TWIST - This Week in State Tax

Welcome to TWIST for the week of November 22nd, featuring Sarah McGahan from the Washington National Tax State and Local Tax practice.

On November 13, 2021, Louisiana voters approved Constitutional Amendment 2, which eliminates the constitutional provision permitting corporate and individual taxpayers to deduct federal income taxes paid from their state taxable income.  The measure also repeals a personal income tax rate structure that was enshrined in the constitution and adopts an individual income tax rate cap of 4.75 percent. The approval of Amendment 2 means that legislation enacted earlier this year setting forth individual and corporate income tax rate reductions and eliminating the deduction for federal taxes paid has become effective.

At the same election, voters rejected Constitutional Amendment 1. This measure would have established a new eight-member commission in charge of creating a streamlined system for electronic filing, remitting, and collecting all state and local sales and use taxes levied within Louisiana. Almost immediately after the results of the election were certified, a complaint was filed in a Louisiana federal district court challenging the constitutionality of Louisiana’s system of collecting and administering local sales and use taxes.

In other rate change news, North Carolina Governor Roy Cooper recently signed a long-delayed budget bill that includes corporate income tax and franchise tax changes. The bill lays the groundwork to eliminate the state’s 2.5 percent corporate income tax incrementally by 2030. The bill also eliminates the alternative tax bases for the state’s franchise tax. Specifically, effective for tax years beginning on or after January 1, 2023 and applicable to the calculation of franchise tax reported on the 2022 return, the franchise tax will be measured solely by a corporation’s net worth.  

Finally, in New Mexico, a Hearing Officer concluded that a taxpayer was not entitled to a deduction from its gross receipts tax base because it failed to obtain a properly executed a nontaxable transaction certificate from its U.S. Government customer in a timely manner. Although the Hearing Officer upheld the assessment because the taxpayer consulted with a CPA and relied on its wrongful advice regarding their multi-state tax compliance, the Hearing Officer abated penalties.  

Thank you for listening to TWIST and have a wonderful Thanksgiving holiday.

Louisiana: Approval of Constitutional Amendment Triggers Income Tax Changes 

Download the pdf

On November 13, 2021, Louisiana voters approved Constitutional Amendment 2, which eliminates the state constitutional provision permitting corporate and individual taxpayers to deduct federal income taxes paid from their state taxable income. The measure also repeals a personal income tax rate structure that was enshrined in the constitution and adopts an individual income tax rate cap of 4.75 percent. The approval of Amendment 2 means that legislation enacted earlier this year setting forth individual and corporate income tax rate reductions and eliminating the deduction for federal taxes paid has become effective.

House Bill 292 (Act 396) revises the state’s corporate income tax structure and reduces the number of tax brackets from five to three. Effective January 1, 2022, the corporate income tax rate is 3.5 percent on taxable income up to $50,000; 5.5 percent on taxable income above $50,000 but not in excess of $150,000; and 7.5 percent on taxable income in excess of $150,000. Currently, the highest corporate income tax rate is 8 percent on taxable income in excess of $200,000. The federal income tax deduction for corporations is repealed, and the rates applied to S Corporations that elect to be taxed at the entity level are also reduced. Senate Bill 161 (Act 389) revises the corporate franchise tax rate effective January 1, 2023. Under the revised law, no franchise tax will be due on the first $300,000 of taxable capital for all taxpayers beginning January 1, 2023. The corporation franchise tax rate is reduced from $3 per $1,000 of taxable capital above $300,000 to $2.75 per $1,000 of taxable capital above $300,000. The Act establishes automatic corporation franchise tax rate reductions in any year that corporation income and franchise tax collections exceed the fiscal year 2018-19 corporation income and franchise tax collections, adjusted annually by a growth factor set forth in the Louisiana constitution. The Act also extends the suspension of the corporation franchise tax on the first $300,000 of taxable capital for small business corporations for all franchise taxable periods beginning before July 1, 2023. Finally, House Bill 278 (Act 395) reduces the state’s individual income tax rates and repeals the deduction for federal taxes paid for tax periods beginning on or after January 1, 2022. The new rates are 1.85 percent on the first $12,500 of net income; 3.5 percent on the next $37,500 of net income and 4.25 percent on net income in excess of $50,000. Currently, the highest individual income tax rate is 6 percent on taxable income in excess of $50,000. The Act also establishes potential future individual rate reductions. Please contact Christie Rao with questions.  

