Louisiana Governor John Bel Edwards has issued an Executive Order (“Order”) that significantly restricts the state’s Industrial Tax Exemption Program (ITEP), which provides manufacturers making eligible capital investments an exemption from local property taxes for up to ten years. Governor Edwards announced the Order during comments he made to the Louisiana State Board of Commerce and Industry (“Board”) at the Board’s June 24, 2016 public meeting. Highlights of the Order include:
- The Governor will only consider contracts accompanied by advance notifications.
- The Governor will not approve or issue contracts for applications for miscellaneous capital additions and applications for tax exemptions for maintenance capital, required environmental capital upgrades, and new replacements for existing machinery.
- The Governor will not approve contracts unless the Board has made a determination that the establishment meets the constitutional definition of “manufacturing.”
- Priority will be given to projects that are new manufacturing plants or establishments. Additions to any existing plant or establishment will only be considered if they provide for new jobs or present compelling reasons for the retention of existing jobs.
- All contracts will include an Exhibit A consisting of a Cooperative Endeavor Agreement between the State of Louisiana, the Louisiana Department of Economic Development, and the Applicant. This Exhibit will document the creation or retention of jobs and provisions for the exercise of the options in the Louisiana Constitution for the term or percentage of the exemption granted in the contract, and for the reduction or loss of the exemption based upon the applicant’s compliance with the contract, provided with respect to the manufacturing project for which the exemption is granted.
- All contracts will also include an Exhibit B, consisting of approvals, to the extent applicable, of the governing Parish Council, Police Jury, Municipal Council, School Board, and Sheriff by resolution signifying whether each of those authorities is in favor of the project.
The Louisiana Department of Economic Development (LED) will work with the Board to communicate the new policies in coming months.
The Governor issued this Order one day after the 2016 Second Special Session adjourned, during which the Legislature also passed Senate Bill 10 (“SB10”), which will have substantial impact to companies taking advantage of the ITEP. SB10 was executed by Governor Edwards as Act 5 on June 28, 2016.
The Act converts the inventory tax credit—a credit that companies can take on their state corporate income or franchise tax returns for amounts they paid in local ad valorem taxes levied on their inventory—into a non-refundable credit. Specifically, Act 5 states that manufacturers who take advantage of the inventory tax credit in the same taxable year in which they also receive the benefit of the ITEP may not receive a refund of inventory tax credits that exceed the amount of tax liability due that year. Instead, these companies must carry forward all excess amounts of the credit for no more than five years. The Act further provides that the limitation on the refundability of the credit extends to the manufacturer’s “related parties, affiliates, subsidiaries, parent companies or owners of the manufacturer for the inventory held that is related to the business of such manufacturer.” It authorizes the Secretary of Revenue to promulgate rules “to ensure that taxpayers affiliated with or related to any other entity through common ownership by the same interest or as a parent or subsidiary shall be considered to be one taxpayer for purposes of the limitation on refundability.” Furthermore, the Act does not define the term “related” for purposes of what inventory may be subject to this reduction when held off-site by an affiliate, subsidiary, or parent company. The Act will take effect immediately and shall apply to all returns filed on or after July 1, 2016, regardless of the taxable year the return relates to.
During the special session, the Louisiana Department of Revenue reported to the Legislature on a study it made of tax returns filed for fiscal year 2014 in which it compared companies taking the inventory tax credit on their state returns with a list of companies utilizing the ITEP. The Department reported that companies getting the benefit of the ITEP also took $86 million of inventory tax credits that year—$14 million was used to offset tax liabilities, while the remaining $72 million was excess credit available for refund to the companies.
Ryan has the largest transaction tax and property tax practices in North America. Our professionals are globally and locally recognized for their ability to secure significant cost savings, as well as developing and implementing industry-leading tax planning strategies for our clients. Ryan’s Louisiana specialists have previously held key leadership roles within the Louisiana Department of Revenue and continue to maintain strong relationships with state and parish officials. With two local Louisiana offices dedicated to our clients’ most important state and local tax matters, Ryan is well positioned to provide award-winning services to companies across the region.
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TECHNICAL INFORMATION CONTACTS:
Jason DeCuir
Director
Ryan
225.334.0040
jason.decuir@ryan.com