The Louisiana Legislature ended the 2016 First Extraordinary Session on March 9, 2016. During this session, the Legislature approved a number of business and individual tax increases in order to close an estimated $950 million budget deficit in Louisiana's current fiscal year and an estimated $2 billion budget deficit next fiscal year. Louisiana's newly elected Governor, John Bel Edwards, has already signed a number of the bills discussed below (Act numbers indicate that the bill has been signed prior to the publishing date of this Alert).

Even with the increased revenue, the Louisiana Legislature still did not close the state's current budget deficit. Various media outlets put the remaining deficit at approximately $30 to $50 million in state services left unfunded this budget cycle. Additionally, the Louisiana Legislature did not close next year's budget deficit, leaving approximately $800 million left unfunded. Thus, it is expected that a Second Extraordinary Session will occur in June of this year, following the 2016 Regular Session, to adopt additional tax measures as tax measures cannot be considered during Regular Sessions in even-numbered years. Bills that were heavily considered in this First Extraordinary Session, but failed to pass, are highlighted below as potential tax measures that will be considered in the Second Extraordinary Session.

2016 First Extraordinary Session

Franchise tax changes

Act 12¹ (HB 19) expands the franchise tax incidents of taxation to include the owning or using of any part or all of certain entities' capital, plant, or other property in Louisiana whether owned "directly or indirectly" through a partnership, joint venture, or any other business organization of which the domestic or foreign corporation is a related party. This reverses the holding in UTELCOM, Inc. and UCOM, Inc. v. Bridges,² which held that two corporations that were limited partners in limited partnerships did not have franchise tax nexus when their only contact with Louisiana was ownership of limited partnership interests in a limited partnership that conducted business in Louisiana. Additionally, Act 12 expands the types of entities subject to franchise tax to include all entities that are taxed as a corporation for federal income tax purposes. Limited liability companies that are qualified and eligible to elect to be taxed as an S corporation are excluded from the franchise tax. Act 12 also provides a holding company deduction to relieve the pyramiding effects due to the expansion of taxable entities. Lastly, Act 12 also increases to $110 (from $10) the initial tax imposed on newly taxable corporations (the tax is due in the first accounting period in which it becomes subject to the franchise tax), and requires already existing entities to calculate the tax based on its corporate books on the first day of the calendar year or fiscal year in which the tax becomes due. These changes are effective for all tax periods beginning on or after January 1, 2017.

Income tax changes

Act 6³ (HB 20) clarifies a law enacted in 2015 limiting the deduction from corporate income tax to 72% of the amount of net operating loss (NOL) incurred in Louisiana. Under Act 6, the NOL deduction cannot exceed 72% of Louisiana net income. Stateddifferently, a taxpayer with current year income will be subject to tax on at least 28% of current year income, regardless of the amount of total NOL carryforwards. Additionally, while the limitation was set to sunset June 30, 2018, under prior law, HB 20 removes the sunset, making the reduction permanent. This change is effective January 1, 2016, but applies to returns filed on or after July 1, 2015.

Act 24⁴ (HB 116) changes the ordering for the use of NOLs to require that the most recent or newest loss be used first (e.g., last in, first out). This change is effective January 1, 2017.

Act 16⁵ (HB 55) requires that corporations add back otherwise deductible interest expenses and costs, intangible expenses and costs, and management fees directly or indirectly paid , accrued or incurred to, or in connection with one or more direct or indirect transactions, with one or more related members. Add-back is not required if the payment is made: (1) to a related party that is taxable in another state or is taxable in a treaty country; (2) in an arm's-length transaction that has substantial business purpose and economic substance and the payments are not made with a principal purpose of avoiding Louisiana taxes; or (3) to a related party that pays an unrelated party for the same expenses (i.e., acts as a conduit). The new add-back requirement applies to all tax years beginning on or after January 1, 2016.

Act 1⁶ (HB 7) reversed the 72% limitation imposed during the 2015 session by making dividend income received from Louisiana banking corporations, national banking corporations doing business in Louisiana, and from capital stock associations whose stock is subject to ad valorem taxation exempt from corporate income tax. This change applies to exclusions claimed on any return filed for any tax year beginning on or after January 1, 2015.

Act 8⁷ (HB 29) would change Louisiana's current graduated tax rates to a flat 6.5% corporate income tax rate. Act 8 would be effective for all tax years beginning on and after January 1, 2017, but only if the proposed amendment of Article VII of the Constitution of Louisiana contained in HB 31 is adopted at a statewide election and becomes effective.

