How to Accidentally Renege on Tax Incentives Agreements – the Consequences of Mississippi Income Tax Repeal

Mississippi’s proposal to repeal the state’s individual income tax portends to surreptitiously renege on many of the state’s existing tax incentives agreements.  One of Mississippi’s more valuable economic development tools is the Advantage Jobs Program providing a cash rebate to certain businesses that create high-paying new jobs in the state.  The rebate is based on a percentage of employee payroll tax withholdings, and the number of new jobs required for eligibility varies based on whether the business is located in more or less developed areas of the state.  The term of these incentive payments can extend to up to 10 years.

H.B. 1439 proposes to immediately exempt from the individual income tax the first $50,000 for single taxpayers and $100,000 for married couples.  The entire individual income tax potentially could be eliminated in ten years, although that is far from certain based on the complex phase-out formula used in the bill.  This sudden increase in exempt wages could effectively eliminate future withholdings for many of the recently hired employees who originally qualified for Advantage Jobs.  Because this rebate is calculated as a percentage of a company’s individual income tax withholdings, income tax repeal could effectively nullify many Advantage Jobs incentives previously negotiated to lure businesses to the state.  Unquestionably, this could fundamentally alter the original economic equation relied upon by many of these taxpayers during the site selection process.

While state leaders appear to be increasingly aware of this consequence (whether that was unintended or otherwise), no formal proposal has been offered to address the issue.  If passed in its current form, H.B. 1439 could not only complicate current economic development negotiations, it could also lead to discord and possible litigation by numerous taxpayers who relied upon these valuable incentives when selecting Mississippi for their recent expansions and relocations.

The current tax repeal proposal swiftly and overwhelmingly passed the House, but is meeting increasing resistance in the Senate.  The bill remains viable and it is too early to predict whether it might ultimately pass or what changes might be made during the remainder of the current session.  Jones Walker will continue to monitor this and other tax related bills and will provide updates as things develop.

Mississippi House Passes Massive Sales Tax Increase on Business Inputs

Within a 24 hour period, the Mississippi House of Representatives introduced and passed a bill to repeal the individual income tax, but at a cost of massive increases in sales taxes imposed on business inputs.  H.B. 1439 would phase out the individual income tax by gradually increasing the personal exemption over an undefined period of time based on a complex formula taking into account general fund revenue growth, but would leave the corporate income tax in place.  If passed, any business income generated by pass-through entities such as partnerships and LLCs, as well as trusts and estates, would be exempt.  The bill also would gradually reduce the sales tax on groceries from the current 7% to 3.5%, which may be the only favorable sales tax change in the bill.

The net cost to Mississippi businesses could be huge.  The regular retail sales tax rate applicable to ordinary purchases of business related goods, services, telecommunications services and utilities would increase from 7% to 9.5%, placing Mississippi among the highest standard rates in the country.  Manufacturers currently pay a 1.5% sales tax on manufacturing equipment and repairs, but the bill would increase that by over 160% to a 4% rate.  Identical increases would apply to farm and timber industry implements, equipment and repairs, as well as technology intensive enterprises.  The dairy industry also will be hit hard, rising from 3.5% to 6%.  Sales taxes on vehicles including aircraft, trucks and semitrailers would increase from 3% to 5.5%.  Rates applicable to sales to electric power associations would increase 250% from the current 1% rate to 3.5%, an upstream cost that will likely be passed on to consumers including business customers in the form of higher rates.

Potentially more troubling is the fact that the bill brings forward all of the sales tax statutes containing the standard industrial, agricultural, governmental and utility exemptions, as well as most income tax credits.  While these provisions are unchanged in the present version, by including them in the bill all of those exemption and credit provisions are open to potential modification or elimination during the legislative process.

Notwithstanding the assumed eventual income tax elimination, H.B. 1439 is receiving considerable attention and commentary over its potential negative impact on Mississippi’s competitiveness in attracting new business and retaining existing enterprises.  It is unclear what the bill’s prospects are in the Senate, but Jones Walker will continue to monitor this bill and other active legislation – including bills calling for a major overhaul of Mississippi’s tax incentives programs – impacting businesses in the state.

