Court Strikes Down Law Limiting Tax Credit for Taxes Paid to Other States, Creating Potential Refund Opportunity
The Louisiana Supreme Court recently held that Act 109 of the 2015 Regular Legislative Session, which amended the requirements for the personal income tax credit for taxes paid to another state, is unconstitutional.
Prior to 2015, a Louisiana taxpayer who derived income from another state and who paid net income taxes on that income in that other state received a full credit for the payment of out-of-state taxes under La. R.S. 47:33.
As a result of Act 109, which amended La. R.S. 47:33, a Louisiana taxpayer is allowed to take a credit for out-of-state taxes paid on income earned out of state only if the laws of the other state provide a reciprocal credit for residents of that state who earn income in Louisiana. Moreover, any such credit is limited to the amount the taxpayer would have paid in Louisiana taxes.
In Smith v. Robinson, La. S. Ct. Dkt. No. 2018-CA-0728 (Dec. 5, 2018), the Louisiana Supreme Court concluded that Act 109 was unconstitutional as a violation of the dormant Commerce Clause of the United States Constitution. The invalidation of Act 109 may present a refund opportunity for Louisiana taxpayers that had their credit for taxes paid to another state limited by Act 109.
To protect a taxpayer’s right to obtain a refund as a result of this decision, it may be necessary to take certain actions before year end. With respect to any 2014 tax return filed on or after July 1, 2015 that did not utilize the full credit for taxes paid to another state as a result of Act 109, taxpayers must file for a refund of their disallowed credit either by filing an amended tax return or by filing a refund claim with the Louisiana Department of Revenue (“LDR”) on or before December 31, 2018 as the prescriptive period for a 2014 tax year refund will run on December 31, 2018.
The LDR has indicated that it will rely on the recent decision in Bannister Properties, Inc. v. Louisiana, Dkt. No. 2018-CA-0030 (La. Ct. App., 1st Cir., Nov. 2, 2018), to deny any refund claim where the taxes were not paid under protest. Bannister Properties could limit the taxpayer’s ability to file a refund claim if a court concludes that the LDR’s interpretation of the Texas margins tax, the tax at issue in Smith v. Robinson, was a mistake of law arising from the misinterpretation by the LDR.
Although the scope of Bannister is not yet clear and the decision will likely be appealed, taxpayers whose 2014 tax credits were limited under Act 109 should consider filing a claim against the State of Louisiana with the Louisiana BTA on or before December 31, 2018 in addition to filing a refund for the 2014 tax year.
For further information or questions regarding a potential refund claim, please contact us at (504) 569-2900.