Sep 19, 2016
From KPMG TaxWatch
In a decision not certified for publication, a Louisiana appellate court recently addressed whether a taxpayer was entitled to corporate income tax refunds as a result of revising its service receipt sourcing methodology on amended returns. The taxpayer at issue performed medically-prescribed diagnostic testing services at its laboratories around the country. The taxpayer operated two different types of labs—large regional laboratories and smaller “rapid response laboratories.” After a large regional laboratory in Metairie, Louisiana was destroyed during Hurricane Katrina, it was rebuilt as a smaller regional response lab where the taxpayer could perform only a limited number of basic medical tests. Thus, post-Katerina, a number of tests performed for Louisiana-based patients were conducted at the Houston, Texas regional laboratory. For corporate income tax purposes, the taxpayer had historically sourced receipts from tests performed on Louisiana patient specimens to Louisiana. The taxpayer continued to do so even after the majority of these tests were performed at the Houston lab. Upon realizing this error, the taxpayer filed amended returns removing the receipts from the diagnostic testing services performed in Houston from the Louisiana sales factor. The Department of Revenue failed to act on the taxpayer’s refund claims and the taxpayer subsequently filed a petition with the Board of Tax Appeals. After the Board ruled in favor of the Department, the taxpayer appealed.
Under Louisiana law in effect for the tax years at issue, service providers in which the use of property was not a substantial income-producing factor were required to use a two-factor (payroll and revenue) formula. Under this formula, receipts from services performed in Louisiana were included in the numerator of the Louisiana revenue factor. Service providers whose use of property to produce income was substantial were required to use an evenly-weighted three-factor formula. This three-factor formula, which was in a different subsection of the statute, had no specific rule for sourcing service receipts, but required that gross apportionable income and net sales attributable to Louisiana be included in the sales factor numerator. There were two key issues before the court. The first was whether the taxpayer’s use of property was a substantial income producing factor. The second issue was how the taxpayer’s receipts should be sourced under the relevant subsection of the sourcing statute. The court first upheld the Board’s determination that the taxpayer’s use of property was a substantial income-producing factor in its business and therefore the taxpayer was required to use the three factor formula. At its labs, the taxpayer used “high-tech, sophisticated, costly instruments and equipment” to perform its diagnostic testing services. The taxpayer had also filed both its original and amended returns using the evenly weighted three-factor formula. The court next addressed how, under the three- factor formula, the taxpayer would determine whether gross apportionable income derived from performing general services was attributed to Louisiana when there was no specific guidance. Because the subsection addressing the three-factor formula was ambiguous with respect to sourcing the taxpayer’s service receipts, the court looked at the overall statute and determined that there was “absolutely” no indication that the legislature intended service businesses to source their income differently depending on whether they used a two-factor or three-factor formula. Thus, regardless of whether which apportionment formula the taxpayer used, service receipts for the tax years at issue should be sourced to Louisiana if the services were performed in the state. Under this “location of performance” rule, the taxpayer’s receipts from services performed at the Houston lab were not attributed to Louisiana. As such, the court issued a judgment in favor of the taxpayer on its refund request. Please contact Amy Hatten at 713- 319-2649 with questions on Quest Diagnostics Clinical Laboratories, Inc. v. Barfield.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.