Mississippi House bill would extend contractors tax to residential construction; Senate bill will require all contractors to register with DOR to obtain local building permit

The Mississippi House of Representatives passed HB 1142 to extend the state’s 3.5% contractor’s tax to residential construction and to require builders to obtain a material purchase certificate (“MPC”) in order to pull a local building permit. Under current law, the contractor’s tax only applies to commercial construction, and the ordinary 7% sales tax applies to certain aspects of residential construction. Confusion and disagreement over that residential tax scheme has led to extensive controversy and litigation especially in the context of roofers, remodelers and others performing home repairs and renovations rather than original construction.

The House bill would also remove certain land costs from the contractor’s tax base, and that would apply both for commercial and residential projects. If enacted, this bill would become effective July 1, 2021.

The Senate passed SB 2874 that would require all residential or commercial contractors to register with the Department of Revenue in order to pull a local building permit, but that bill did not extend the contractor’s tax to residential construction and repairs as with the House bill. The Senate bill would be effective immediately upon passage.

Mississippi House advances offer in compromise legislation

For several years Mississippi has attempted to pass legislation to authorize offers in compromise allowing taxpayers to pay less than the full amount of finally determined taxes due by them. The Mississippi Constitution prohibits any release or extinguishment of any obligation or liability to the state, except for the compromise of certain doubtful claims.

On Thursday the House of Representatives amended and advanced HB 1095 to enact a process by which the Department of Revenue may approve offers in compromise for doubtful claims upon “the advice of the Attorney General.”  The original draft required approval by the Governor.  The bill defines a doubtful claim as one for which a notice of tax lien has been enrolled in the Uniform State Tax Lien registry for a finally determined tax liability and for the collection of which the ordinary process of law has been ineffectual. If enacted, this bill would be effective July 1, 2021.

Mississippi House, Senate move to eliminate June 25 advanced sales, use and payroll tax payments

Years ago the Mississippi Legislature “borrowed” certain sales, use and payroll tax collections from a subsequent fiscal year to close a then-current year budget gap.  Because Mississippi has a June 30 fiscal year end, the legislation required certain taxpayers having a monthly tax liability of $50,000 or more to accelerate 75% of their June tax liabilities to June 25 so the state could recognize that income in the current fiscal year, whereas the ordinary July 20 payment deadline would have pushed those funds into the following year.  Once enacted, that “temporary” fix was never removed due to the effect it would have on the budget.

On Thursday, the House of Representatives passed HB 1139 to repeal this prepayment requirement, meaning all June tax liabilities would be remitted in full by July 20 consistent with other monthly returns and payments.  The Senate passed a companion bill, SB 2843, that would phase out that requirement by 2024 in contrast to the House’s immediate repeal.  These bills would be effective July 1, 2021, although the Senate bill still contains a reverse repealer provision.  These bills are likely going to conference committee to be reconciled and finalized.

Andre Burvant featured on the cover of Louisiana CPA’s Lagniappe magazine

Our Jones Walker SALT partner, Andre Burvant, was featured on the cover of Louisiana CPA’s Lagniappe magazine. The edition also included Andre’s article “COVID-19 Conundrum: Unexpected State Tax Consequences of a Remote Workforce.”

Andre explains the state and local tax issues that should be considered by employers contemplating extending or making permanent their employees’ work from home options, and he encourages employers to watch for state and local guidance on this emerging topic.