Louisiana: Remote Seller Launches Constitutional Challenge to Home Rule Sales Tax Administration 

Download the pdf

In Louisiana, 63 of 64 parishes impose and administer their own sales and use taxes. On Election Day (November 13, 2021), voters rejected a measure that would have established a new eight-member commission in charge of creating a streamlined system for electronic filing, remitting, and collecting all state and local sales and use taxes levied within Louisiana. The new commission would have been authorized to issue policy advice relating to sales and use taxes levied by all taxing authorities within the state and to develop rules, regulations, and guidance to simplify and streamline the audit process for sales and use taxpayers. Almost immediately after the results of the election were certified, a complaint was filed in a Louisiana federal district court challenging the constitutionality of Louisiana’s system of collecting and administering local sales and use taxes. Under the Louisiana constitution, local taxing districts, such as parishes, cities, towns, and certain special districts such as school districts or even fire districts, are authorized to establish their own local sales and use tax rate and in some cases the exemptions that are available. The local taxes are administered, including returns, remittances and audits, by a single entity in each parish.  Louisiana law requires that if a remote seller exceeds 200 transactions or $100,000 of in-state sales, that seller required to register and file reports in each parish in which sales were made. The plaintiff, an out of state remote seller of jewelry-making supplies, alleged that Louisiana’s regime is overly burdensome and violates the Dormant Commerce Clause and the Due Process Clause of the U.S. Constitution. Interestingly, the plaintiff asserted that it avoided exceeding Louisiana’s economic nexus threshold because the cost of complying with sales tax laws in all the parishes would be too great.

In the plaintiff’s view, the locally administered Louisiana system lacks almost all the hallmark features the Wayfair court identified as reducing burdens on remote sellers. Unlike South Dakota, Louisiana has no centralized point of contact through which the seller can seek clarification on rates or definitions. Louisiana has not adopted the Streamlined Sales and Use Tax Agreement and does not provide sellers with software for registering and reporting in each local jurisdiction. In the plaintiff’s view, these missing features create an undue burden on out-of-state sellers that discriminates against interstate commerce.  

Additionally, the plaintiff alleges that the Louisiana system violates the Due Process Clause because there is not a reasonable relationship between the tax system’s features and the value gained from the process as it relates to out-of-state sellers. A tax must be “reasonably related” to “values connected with the taxing State.” In the plaintiff’s view, the detailed level of local knowledge required to understand and comply with the various taxing districts within each parish imposed a burden that far outweighed the revenue benefit local governments receive.   Furthermore, the vast majority of the plaintiff’s sales in Louisiana were wholesale sales, which are not subject to sales and use tax, therefore the burden of complying with the registration and reporting requirements were particularly burdensome given the actual collected tax amount was nominal. The plaintiff requested declaratory and injunctive relief against the enforcement of the local laws, practices, procedures, and policies against out-of-state sellers. Please contact Randy Serpas with questions on Halstead Bead, Inc. v. Lewis (filed November 15, 2021).

New Mexico: Gross Receipts Tax Owed on Services Provided to Government 

Download the pdf

A Hearing Officer in New Mexico recently addressed whether a taxpayer was liable for gross receipts taxes related to its performance of IT services in New Mexico at two military bases. After the New Mexico Taxation and Revenue Department, issued the taxpayer a gross receipts tax assessment, the taxpayer protested on the basis that it was entitled to a deduction for the services provided to the military bases. Under New Mexico law, gross receipts tax is imposed on any business carrying or causing to be carried on any activity with the purpose of direct or indirect benefit in New Mexico. “Gross receipts” include the amount received from performing services. However, a taxpayer may be entitled to a deduction from gross receipts by obtaining a properly executed a nontaxable transaction certificate (NTTC) from a purchaser.  An NTTC must be timely, meaning a taxpayer must be in possession of the NTTC when the transaction occurs or within 60 days of notice by the Department requiring the taxpayer to possess an NTTC.

In this case, the taxpayer argued that it was entitled to take a deduction because the purchaser (the military bases) served it with an NTTC during the audit. However, the NTTC was not presented within the 60-day period, and the Hearing Officer concluded that the taxpayer was not entitled to take the deduction. Even after failing to present an NTTC, a taxpayer can provide alternative evidence proving that a service was sold for resale. Although the taxpayer established that certain of its services were for resale, other services were being provided to the ultimate consumer (the military base). Further, a general deduction for property sold to a government agency did not extend to services. As such, the Hearing Office upheld the assessment related to those services. However, because the taxpayer consulted with a CPA and relied on its wrongful advice regarding their multi-state tax compliance, the Hearing Officer abated penalties. Please contact Sarah McGahan with questions on this decision. 

North Carolina: Budget Bill Phases out the Corporate Income Tax

Download the pdf

North Carolina Governor Roy Cooper recently signed a long-delayed budget bill (Senate Bill 105) that includes corporate income tax and franchise tax changes. The bill lays the groundwork to eliminate the state’s 2.5 percent corporate income tax by 2030. For taxable years beginning in 2025, the rate will be reduced to 2.25 percent and then incrementally reduced thereafter; to 2 percent in 2026; to 1 percent in 2028; and 0 percent in 2030. Currently, the franchise tax base is based on the greater of three calculations: a proportion of the corporation’s net worth, 55 percent of the corporation’s appraised value, or the corporation’s actual investment in tangible property in the state. Effective for tax years beginning on or after January 1, 2023 and applicable to the calculation of franchise tax reported on the 2022 return, the franchise tax is determined by measuring a corporation’s net worth.  Please contact Nikki Emanuel with questions.