If adopted by voters, HB 31 would eliminate the constitutional requirement that federal income taxes paid be deducted when computing corporate income tax liability (note: federal income taxes paid would still be deductible in computing state individual income taxes). Because Louisiana's constitution authorizes federal income taxes paid to be deductible, a statewide election must be held to amend the constitution. HB 31 provides for the submission of the proposed constitutional amendment to voters at the statewide election to be held November 8, 2016. HB 95 would repeal the statutory provisions that authorize the deduction for federal income taxes paid by corporations, effective January 1, 2017, if the constitutional amendment contained in HB 31 is adopted at a statewide election and becomes effective.

Sales and use tax changes

Act 22⁸ (HB 30) adopts click-through and affiliate sales and use tax nexus provisions. Specifically, the definition of "dealer" is expanded to include: (1) the solicitation of business through an independent contractor or any other representative under an agreement with a Louisiana resident under which the Louisiana resident refers potential customers to the seller (note: in order for this provision to apply, the cumulative gross receipts from such sales must exceed $50,000; this presumption can be rebutted); (2) the sale of the same or a substantially similar line of products as a Louisiana retailer under the same or substantially similar business name, trademarks, service marks, or trade names as those used by the Louisiana retailer; (3) holding a substantial ownership interest (i.e., a direct or indirect ownership interest of more than 5%) in a retailer maintaining a sales location in Louisiana, or who is owned by a retailer maintaining sales locations in Louisiana; (4) solicitation of business or maintenance of a market in Louisiana through an agent or other representative, through an agreement with the dealer. Under the provision, "dealers" are required to collect Louisiana state sales tax at a rate of 8%, 4% of which will be shared with the local taxing jurisdictions. These expanded nexus provisions apply to tax periods beginning on and after April 1, 2016.

Act 15⁹ (HB 43) caps the amount of vendor's compensation for a dealer who operates one or more business locations in Louisiana at $1,500 per month. This legislation also eliminates any compensation for the sales taxes collected and remitted related to the additional penny sales tax imposed by Act 26 (discussed below). This provision applies all taxable transactions occurring on or after April 1, 2016.

Act 25¹⁰ (HB 61), temporarily imposes sales/use tax on many items that previously were exempt, including a portion of business utilities and manufacturing machinery and equipment Additionally, manufacturers' rebates on vehicles, LA Tax Free Shopping, all sales tax holidays, and numerous others items will no longer be subject to exemption. These provisions are effective April 1, 2016 through July 1, 2018. A follow-up Alert providing additional details to these sales tax changes will be published shortly.

Act 26¹¹ (HB 62) temporarily increases Louisiana's 4% sales, use, and lease tax by an additional penny on every dollar spent, and provides an exclusive list of items now exempt from tax. As a result, many items previously exempt from sales tax will now be subject to 1% sales or use tax. This provision, which is effective April 1, 2016, expires April 1, 2019. A follow-up Alert providing additional details to these sales tax changes will be published shortly.

Tax credits and payments

Act 23¹² (SB 15) changes the ordering for the priority of credits and payments applied on income and franchise tax by making certain refundable credits second in the list of priorities. The priority order is: (1) current year nonrefundable credits with no carryforward; (2) refundable credits (except the inventory tax credit contained in La. R.S. Section 47:6006); (3) credits that carry forward from prior years in order of length of carry-forward period remaining, starting with the shortest period; (4) current year nonrefundable credits with a carryforward period; (5) transferable, but not refundable, credits; (6) the inventory tax credit; and (7) taxpayer payments made. These provisions apply to all tax periods beginning on or after January 1, 2016.

Act 18¹³ (HB 71) makes changes to the Enterprise Zone program, including decreasing the amount of sales and use tax rebate for projects with an advance notification filed on or after April 1, 2016, to $100,000 per new employee and decreasing the amount of the income tax credit from $2,500 to $1,000 for net new jobs created for certain employees (the credit is increased to $3,500 if the new employee receives specific public assistance (e.g. SNAP, WIC, medical, unemployment benefits) during the six-months prior to employment or the net new employee is hired by a participating business located in an enterprise zone. Additionally, Act 18 eliminates hotels from eligibility and prohibits the Department of Economic Development from accepting new project advance notifications on or after July 1, 2017. The change is effective March 10, 2016.

