On December 5, 2018, the Louisiana Supreme Court (“Court”) affirmed a lower court judgement declaring Act 109, 2015 Regular Session, unconstitutional for disallowing an income tax credit to Louisiana business owners for taxes they paid in other states.
Louisiana has historically provided residents a full credit against their Louisiana income tax liability for taxes paid to other states on income derived in those states. In 2015, however, the Louisiana Legislature passed Act 109 to temporarily limit the availability of the credit to only those taxes paid to a state with a reciprocal credit.
In Ivan I. Smith v. Louisiana Department of Revenue, two Louisiana residents owned interests in multiple LLCs and S corporations that conducted business in both Louisiana and Texas. The taxpayers paid Texas margin tax at the entity level on the Texas-sourced income of the respective entities and subsequently claimed a credit for the taxes paid to Texas on their 2015 Louisiana resident income tax returns. Because Texas does not levy an income tax, and thus has no reciprocal credit to provide, the credits were denied.
The Court reviewed the structure of the Texas margin tax, as well as prior Louisiana and U.S. Supreme Court jurisprudence, and found that the margin taxes paid to Texas were income taxes paid to another state for purposes of the Louisiana tax credit. The Court further held that Act 109 results in Louisiana residents who earn interstate income being taxed twice on all or a portion of their interstate income, thus violating the dormant Commerce Clause of the U.S. Constitution.
As a result of the Court’s decision, certain Louisiana residents who operate in a flow-through business structure and who also conduct business in other states (i.e., Texas) may be able to file refund claims. The Act 109 limitations applied to original returns filed after July 1, 2015, regardless of the tax year to which the return related.
Prior to the Court’s ruling, the Legislature passed Act 6, 2018 Second Special Session, to extend the sunset date for Act 109 and possibly address some of its unconstitutional issues. Starting January 1, 2018, an individual partner, member, or shareholder that pays “another state’s entity-level tax that is based solely upon net income included in the entity’s federal taxable income without any capital component” is allowed a deduction equal to their proportionate share of the entity-level tax paid. Because a deduction is not equivalent to a credit, however, the new deduction does not appear to address the unconstitutional nature of Act 109.
Further, Act 6 caps the credit at a ratio based essentially on the percentage of a taxpayer’s total income earned outside of Louisiana. Thus, a taxpayer may be precluded from receiving a full credit for the taxes paid to another state, even if that state offers a reciprocal credit.
It appears that Act 6 could have the same constitutional issues as Act 109. It is our understanding that no taxpayer has yet to challenge the 2018 legislation. The Ryan team is currently having discussions with taxpayers potentially impacted by Act 109 (2015) and/or Act 6 (2018) regarding procedural avenues for filing and protecting their claims. If you believe your business structure could be impacted, please do not hesitate to reach out to the contacts below.
The Louisiana Supreme Court opinion can be viewed in its entirety on the Court’s website.
TECHNICAL INFORMATION CONTACTS:
Jason DeCuir
Principal
Ryan
225.334.0040
jason.decuir@ryan.com
Matt Grabner
Manager
Ryan
512.960.1147
matthew.grabner@ryan.com
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