Louisiana Extends Deadlines for Property Tax Rolls and Payments in Parishes Affected by Hurricane Laura

Governor John Bel Edwards, State of Louisiana, by Executive Proclamation, has extended the deadlines for property tax rolls and payments in the parishes affected by Hurricane Laura. Proclamation number 10-JBE-2021 states that for the impacted parishes of Calcasieu, Cameron, and Beauregard, the deadline for tax assessors to complete and file the tax roll of his or her parish found in La. R.S. 47:1993(0)(1) and the deadline for tax assessors to deliver to the appropriate tax collector the tax roll for the year 2020 found in La. R.S. 47:2126 are suspended until January 8, 2021. Additionally, the deadline found in La. R.S. 47:2127(A) for ad valorem tax payments in these parishes shall also be suspended for sixty calendar days from December 31, 2020 to March 2, 2021. As such, ad valorem tax payments must be made no later than March 2, 2021, without penalty, and interest shall not begin accruing on unpaid ad valorem taxes until March 3, 2021.

For the impacted parishes of Calcasieu, Cameron, and Beauregard, the deadline found in La. R.S. 47:21 53(A)(1 )(a) for the mailing of a notice of delinquency by the tax collectors shall be suspended until April 5, 2021; and the deadline found in La. R.S. 47:2153(A)(2)(a) for the tax collectors to search the mortgage and conveyance records of tax sale eligible properties for the purpose of identifying tax sale parties shall be suspended to May 3, 2021.

Louisiana Due Process is No Longer in “Jeopardy!”: Louisiana Supreme Court Denies LDR Writ Application in Due Process/Personal Jurisdiction Case

On January 20, 2021, the Louisiana Supreme Court denied the Louisiana Department of Revenue’s writ application in the closely-followed Louisiana due process / personal jurisdiction case of Robinson v. Jeopardy Productions, Inc., 2020-C-01343 (La. 1/20/21).  This case is now final.

A copy of the Louisiana Supreme Court’s writ denial ruling can be found here.

The Louisiana First Circuit Court of Appeal had previously ruled in favor of the taxpayer out-of-state Jeopardy! game show production company, Jeopardy Productions (“Jeopardy”), finding that Jeopardy lacked sufficient contacts with the State of Louisiana to allow the Department to sue Jeopardy to collect Louisiana corporate income and franchise taxes on royalty income earned from the licensing and distribution of Jeopardy’s intellectual property.

Jeopardy did not transact any business in Louisiana, and its sole source of revenue was in the form of royalties from licensing and distribution agreements with independent, non-Louisiana third-party entities, who subsequently distributed the Jeopardy! game show and merchandise to other separate third-party entities.  Jeopardy had no control over where the distribution companies distributed the game show and merchandise, and Jeopardy was not in a partnership, joint venture, or agency relationship with the distribution companies.  All of Jeopardy’s business decisions concerning the licensing agreements were made in California, where Jeopardy maintains its principal place of business.

The Department asserted that it could file suit to impose tax upon Jeopardy simply because the company received some of its revenue from royalty income that was ultimately derived from third-party licenses located in Louisiana.  The First Circuit, however, disagreed, affirming the district court’s ruling that Jeopardy lacked the requisite personal jurisdiction to be sued by the Department in Louisiana, and confirming that Jeopardy’s contacts through unrelated parties in Louisiana did not rise to the level of minimum contacts required by due process of law.

The district court found that the third-party activities constituted arms-length transactions that did not support a decision that Jeopardy purposefully directed business on its behalf in Louisiana.  The trial court concluded that to maintain personal jurisdiction over Jeopardy in Louisiana would violate the notions of fair play and substantial justice.

On appeal, the First Circuit agreed with the district court, asserting that personal jurisdiction may be asserted only as long as due process is not offended.  Citing relevant U.S. Supreme Court precedent, the First Circuit explained that due process requires the nonresident defendant to have certain “minimum contacts” with the forum state, such that maintaining a suit against the defendant does not offend traditional notions of fair play and substantial justice.  The First Circuit further explained that the minimum contacts prong of the due process test is satisfied when the defendant purposefully avails itself of the privilege of conducting activities within the forum state, thus invoking the benefits and protections of its laws and allowing the defendant to reasonably anticipate being hailed into court in the forum state.

The First Circuit concluded that Jeopardy made no intentional or direct contact with Louisiana, and the random, fortuitous, and attenuated contacts with Louisiana, initiated by the independent activities of third parties, were simply not sufficient to establish personal jurisdiction over Jeopardy in Louisiana.

