Apr 24, 2017
From KPMG TaxWatch
On Monday April 17, 2017, House Bill 628 was introduced in the Louisiana House of Representatives. If enacted, House Bill 628 would implement one component— a new Commercial Activity Tax—of Governor John Bel Edwards’ 2017 Budget Stabilization Plan. The Plan is designed to bring “stability and predictability” to the state fiscal picture. On the sales and use tax side, the Plan would sunset the new “clean penny” one cent sales and use tax that was adopted last year. This change would reduce tax revenues by $880 million. To raise an additional $180 million, the Plan would “clean up existing pennies,” which appears to refer to permanently eliminating certain exemptions and exclusions and increase receipts by $200 million more by expanding the sales tax to certain services. On the corporate tax side, the Plan would eliminate the corporate income tax deduction for federal taxes paid and reduce the highest marginal corporate income tax rate from 8 percent to 7 percent. Interestingly, the elimination of the corporate tax deduction for federal taxes paid would likely require voter approval, and voters rejected a similar ballot initiative in November 2016. The corporate franchise tax would be phased-out over a ten-year period under the Plan. The most sweeping- and likely controversial- part of the Plan is the adoption of a new Louisiana Commercial Activity Tax (LACAT), which is expected to raise $800-900 million in revenue. Although the Governor released a fact sheet on the proposed LACAT when it was announced, the introduction of House Bill 628 provides some additional details.
Effective January 1, 2018, the LACAT would be imposed on the taxable “gross receipts from all sources” of each entity doing business in the state. Entities subject to the LACAT would include corporations, partnerships, limited liability companies, limited liability partnerships, limited partnerships, estates, trusts, or associations, whether domestic or foreign. Certain types of entities- non-profits, public utilities, financial institutions, insurance companies, homeowners associations, political organizations, and rural electric and telephone cooperatives- would not be subject to LACAT.
Per House Bill 628, “gross receipts from all sources" would mean the sum of the following: (a) taxable gross receipts from rents and royalties from immovable or corporeal movable property from all sources; (b) taxable gross receipts from royalties or similar revenue from the use of patents, trademarks, copyrights, secret processes, and other similar intangible rights from all sources; (c) taxable gross receipts from construction, repair, or other similar services from all sources; (d) taxable gross receipts from estates, trusts, and partnerships from all sources; and (e) taxable gross receipts from all other items and sources of gross income.
Under House Bill 628, there would be separate CAT computations for corporate and non-corporate entities. S-Corporations would be subject to the non-corporate rate structure if they excluded all Louisiana taxable income pursuant to L.R.S. 47:287.732. For entities other than corporations, the LACAT would be based on gross receipts from all sources, according to the following schedule:
1. If an entity's gross receipts were at least $150,000 but equal to or less than $500,000, the LACAT would be $250.
2. If the entity's gross receipts were more than $500,000, but equal to or less than $1.0 million, the LACAT would be $500.
3. If the entity's gross receipts were more than $1.0 million, but equal to or less than $1.5 million, the LACAT would be $750.
4. If the entity's gross receipts were more than $1.5 million but equal to or less than $3.0 million the LACAT would be $1,500.
5. If the entity's gross receipts were more than $3.0 million, but equal to or less than $6.0 million, the LACAT would be $3,250.
6. If the entity's gross receipts were more than $6.0 million, but equal to or less than $12 million, the LACAT would be $6,500.
7. If the entity's gross receipts were more than $12 million, the LACAT would max out at $12,500.
Corporations and entities that are taxed as corporations for federal income tax purposes, except for corporations engaged in the business of manufacturing or merchandising, would be required to pay the greater of the following:
1. The net corporate income tax due after the application of all credit carryforwards, nonrefundable credits, and refundable credits, or
2. One of the following amounts:
(a) $250 if the entity's gross receipts are at least $150,000, but equal to or less than $500,000.
(b) $500 if the entity's gross receipts are more than $500,000, but equal to or less than $1.0 million.
(c) $750 if the entity's gross receipts are more than $1.0 million, but equal to or less than $1.5 million.
(d) 0.35 percent of the amount of Louisiana gross receipts if the entity's gross receipts are greater than $1.5 million with Louisiana gross receipts being that portion of total gross receipts sourced to Louisiana under the Louisiana corporation income tax law.
House Bill 628 contains a special rate structure for corporations and entities that are taxed as corporations for federal income tax purposes if they are engaged in the business of manufacturing, merchandising or gaming. These entities would be subject to the greater of (1) corporate income tax liability, (2) a minimum tax based on gross receipts, or (3) the lesser of (a) 0.35 percent of the amount of Louisiana gross receipts or (b) 2.76 percent of the amount of the entity's Louisiana gross profits. “Louisiana gross profits" would be defined as Louisiana gross receipts reduced by cost of goods sold attributable to Louisiana gross receipts. Louisiana gross receipts are gross receipts attributed to Louisiana under the state’s market sourcing rules. If the amount of cost of goods sold attributable to Louisiana gross receipts was zero, then "Louisiana gross profits" would mean Louisiana gross receipts. Please stay tuned to TWIST for updates on the Louisiana CAT and the rest of Governor Bel Edward’s proposals.
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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.