Detailed Louisiana Development
The Louisiana Board of Tax Appeals recently issued two corporate income and franchise tax decisions. The first decision addressed whether a taxpayer held its equipment rental fleet out for sale in the ordinary course of business so that it was considered inventory qualifying for the credit for property taxes paid. The second decision addressed whether interest paid on certain types of debt and the debt itself was included in the taxpayer’s franchise tax sales and property factors.
In the first decision, Herc Rentals, Inc. v. Robinson, the taxpayer rented heavy construction equipment and machinery to customers and derived approximately 95 percent of its revenue from doing so. Under Louisiana law, a credit against Louisiana income or corporate franchise tax is allowed for ad valorem taxes paid on inventory held by retailers. The term “inventory” is not defined in the credit statutes, but the property tax code defines inventory as “the aggregate of items of tangible personal property” that are “held for sale in the ordinary course of business.” Items awaiting sale, including used or traded in merchandise, also qualify for the credit. In a previous case, the Board held that renting items while they are waiting to be sold does not disqualify them as inventory. However, the taxpayer in that case derived only 6 percent of its revenue from rentals and sold virtually all its equipment within three years. The Board contrasted these facts with the taxpayer’s facts, noting that the taxpayer in the instant case derived only 5 percent of its income from equipment sales and it took an average of 6.6 years to sell a piece of equipment. Further, the taxpayer itself admitted that it generally only sold its rental fleet at the end of its useful life. In the Board’s view, there was a difference between disposing of equipment at the end of its useful life and actually holding inventory for sale in the ordinary course of business. As such, the Board concluded the taxpayer did not qualify for the inventory tax credit.
In the second opinion, Toyota Motor Credit Corp. v. Robinson, the Board addressed whether interest on Retail Installment Contracts (RICs) was included in the Louisiana sales factor numerator and whether the value of the RICs was included in the Louisiana property factor numerator. The taxpayer, a corporation organized and operated outside of Louisiana, engaged in transactions with in- state car dealers. Car dealers sent credit applications to the taxpayer to determine the credit risk of the potential customer. If approved, the dealer negotiated terms (including price, finance terms, etc.) with the customers and financed the sale of the car through a RIC. The taxpayer subsequently purchased approximately 85 percent of the dealers’ RICs, and maintained, serviced, and stored records related to the RICs at its California headquarters. Under Louisiana law, corporations apportion their franchise tax base using a two factor sales and property formula. For sales factor purposes, interest on customers’ notes and accounts is attributed to the state where the customers are located. Other interest is sourced to the business situs of the asset producing the interest. The taxpayer argued that once a dealer assigned a RIC to the taxpayer, the interest was no longer interest on a customer’s note. As such, it was the taxpayer’s position that the interest from the RICs was “other interest” sourced to California where it had a business situs. The Department argued, and the Board agreed, that the interest payments from Louisiana RICs constituted “interest received on customers’ notes and accounts” that should be attributed to Louisiana. The Board noted that nothing in the statute or the regulation required the interest to be paid to the original seller of the goods or services it to be classified as "interest on customers' notes or accounts.”
The Board next ruled in the taxpayer’s favor and held that the RICs associated with Louisiana sales were not included in the Louisiana property factor numerator. Under Louisiana law, trade notes and accounts associated with the sales of merchandise are sourced to the location where the merchandise was delivered. Other notes and accounts are attributed to the location where they have a business situs. The Department argued the notes were “trade accounts receivables” attributed to the Louisiana property factor because the car sales occurred in Louisiana. In contrast, the taxpayer argued that the RICs were not “trade” accounts or notes because it was not the “seller” of merchandise in Louisiana. The Board agreed with the taxpayer and reasoned that while the RICs were classified as “trade accounts” in the hands of the seller, when they were later assigned to the taxpayer they were no longer “trade accounts” because the taxpayer did not sell the merchandise in the course of their regular business. Importantly, the Department of Revenue’s regulation specifically defined trade accounts and trade notes receivable with reference to sales of merchandise by the taxpayer, The Board concluded that the notes should be sourced to the business situs of the taxpayer outside of Louisiana. Please contact Christie Rao at 504-569-8807 with questions on these Board of Tax Appeals decisions.
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