Louisiana is at it again!
Louisiana Governor John Bel Edwards and the Louisiana Department of Revenue are now seriously discussing and considering the recommendation of legislation to create a new gross receipts tax in Louisiana. The Governor’s administration will likely be presenting this gross receipts tax option to the Louisiana Legislature as part of the Governor’s budget package in the 2017 regular legislative session (which is a fiscal session).
The model the Edwards administration is currently considering is based on the Ohio Commercial Activities Tax (or “CAT”), although the administration is also examining various approaches utilized by other states such as Texas.
Interestingly, this new gross receipts tax proposal comes very soon after the conclusion of a multitude of recent revenue studies, fiscal review commissions, and tax policy task forces , including the Legislature’s Task Force on Structural Changes in Budget and Tax Policy – none of which ever recommended or discussed the creation of a new gross receipts tax in Louisiana.
The Jones Walker SALT Team understands that the administration’s idea of a new gross receipts tax is a result of the Governor’s interest in immediately finding a replacement for the Louisiana corporate franchise tax, as well as the Legislature’s (and the public’s) current lack of appetite to entertain discussion of certain other key revenue raising measures, such as a repeal of the corporate income tax deduction for federal income taxes paid (the “FIT deduction”) and similar individual income tax changes.
An ultimate goal of the administration in the upcoming fiscal session would be to repeal the current Louisiana franchise tax, enact and implement a new Louisiana gross receipts tax, lower the state sales tax rate back to 4%, continue (or make permanent) certain of the statutory suspensions of many state sales tax exemptions and exclusions, expand the sales tax base to include certain additional services (including real property repairs and “digital goods and services” transactions), among other potential changes. Further, depending on the ultimate net revenue generation projected from a proposed gross receipts tax (coupled with these other tax changes), another possibility on the table would be a corresponding phase-out of the Louisiana corporate income tax.
Closely reviewed by the administration as a model for Louisiana, the Ohio CAT is a tax imposed on each person with taxable gross receipts for the privilege of doing business within the state. The CAT is imposed on the person receiving the gross receipts (subject to a minimum threshold amount), and applies to most businesses regardless of organizational structure (sole proprietorships, disregarded entities, LLCs, S-corporations, corporations, trusts, and other associations are subject to the CAT). Net taxable gross receipts over $1 million are subject to the Ohio CAT at a rate of 0.26% (coupled with a variable Annual Minimum Tax (AMT)).
Ohio also currently uses a bright-line factor presence economic nexus test to determine which persons have nexus with the state for purpose of the CAT. This economic nexus issue, however, is currently the subject of closely watched litigation that is now before the United States Supreme Court. Sourcing and apportionment would likely be interesting challenges for such a new tax in Louisiana.
Of additional note is the fact that the Ohio CAT has a rate of only 0.26%, while a proposed Louisiana gross receipts tax is currently rumored to have a rate that is much higher.
While it is true that Louisiana is suffering from a current fiscal crisis and several years of revenue instability, critics of the gross receipts taxes – such as COST – have in the past explained that gross receipts taxes can sometimes run afoul of the tax policy principles of transparency, fairness, economic neutrality, and competitiveness.
Taxpayers in the Louisiana and multistate business community should follow closely the upcoming regular session and be prepared to let legislators, industry groups, and/or tax advisors know of any areas of concern or other considerations regarding the implementation of a possible new gross receipts tax in Louisiana.
The Jones Walker SALT Team will of course be closely following these developments, and we will be sure to continue to report on any new updates as they occur.
Should make for an interesting legislative session.