Louisiana has enacted a number of business and individual tax increases during its Second Extraordinary Session for 2016 which ended on Thursday, June 23, 2016. The increases are intended to close an estimated $600 million budget deficit for the State's fiscal year which started on July 1, 2016.

After the legislation passed during the First Extraordinary Session in March of 2016, the State saw an increase in revenues but it was not enough to close the State's budget deficit. This Second Extraordinary Session focused on passing tax changes to further increase revenues that affect corporate and individual income tax, sales tax, and taxes specific to insurance companies. While sales taxes were also affected by actions of the Section Session, they will be discussed in a separate Alert.

Corporate income tax changes

Act 8¹(HB 20) requires all taxpayers, other than those in the oil and gas exploration and production industry, to use single factor (sales) apportionment. Nevertheless, the apportionment formula for the oil and gas exploration and production industry has been changed from an equally weighted three factor apportionment formula based on sales, property, and payroll, to a four factor formula with a double weighted sales factor.

The Act adopts market-based sourcing for non-tangible personal property and services, and provides new apportionment sourcing rules for leases and sales of intangible property, using specific examples of how to source these items. If the sourcing methodology specified for sourcing services does not clearly reflect the taxpayer's market in Louisiana, the Act provides that a taxpayer may use, or the Louisiana Department of Revenue (LDR) may require the use of, other criteria and methodologies that will reasonably approximate the taxpayer's market in the state. Note: the provisions in the Act regarding the apportionable sourcing of lease and royalty income contradicts existing Louisiana statutes which requires those items to be characterized as allocable income.²

Lastly, Act 8 incorporates a sales factor "throw-out" rule for sales to states in which the taxpayer is not taxable or if the sale's state of assignment cannot be determined.

These changes are effective for taxable periods beginning on or after January 1, 2016.

Act 2³ (HB 47) addresses prior Net Operating Loss changes by clarifying that application of the present law will not apply to an amended return filed on or after July 1, 2015 if the claim refers to a net operating loss deduction properly claimed on an original return filed prior to July 1, 2015.

Tax credits and payments

Act 4⁴ (SB 6) changes the refundable treatment of inventory tax credits, effective for any return filed on or after July 1, 2016. The provisions of this Act will not apply to amended returns for original returns filed before July 1, 2016. The Act creates three categories of taxpayers based on the credit amounts claimed and, in calculating the amount of the inventory tax limitation, all taxpayers included in one consolidated federal income tax return will be treated as a single taxpayer. Each taxpayer is allowed to claim the credit on its separately filed income or corporate franchise tax return, but is limited to the application of the refundability. This change is effective for any return filed on or after July 1, 2016, regardless of the year to which the return relates, except amended returns upon which the credit was properly claimed.

Act 5⁵ (SB 10) prohibits certain manufacturers, and all related parties, affiliates, parent companies, subsidiaries, or owners of such manufacturers that claim the industrial property tax exemption from claiming a refund of the inventory tax credit in the same year. This change is effective for any return filed on or after July 1, 2016, regardless of the year to which the return relates, except amended returns upon which the credit was properly claimed.

Act 9⁶ (HB 25) reduces the amount of the Louisiana Citizens Property Insurance Corporation Assessment income tax credit from 72% to 25% of the amount of the surcharges, market equalization charges, or assessments paid. In addition, this Act repeals the sunset of the reductions, in effect making them permanent. Act 9 is applicable to all taxable years beginning on or after January 1, 2016.

Act 10⁷ (HB 29) changes the calculation of overpayment interest by making statutory interest begin 90 days after a the date the return was due, the claim of overpayment was filed, or the tax was paid, whichever is later. In addition, this Act authorizes the Secretary of the LRD (secretary) to net any overpayments of franchise tax against corporate income tax in determining the amount of interest the corporation owes on unpaid taxes. Further, this Act authorizes the secretary to net any overpayments of corporate income tax against franchise taxes due. This Act is applicable to any refunds issued on or after September 1, 2016, notwithstanding the tax period to which the claim relates.

Individual income tax changes

Act 11⁸ (HB 50) reduces the amount of deduction allowed for certain net capital gains. This change applies only to the sale or exchange of an equity interest in or the assets of a nonpublicly traded business that is domiciled in Louisiana which the taxpayer held for a minimum of five years immediately prior to the sale or exchange. The amount of the capital gains deduction is as follows: (1) 50% for a business domiciled in the state for 5 years or more, but less than 10 years; (2) 60% for a business domiciled in the state for 10 years or more, but less than 15 years; (3) 70% for a business domiciled in the state for 15 years or more, but less than 20 years; (4) 80% for a business domiciled in the state for 20 years or more but less than 25 years; (5) 90% for a business domiciled in the state for 25 years or more, but less than 30 years; (6) 100% for a business domiciled in the state for 30 years or more. This Act applies to sales or exchanges of equity interests or assets that occur on or after June 28, 2016.

Insurance premium tax changes

Act 7⁹ (HB 24) exempts certain health maintenance organizations from the 5% reduction of the investment tax credit. In addition, for taxable years beginning on or after January 1, 2017 and before January 1, 2019, Act 7 excepts these insurers from the modification of the type of investments that are no longer "qualified Louisiana investments." Lastly, Act 7 provides an opportunity for the investment credit against premium tax to be obtained for the single year of 2016.This Act is effective June 24, 2016.

Act 1¹⁰ (HB 35) changes the previous annual license tax rate on health maintenance organizations from 2.25% to 5.5%. In addition, the legislation requires the commissioner of insurance to comply with the provisions of present law regarding the maintenance of books and records and the disposition of collections. This Act is applicable to all taxable periods beginning on or after January 1, 2016.

Implications

Affected taxpayers should consider the impact of these new provisions on their estimated payments, especially those taxpayers that have historically used a three factor formula as well as service providers that now will be sourcing receipts based on market based sourcing.

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ENDNOTES

¹ Act 8 was signed by the governor on June 28, 2016.

² La. Rev. Stat. Ann. Section 47:287.92.

³ Act 2 was signed by the governor on June 22, 2016.

⁴ Act 4 was signed by the governor on June 28, 2016; see also EY Tax Alert 2016-1131, regarding Louisiana's Inventory Tax Credits.

⁵ Act 5 was signed by the governor on June 28, 2016; see also EY Tax Alert 2016-1131, regarding Louisiana's Inventory Tax Credits.

⁶ Act 9 was signed by the governor on June 28, 2016.

⁷ Act 10 was signed by the governor on June 28, 2016.

⁸ Act 11 was signed by the governor on June 28, 2016.

⁹ Act 7 was signed by the governor on June 24, 2016.

¹⁰ Act 1 was signed by the governor on June 22, 2016.