Miscellaneous tax changes

In addition to the broad changes noted above, several other changes were passed, including:

— Act 10¹⁴ (HB 87) reduces the amount of the investment tax credit for the insurance premiums tax by 5% for any tax year beginning on or after January 1, 2016 and before January 1, 2018, and deletes from the definition of a "Louisiana qualified investment" certificates of deposit issued by a Louisiana bank and cash on deposit in a Louisiana bank or trust company. Act 10 also makes changes to premiums taxes paid by certain HMOs.

— Act 4¹⁵ (HB 14), effective April 1, 2016, increases tobacco taxes

— Act 13¹⁶ (HB 27), effective April 1, 2016, increases alcohol taxes

— Act 14¹⁷ (HB 39), effective April 1, 2016, levies an automobile rental tax

— Act 17¹⁸ (HB 59), effective July 1, 2016, addresses hotel taxes

— Act 9¹⁹ (HB 72), effective April 1, 2016, increases the state sales tax on telecommunications services

Bills that did not pass this session, but may be resubmitted

As noted above, because the Louisiana Legislature was unable to close this year's budget deficit, and did not close next year's budget deficit, additional tax changes may be likely to come in an additional Extraordinary Session in 2016 or during 2017. Some of the bills that were heavily considered in this Extraordinary Session but did not pass, and are likely to be considered in a future session include:

— HB 25, which would further reduce NOLs, and / or possibly suspend the use of NOLs

— HB 46, which would reduce the inventory tax credit

— HB 54, which would make permanent all limitations and reductions adopted in 2015

— HB 99, which would impose a single sales factor and adopt market-based sourcing

Implications

Taxpayers should carefully consider the myriad of tax law changes the Legislature made in the past week and evaluate the impact on their state tax posture. There were a significant number of bills passed by both houses of the Louisiana Legislature during the last 20 minutes of the session, and this haste made careful consideration of the language in the bill very difficult. As such, the new language should be carefully considered since the legislation was so quickly crafted, this haste might lead to unintended tax consequences for some taxpayers. The complete ramification of all of this legislation have not yet been fully considered (perhaps, even by the Legislature itself.)

With many of the sales tax law changes set to begin on April 1, 2016, and many of the income tax changes becoming effective retroactively to years beginning on or after January 1, 2016 or January 1, 2017, taxpayers will not have much time to respond to and prepare for these tax law changes prior to their effective dates. The numerous changes made to the sales tax rate will require careful consideration of which items still have exemptions, which items have reduced exemptions, and which items are taxed at the full rate. This will require vendors to keep track of multiple state level rates (in addition to local rates), and change these rates at enumerated times. This will likely create compliance issues as taxpayers try to adjust to the changes.

Additionally, the income tax makes Louisiana's tax law even more unique, creating additional disconnects from basic state tax norms that will be traps for the unwary. For example, Louisiana's NOL ordering and priority rules are now completely decoupled from the federal provisions and taxpayers will have to track their NOLs in a way that is simply counter intuitive. As such, taxpayers must carefully consider their Louisiana tax posture, as generally accepted work papers or calculation methods that worked in the past or work for other states will be irrelevant for Louisiana tax purposes.

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ENDNOTES

¹ Act 12 was signed by the governor on March 10, 2016.

² UTELCOM, Inc. and UCOM, Inc. v. Bridges, No. 2010 CA 0654, 77 So. 3d 39 (La. App. 1 Cir. Sept. 12, 2011).

³ Act 6 was signed by the governor on March 9, 2016.

⁴ Act 24 was signed by the governor on March 10, 2016.

⁵ Act 16 was signed by the governor on March 10, 2016.

⁶ Act 1 was signed by the governor on March 4, 2016.

⁷ Act 8 was signed by the governor on March 9, 2016.

⁸ Act 22 was signed by the governor on March 14, 2016.

⁹ Act 15 was signed by the governor on March 10, 2016.

¹⁰ Act 25 was signed by the governor on March 14, 2016.

¹¹ Act 26 was signed by the governor on March 14, 2016.

¹² Act 23 was signed by the governor on March 10, 2016.

¹³ Act 18 was signed by the governor on March 10, 2016.

¹⁴ Act 10 was signed by the governor on March 9, 2016.

¹⁵ Act 4 was signed by the governor on March 8, 2016.

¹⁶ Act 13 was signed by the governor on March 10, 2016.

¹⁷ Act 14 was signed by the governor on March 10, 2016.

¹⁸ Act 17 was signed by the governor on March 10, 2016.

¹⁹ Act 9 was signed by the governor on March 9, 2016.