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Update: Important Changes To Sales and Corporate Taxes

by Matthew Person on March 23, 2016

Louisiana recently passed significant changes affecting the application of sales and use tax. These changes go into effect April 1, 2016 and remain in effect for 18 months, ending after June 30, 2018. The temporary taxes include a 1% increase to Louisiana’s 4% sales tax and the lessening of many sales tax exemptions.

Louisiana’s state-level sales and use tax is actually three separately imposed taxes. There is a 2% tax under one statute and two additional 1% taxes that are found in another statute. Collectively, these three taxes are thought of as Louisiana’s state-level sales tax of 4%. The fact that the state-level sales taxes are actually three separate taxes was not as important before the Special Session because they were uniformly applied to transactions in the state. Prior, any transaction taxable under one of these three taxes was taxable under all three taxes. This changes as of April 1, 2016. In addition to these changes, a new 1% state-level sales tax has been added, bringing the total number of state imposed sales and use taxes to four, resulting in a total combined rate of 5%.

The Legislature temporarily suspended numerous exemptions from the 4% state sales tax. The suspension will be in effect for a three-month period beginning April 1, 2016 and ending July 1, 2016. In July, the exemptions will be partially reinstated, and the state will continue to tax these items at a reduced rate of 2% until July 1, 2018. This partial exemption will apply to all sales except for the following:

  • Groceries
  • Residential utilities (natural gas, electricity, water)
  • Prescription drugs
  • Motor fuel subject to excise tax
  • Lease or rentals of railroad rolling stock, piggyback trailers, and certain trucks and trailers used in interstate commerce
  • Personal property for resale
  • Materials sold for further processing
  • Feed for animals held for business purposes
  • Farm products produced and used by farmers
  • Agricultural products
  • Drugs administered to livestock for agricultural purposes
  • The first $50,000 of farm equipment and farm equipment used in poultry production
  • Fuel used on the farm
  • Livestock, poultry, and other farm products sold at public livestock auctions
  • Seeds, pesticides, fertilizers, and containers sold to farmers
  • 50-ton vessels, new component parts, and certain materials and services for vessels operating in interstate commerce
  • Materials used in the production of crawfish and catfish
  • Property sold to the government (federal, state, and local)
  • Personal property imported, produced, or manufactured in Louisiana for export
  • Property sold to electric cooperatives and parish councils on aging
  • Factory-built homes

Note that these items may also be subject to the new 1% tax, which has its own list of exemptions. Additionally, the discount rates for filing sales tax reports timely will be capped at $1500 per month beginning April 1, 2016 and the discount for taxes on low-alcoholic-content beverages will decrease to 1.5%. The timely filing discount for tobacco and stamping reports will be reduced to 5%.

“We now have the highest combined sales tax in the country, of any state,” overtaking Tennessee, Robert Scott, president of the Public Affairs Research Council said. But, unlike Tennessee, Louisianans also pay income tax, he said. Dawn Starns of the National Federation of Independent Businesses said Louisiana is not a competitive state and small business, particularly, gets hit with sales tax increases. She urged the legislature to think about the ripple effects its decisions have on small-business owners.

In addition to the sales tax changes, effective January 1, 2016, a company’s net operating loss deduction may not exceed 72% of its Louisiana net income. For all tax periods beginning on or after January 1, 2016, a business will be required to take a refundable credit before it uses any credit that can be carried forward. Additionally, a refundable credit allowed against both income and corporate franchise taxes must be applied to corporate income tax liabilities and then to franchise tax liabilities. Also effective for tax years beginning on or after January 1, 2016, corporations will be required to add-back certain otherwise deductible expenses incurred in connection with a transaction with related entities if the principal purpose of the transaction was to avoid Louisiana income tax.

For tax periods beginning on or after January 1, 2017, businesses must apply the most recent net operating loss first (rather than in order of the year of the loss). Depending on the results of a November vote to adopt a constitutional amendment that would eliminate the state corporate income tax deduction for federal income taxes paid, the Louisiana corporate income tax rate may be revised to a flat 6.5%.

In addition, effective for tax years beginning on or after January 1, 2017, any entity electing to be taxed as a corporation for federal tax purposes will owe the state franchise tax. This provision, however, does not apply to a limited liability company eligible to be taxed under Subchapter S or to any other entity acquired between January 1, 2012 and January 1, 2014 by an entity that was taxed under Subchapter S.

The changes are confusing and guidance is still being developed by the Louisiana Department of Revenue. If you are unsure how your sales tax and collection reporting process will change or how these changes will affect your corporate tax returns, get in touch with us today. We will help you work through how the changes affect you and your business and offer guidance on how to navigate the changes to the Louisiana tax structure.

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