LA: Statute Disallowing Residents a Credit for Texas Franchise Taxes Paid Violated the Commerce Clause

Recently, the Louisiana Supreme Court held that a statute disallowing a credit for taxes paid to other states for Texas franchise taxes paid by individual Louisiana taxpayers violated the Commerce Clause of the U.S. Constitution. Under a revised 2015 law, Louisiana credits for taxes paid to other states are available only for income taxes paid to a state that offers a reciprocal credit to that state’s own residents who transact business in Louisiana. Further, even if a reciprocal credit exists, the credit is limited to the amount of tax that would have paid on the income if earned in Louisiana. Texas does not impose a personal income tax and does not offer a reciprocal credit. The taxpayers, Louisiana resident owners in several pass-through entities, paid Texas franchise taxes at the pass-through entity level and were denied a credit for the franchise taxes paid against their Louisiana individual income taxes. After a district court ruled in the taxpayers’ favor, the Department of Revenue appealed.

The first issue before the court was whether the Texas franchise tax was an income tax. If it was not an income tax, then the credit was barred by the strict language of the statute, and there would be no reason to review the constitutionality of the credit statute.  An earlier case in Louisiana, Perez v. Secretary of Louisiana, held that the Texas franchise tax was an income tax. That 1999 decision, in which the Department of Revenue acquiesced in 2003, addressed the Texas franchise tax prior to the amendments enacted in 2006. The court noted that the Department never revoked its Statement of Acquiescence, and that the current version of the Texas franchise tax begins with revenue, applies a three-step calculation to determine the base, and taxes income that is also taxable under Louisiana law. For these reasons, the court concluded that the post-2006 Texas franchise tax was a net income tax for purposes of the Louisiana credit statute.  The court also rejected the Department’s position that a tax imposed on a pass-through entity could not be credited against the income of an individual owner of that pass-through entity.

Next, the court addressed the constitutionality of the credit statute and ruled that its application resulted in the double taxation of interstate income as compared with the taxation of intrastate income.  In the courts’ view, this disparate treatment impermissibly discriminated against interstate commerce, and failed the fair apportionment prong of the Complete Auto test.  After citing to the U.S. Supreme Court’s decision in Wynne, the court concluded that, like the Maryland tax scheme, the Louisiana law failed to provide a credit that resulted in the double taxation of income earned outside Louisiana. Because the income, if earned in Louisiana, would only be taxed once, the Louisiana law created “an incentive for taxpayers to opt for intrastate rather than interstate economic activity” which, pursuant to Wynne, violated the dormant Commerce Clause.  As such, the court concluded that the Louisiana credit statute was unconstitutional. Please contact Amy Hatten at 713- 319-2649 with questions on Smith v. Robinson.