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Bloomberg BNA regularly spotlights the insights of state and local tax attorneys at KPMG LLP. In this installment, Sarah McGahan discusses the fiscal challenges facing Louisiana and Governor Edward's plan to address the state's budget shortfall, including a controversial commercial activity tax.
By Sarah McGahan
Sarah McGahan is director in the State and Local Tax group of KPMG LLP's Washington National Tax practice. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.
The Louisiana Legislature convened on April 10, 2017 and tax reform is once again a topic that will surely be the subject of much debate in the next several weeks. Recall, in 2016 Governor John Bel Edwards convened not one, but two, special legislative sessions to address a deficit for the fiscal year ending June 30, 2016, as well as a $2 billion shortfall for the fiscal year starting July 1, 2016. Numerous revenue raising measures were passed during the special sessions, including, but not limited to, the enactment of a new, temporary one percent state-level sales and use tax and the temporary suspension of numerous of sales tax exemptions and exclusions. A number of corporate income and franchise tax changes were also enacted, including limits on the use of net operating losses and corporate and personal income tax credits.
This year, the Bayou State is once again facing budget challenges. In his recently released 2017 Budget Stabilization Plan, the Governor noted that Louisiana faces a $1.3 billion fiscal cliff, which will materialize when the temporary tax increases and haircuts expire. The Governor's plan is designed to bring “stability and predictability” to the state. On the sales and use tax side, the Plan would sunset the new “clean penny” one cent sales and use tax that was adopted last year. This change would reduce tax revenues by $880 million. To raise an additional $180 million, the Plan would “clean up existing pennies,” which appears to refer to permanently eliminating certain exemptions and exclusions and increase receipts by $200 million more by expanding the sales tax to certain, as-of-yet unspecified, services. On the corporate tax side, the Plan would eliminate the corporate income tax deduction for federal taxes paid and reduce the highest marginal corporate income tax rate from 8 percent to 7 percent. Eliminating the corporate tax deduction for federal taxes paid would likely require voter approval, and voters rejected a similar ballot initiative in November 2016. The corporate franchise tax would be phased-out over a ten-year period under the plan. The most sweeping- and likely controversial- part of the Plan is the adoption of a new Commercial Activity Tax, which is expected to raise $800-900 million in revenue. Although information available on the proposed tax changes is sparse, the Plan contains some additional detail on the Louisiana Commercial Activity Tax or LACAT.
The LACAT would be assessed on all types of entities (corporations, LLCs, partnerships, disregarded entities, etc.) doing business Louisiana. Certain insurance companies, financial institutions, non-profits and governmental entities would be exempt. The base of the LACAT would be gross receipts (with a deduction allowed for cash discounts and returns and allowances) attributed to Louisiana using the sales factor sourcing rules. Businesses with less than $1,500,000 in taxable gross receipts would not subject to the LACAT, but would be subject to a minimum CAT ranging from $250 to $750, depending on an entity's gross receipts. For taxpayers with $1.5 million to $3.0 million in gross receipts attributed to Louisiana, the LACAT would be imposed at a rate which graduates to 0.35 percent on receipts when receipts reach $3 million. Taxpayers with over $3 million of receipts would be subject to LACAT of a flat 0.35 percent rate on all receipts sitused to Louisiana. For corporations and limited liability companies that have elected to be taxed as corporations, the total amount due on the corporation income tax return would be the greater of: (1) the minimum CAT; (2) the LACAT; or (3) the net corporate income tax due after the application of all credits. As such, it appears that although the LACAT effectively serves as an alternative minimum tax. Finally, on the personal income tax side, the Plan would lower rates and eliminate the personal tax deduction for federal income taxes paid.
There are numerous bills that have been introduced in the Louisiana legislature that would implement certain of the Governor's proposed changes, as well as bills that would make other amendments to Louisiana's tax laws. Louisiana's regular session is scheduled to end by June 8, 2017. It remains to be seen whether lawmakers will adopt legislation that aligns with the Governor's Budget Stabilization Plan, but businesses should likely be prepared for another round of tax changes in the Bayou State.
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