  Therefore, a taxpayer filing a new refund claim for a tax that was not paid under protest, should consider filing a protective claim against the state in the Louisiana Board of Tax Appeals in addition to a refund claim.  If successful, a claim against the state may only be paid by legislative appropriation.

For additional information, please contact: Jaye A. Calhoun at (504) 293-5936, Jason R. Brown at (225) 389-3733, or Willie Kolarik at (225) 382-3441.

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[1] Perez v. Secretary of Louisiana Department of Revenue, 731 So.2d 406 (La. App. 1st Cir. March 8, 1999).

[2] Comptroller of Treasury of Maryland v. Wynn, 135 S.Ct. 1787 (2015).

[3] Complete Auto Transit v. Brady, 430 U.S. 274 (1977).

[4] Bannister Properties, Inc. v. State of Louisiana, Dkt. No. 2018 CA 0030 (La. Ct. App., 1st Cir., Nov. 2, 2018).

[5] UTELCOM, Inc. v. Bridges, La. Ct. App., 1st Cir., 77 So 3d 39 (2011) (Which held that La. Admin. Code 61:I.301(D) was invalid because it was promulgated based on a mistake of law due to the Department’s misinterpretation of the corporation franchise tax law.)

lsc

by Christopher J. Dicharry

Effective July 1, 2015, the net operating loss carryback (NOL) will be eliminated and the carryover will be limited to 72% of the carryover. La. Acts 2015, No. ___( HB No. 624 (Rep. Jackson) amending La. R.S. 47:287.86) and La. Acts 2015, No. ____(HB No. 218 (Rep. Broadwater) amending La. R.S. 47:287.86).

Under the bills, the NOL is curtailed based upon when a taxpayer’s return is filed. All returns claiming a NOL deduction filed on or after July 1, 2015 will be subject to the 72% limit regardless of the taxable year to which the return relates. However, the filing of an amended return on or after July 1, 2015 amending a return filed before July 1, 2015 will receive the full NOL if the NOL was properly claimed on the original return. Thus, a late filed original 2013 return filed after July 1, 2015 will be subject to the reduced NOL deduction even though other taxpayers got full deductions for timely filed 2013 returns. Additionally, 2014 returns under extension will not get the full deduction if the returns are not filed before July 1, 2015. A taxpayer that loses the benefit on a return filed after July 1, 2015 and for which a valid extension to file was granted prior to July 1, 2015 is allowed to proportionally recoup the disallowed NOL deduction for each taxable year beginning during calendar years 2017, 2018, and 2019.

Taxpayers should consider filing income tax returns for 2014 and earlier years before July 1, 2015 claiming the proper amount of the NOL deduction even if the returns will have to be amended after July 1, 2015.

Note: HBs 218 and 624 have not been signed by the Governor; however, it is very likely that HBs 218 and 624 will become law.

The Louisiana Legislature made numerous changes to business exclusions, exemptions, deductions, and credits. Many of these changes are effective July 1, 2015.  This article addresses only two of the major changes enacted by the Louisiana Legislature during the 2015 regular session. 

For more information or questions about tax law changes during the 2015 regular session, contact Chris Dicharry.