In this newsletter you will find information on recent updates and changes in the law on the state level following the Louisiana Legislative special session. If you have any questions, please contact Andrew Sullivan at (504) 569-2900.
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In its 2016 Second Extraordinary Session, the Louisiana Legislature passed several bills designed to increase revenue and also amended several laws which were enacted during the 2016 First Extraordinary Session.
Act 3: Manufacturers purchasing certain materials for use in processing are not required to pay state sales and use tax on such materials under La. R.S. 47:301(10)(c)(i)(aa). Pursuant to this “further processing” exclusion, the Louisiana Supreme Court recently held that an electricity company’s purchase of limestone for the purposes of absorbing sulfur emissions was excluded from state sales and use tax. Nelson Industrial Steam Company v. Bridges, 2015-1439 (La. 05/03/16), 190 So.3d 276.
In an effort to curb creative uses of this exclusion, Act 3 clarifies and limits the scope of this exclusion such that only materials that meet all the criteria of the new law are eligible. Notably, if the materials are further processed into a “byproduct” for sale, the purchases of such materials are taxable. A “byproduct” is defined as “any incidental product that is sold for a sales price less than a cost of materials.”
The new rules for the “further processing” exclusion are retroactive and applicable to all refund claims submitted, or assessments of additional taxes due, which are filed on or after June 23, 2016.
Manufacturers and other businesses that rely on this exclusion for purposes of state sales and use tax should carefully consider alternative options going forward.
Act 12: Under prior law, there were dozens of exclusions and exemptions from the four percent (4%) state sales and use tax. During its 2016 First Extraordinary Session, the Legislature suspended most of these exemptions and exclusions from the first two percent (2%) of the state sales and use tax until June 30, 2016, and suspended the exemptions and exclusions from the remaining two percent (2%) until June 30, 2018.
In Act 12, the Legislature restored several exemptions and exclusions for the remaining two percent (2%) of the state sales and use tax effective July 1, 2016. Notable among the restored exemptions and exclusions are the following:
(1) Isolated or occasional sales of tangible personal property by a person not engaged in such business;
(2) Membership fees or dues of nonprofit civic associations;
(3) Sales of admissions to athletic and entertainment events held for or by an elementary or secondary school;
(4) Sales of admissions to entertainment events sponsored by domestic nonprofit charitable, religious and education organizations; and
(5) Sales of admissions, parking fees and sales of tangible personal property at events sponsored by domestic, civic, educational, historical, charitable, fraternal or religious nonprofit organizations.
Furthermore, effective July 1, 2016, the exclusions and exemptions described above are added to the list of allowable exemptions and exclusions for the additional one percent (1%) state sales and use tax enacted during the First Extraordinary Session (“Clean Penny”). The Clean Penny expires June 30, 2018. Note that isolated and occasional sales were originally exempted from the Clean Penny.
Act 4: Under prior law, taxpayers that were manufacturers, distributors and retailers were allowed a credit against Louisiana income or corporation franchise tax for ad valorem taxes paid on inventory to political subdivisions.
Under new law, certain taxpayers eligible for the inventory tax credit will now be required to carry forward part of the tax credit rather than receive a full refund of any excess over their tax liability for the tax year. Small and medium-sized taxpayers will remain eligible for the refundable credit.
The rules are as follows:
Note that the following rules rely on a taxpayer’s payments to all political subdivisions and are not applied on a parish-by-parish basis. So, a taxpayer paying $300,000 in ad valorem inventory taxes to five (5) different parishes is subject to the $1,000,000 limitation.
Taxpayers that are subject to ad valorem taxes on inventory should review their planning. The new rules apply to any return filed on or after July 1, 2016, regardless of the taxable year to which the return relates.
Act 5: Pursuant to Article VII, Section 21(F) of the Louisiana Constitution, any manufacturing establishment entering Louisiana or expanding its existing Louisiana facility is eligible to receive an exemption from ad valorem taxes for all buildings, machinery and equipment used as part of the manufacturing process for ten (10) years. This is often referred to as the “industrial tax exemption.”
Under new law, any manufacturer claiming the industrial tax exemption pursuant to Article VII, Section 21(F) of the Louisiana Constitution is no longer eligible for the refundable tax credit for inventory. Instead, if the tax credit exceeds the taxpayer’s liability for the year, the taxpayer is limited to carrying forward the excess credit against subsequent tax years for a period not to exceed five (5) years. Taxpayers affiliated with or related to another entity through common ownership shall be considered a single taxpayer for purposes of this new rule.
The new law applies to all claims for credits on any return filed on or after July 1, 2016, regardless of the taxable year to which the return relates.
Act 11: La. R.S. 47:293(9)(a)(xvii) and 47:293(10) provide an individual income tax deduction or exclusion for net capital gains, limited to gains recognized and treated for federal purposes as arising from the sale or exchange of an equity interest in, or substantially all of the assets of, a non-publicly traded business commercially domiciled in Louisiana.
In Act 11, the Legislature significantly narrowed the the income tax deduction for net capital gains described above. Under new law, only a taxpayer selling or exchanging an equity interest in, or substantially all of the assets of, a non-publicly traded business that such taxpayer has held for a minimum of five (5) years immediately prior to the sale or exchange is eligible for this deduction.
In addition to narrowing the eligible class of taxpayers, the Legislature also reduced the applicable amount of the deduction depending on the number of years the business entity has been domiciled in Louisiana immediately prior to the sale or exchange.
The applicable amounts are as follows:
(1) If the entity has been domiciled in Louisiana for at least five (5) years, but less than ten (10) years, the capital gains deduction shall be 50%;
(2) If the entity has been domiciled in Louisiana for at least ten (10) years, but less than fifteen (15) years, the capital gains deduction shall be 60%;
(3) If the entity has been domiciled in Louisiana for at least fifteen (15) years, but less than twenty (20) years, the capital gains deduction shall be 70%;
(4) If the entity has been domiciled in Louisiana for at least twenty (20) years, but less than twenty-five (25) years, the capital gains deduction shall be 80%;
(5) If the entity has been domiciled in Louisiana for at least twenty-five (25) years, but less than thirty (30) years, the capital gains deduction shall be 90%; and
(6) If the entity has been domiciled in Louisiana for at least thirty (30) years, the capital gains deduction shall be 100%.
Individuals contemplating a sale or exchange of interests or assets eligible under the prior iteration of the net capital gains deduction should carefully consider their planning goals in light of the new legislation, which is effective for all sales or exchanges occurring after June 28, 2016.
Act 6: Under new law, certain nonprofit organizations selling tangible personal property and services exempt from state sales and use tax are now subject to an annual reporting requirement.
The annual report requires such organizations to file a report describing their annual gross sales of tangible personal property or services that are not subject to state sales and use taxes. The annual report is due on September 30th of each year and must be submitted electronically. Act 6 is effective July 1, 2016.
The new reporting requirement does not apply to any nonprofit organization or its affiliates that have been granted an exemption from federal income tax pursuant to Section 501(c)(3) of the Internal Revenue Code.
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The information contained within this newsletter does not constitute legal advice and is not intended to create an attorney-client relationship. You should consult an attorney for individual advice regarding your own particular situation.