Louisiana enacts optional pass-through tax


Pat McCown
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Kevin Herzberg
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David Rohlmeier
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Debasish Chakrabarti
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Richard Jackson
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Jamie C. Yesnowitz
Washington, DC
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Chuck Jones
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Lori Stolly
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Louisiana’s 2019 legislative session produced two significant tax laws addressing relevant state tax issues faced by legislatures across the nation in the wake of federal income tax reform and the elimination of the physical presence rule for sales and use tax.1 S.B. 223, signed June 22, 2019, creates an option for pass-through entities to elect to pay the state income tax at the entity level, circumventing the $10,000 federal limit for individual itemized deductions adopted by the Tax Cuts and Jobs Act of 2017 (TCJA).2 H.B. 547, signed June 17, 2019, updates requirements for remote sellers to collect and remit sales tax originally adopted in 2018 following the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc.3

Pass-through entity tax Effective for tax years beginning on or after Jan. 1, 2019, an S corporation or any other entity taxed as a partnership may elect to pay income tax at the entity level, like a C corporation.4 The election is not available to entities filing a composite partnership return.5 The election must be made in writing and can be made during the preceding tax year, or at any time during the taxable year up to the 15th day of the fourth month after the close of the tax year.6 Once made, the election is effective for the year for which it was made and for all succeeding taxable years, until the election is terminated.7 An entity may apply for termination if its shareholders, partners and members owning more than 50% of the entity consent.8

The tax is applied on a graduated scale, with the first $25,000 of taxable income taxed at 2%, taxable income from $25,001 to $100,000 taxed at 4%, and taxable income of greater than $100,000 taxed at 6%.9 Further, an entity that has made this election is allowed a deduction in an amount equal to the federal income tax the entity would have paid on its Louisiana net income for the taxable year if it had been required to file a federal income tax return as a C corporation.10

Shareholders and owners of entities making this election may exclude the related net income or loss from the entity from their individual income tax returns, provided the entity properly filed a Louisiana corporate income tax return.11

Remote seller sales tax obligations Applicable to periods beginning on or after July 1, 2019, and effective Aug. 1, 2019, H.B. 547 updates the imposition section of the Louisiana sales tax code. Related legislation enacted last year requires dealers to collect and remit sales and use tax when they have a specified amount of sales or number of transactions within the state.12 Further, in 2017, the Louisiana legislature created but did not activate the Louisiana Sales and Use Tax Commission for Remote Sellers (the “Commission”) within the Louisiana Department of Revenue for the administration and collection of sales and use tax imposed by the state and political subdivisions with respect to remote sales.13 The new law activates the Commission by modifying a previous qualification to clarify that activation was triggered by the Wayfair decision.14 Further, it provides that dealers must collect and remit state and local taxes on a monthly basis with respect to all taxable sales until the Commission enforces collection and remittance responsibilities.15

Importantly, H.B. 547 updates the definitions of “remote sale” and “remote seller.” A “remote sale” is “a sale that is made by a remote seller for delivery into Louisiana.”16 A “remote seller” is “a seller who sells for sale at retail, use, consumption, distribution, or for storage to be used for consumption or distribution any taxable tangible personal property, products transferred electronically, or services for delivery within Louisiana, but does not have physical presence in Louisiana, and is not considered a dealer as defined by R.S. 47:30(4)(a) through (l).”17

Remote sellers must register with the Commission no later than 30 calendar days after surpassing the criteria for becoming a dealer (generally, $100,000 in gross revenue or 200 transactions) and commence collection of state and local sales and use tax no later than 60 days after exceeding the criteria.18 The Commission must select an enforcement date not later than July 1, 2020, and release a notice 30 days prior to enforcement stating the enforcement date, as well as provide related administrative rules.19 The Commission also is empowered to enter into voluntary disclosure agreements with remote sellers with respect to state and local sales and use taxes.20