The First Circuit, therefore, affirmed the district court’s judgment granting Jeopardy’s declinatory exception of lack of personal jurisdiction and dismissing the Department’s petition to collect taxes.

A copy of the First Circuit’s prior opinion in the Jeopardy case can be found here.

Jay Adams and Andre Burvant of the Jones Walker SALT Team represented Jeopardy in this tax case.

Mississippi Should Follow New Federal Treatment of PPP Deductions

When Congress recently passed Consolidated Appropriations Act of 2021, it explicitly reversed the IRS’s earlier position that expenses paid with non-taxable forgiven PPP loan proceeds could not be deducted.  As a result of this legislation, the IRS recently issued Revenue Ruling 2021-2 confirming that the act reversed its prior guidance in Notice 2020-32 and Rev. Rul. 2020-27 which purported to deny a “double-dip” with those deductions.  Thus, for federal income tax purposes the expenses paid with those funds should be fully deductible even if the forgiven PPP loans are non-taxable.

Mississippi should follow the new federal treatment due to legislation passed in 2020.  House Bill 1748 was enacted to explicitly deny “a deduction for otherwise deductible payments paid with funds received under the Paycheck Protection Program (PPP) established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but only to the extent those payments are not allowed as deductions for federal income tax purposesTo the extent such payments are allowed as deductions for federal income tax purposes, those expenses shall be deemed to have been incurred in connection with earning and distributing taxable income, notwithstanding that such payments resulted in forgiveness of loans received.”

This provision has since been codified as a new Section 27-7-109 in the tax code.  (NOTE: as of this writing it does not appear this new statute is included in all reporting services, including the version provided to the public for free on the Mississippi Legislature’s website.)

The broad language in the new Section 27-7-109 should preclude the Department from taking the position that the expenses were incurred in generating non-taxable income and therefore non-deductible, as those types of expenses are generally disallowed via Miss. Code Ann. Section 27-7-17(1)(a) (“Expense incurred in connection with earning and distributing nontaxable income is not an allowable deduction”).

With the 2021 Legislature currently in session, however, taxpayers should monitor proposed legislation in the event a bill is introduced to re-establish that non-deductibility.

Jones Walker LLP Authors:

John Fletcher, Partner

Walt Terry, Associate

Jones Walker’s SALT Team Presents Webinar: The Time is Now – 2020 Tax Traps and 2021 Planning

‘Tis the season for the final 2020 Jones Walker SALT Team webinar, titled “The Time Is Now – 2020 Tax Traps And 2021 Planning.” In this year-end state & local tax webinar, the Jones Walker SALT Team will help to ensure that you’re making a list, checking it twice… and doing it correctly, or it won’t be nice!

Please join us for a discussion of various year-end action items, planning opportunities, deadlines, obstacles, and potential “foot faults” that companies should be aware of and consider in their year-end state and local tax activities, including those concerning:

  • Audits and related prescription (statute of limitations) issues and waiver considerations/requirements
  • Refund claims and related prescription (statute of limitations) issues and requirements
  • Workforce planning/locations and related nexus or tax reporting issues and considerations
  • Credits and incentives requirements
  • Property tax issues, such as taxability, property location, and valuation (including informational support for issues such as obsolescence, etc.)

As the old holiday saying goes, “the best way to spread tax department cheer is planning now, instead of next year!”

When: Thursday, December 10, 2020 | 12:00 – 1:00 p.m. CST

Presenters:

Webinar Registration Details: Registration is complimentary. Contact cfarley@joneswalker.com

This program is intended for intermediate to advanced practitioners in state and local tax administration and those doing business in Louisiana and Mississippi. The full day’s program has been recommended for 1 hour of Texas and Louisiana CPE. This course or a portion thereof has been approved by the Mandatory Continuing Legal Education Committee of the Louisiana State Bar Association for a maximum of 1 hour credit. An application for accreditation of this activity has been submitted to the MCLE Committee of the State Bar of Texas and is pending.

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