Commentary With this new legislation, Louisiana further advances its laws to address the impact of Wayfair and tax reform. Specifically, with H.B. 547, Louisiana has clarified its statutory language and is poised to move forward in its efforts to tax transactions from remote sellers. Notably, Louisiana established the Commission with the intention of simplifying the reporting obligation for out-of-state sellers or “remote sellers.”21 However, it is unclear if an out-of-state seller who meets one of the parts of the definition of the term “dealer” will be able to utilize the centralized reporting system because the definition of “remote seller” excludes taxpayers who are defined as dealers. While the new law gives Louisiana’s economic nexus rules some teeth, questions remain regarding which taxpayers will qualify to take advantage of the centralized reporting system. It is important for taxpayers to closely consider the definitions of “dealer” and “remote seller” to determine if they can take advantage of the centralized reporting system or will have the burden of reporting separately in each of the local jurisdictions.

Like several other states, Louisiana has attempted to establish a workaround from the $10,000 federal limit to the itemized individual deduction for state taxes by allowing pass-through entities to elect to pay income tax at the entity level. The IRS has previously denied similar attempts to circumvent the limitation and it will be interesting to see how they react to this newly adopted elective regime.

1 Act 360 (H.B. 547) and Act 442 (S.B. 223), Laws 2019.
2 Pub. Law No. 115-97. For a discussion of this Act, see GT Alert: Tax Reform Law Transforming Business and Tax Planning.
3 138 S. Ct. 2080 (2018). For a discussion of this case, see GT SALT Alert: Wayfair Ruling Overturns Quill Physical Presence Requirement.
4 LA. REV. STAT. ANN. § 287:732.2.A.(1). S corporations making this election are ineligible for the S corporation exclusion available under LA. REV. STAT. ANN. § 287:732.B.(6).
5 LA. REV. STAT. ANN. § 287:732.2.F.
6 LA. REV. STAT. ANN. § 287:732.2.A.(2). Late elections may be treated as timely if the secretary determines that there was reasonable cause for the failure to make a timely election.
7 LA. REV. STAT. ANN. § 287:732.2.A.(3).
8 LA. REV. STAT. ANN. § 287:732.2.A.(4). The secretary may terminate the election if the entity shows a material change in circumstances, including a significant change in federal tax law.
9 LA. REV. STAT. ANN. § 287:732.2.B.
10 LA. REV. STAT. ANN. § 287:732.2.C.
11 LA. REV. STAT. ANN. § 297:14.A.
12 H.B. 17, Laws 2018, Second Extraordinary Session. See GT SALT Alert: Louisiana’s Special Legislative Sessions Yield Results. Specifically, the term “dealer” includes any person who sells for delivery into Louisiana tangible personal property, products transferred electronically, or services, and who does not have a physical presence in Louisiana, if during the previous or current calendar year either of the following criteria was met: (i) the person’s gross revenue for sales delivered into Louisiana exceeded $100,000 from sales of tangible personal property, products transferred electronically, or services; or (ii) the person sold for delivery into Louisiana tangible personal property, products transferred electronically, or services in 200 or more separate transactions. LA. REV. STAT. ANN. § 47:301(4)(m)(1).
13 LA. REV. STAT. ANN. § 47:339.
14 LA. REV. STAT. ANN. § 47:339.A.(2). The new language, rather than requiring a decision authorizing states to require remote sellers to collect and remit state and local sales and use taxes, instead requires a decision by the U.S. Supreme Court to “overrule(s) the physical presence requirement for a remote seller to collect and remit state and local sales and use tax on remote sales for delivery into the state,” which occurred as a result of Wayfair.
15 LA. REV. STAT. ANN. § 47:302.W.(6).
16 LA. REV. STAT. ANN. § 47:339.B.(5).
17 LA. REV. STAT. ANN. § 47:339.B.(6) (emphasis added).
18 LA. REV. STAT. ANN. § 47:340.G.(6).
19 Id.; LA. REV. STAT. ANN. § 47:340.F, G.(6)(b).
20 LA. REV. STAT. ANN. § 47:340.G.(11).
21 Louisiana is a “home rule state,” meaning that it allows local jurisdictions to separately assess and collect sales and use tax. Dealing with multiple local filing jurisdictions can result in a heavy compliance burden for businesses without a physical presence in Louisiana. The Commission was established to create a central reporting and collection location for remote sellers in order to ease this burden.

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