Louisiana Corporate Franchise Taxes: Laws, Changes, and Implications

Corporate Franchise Taxes in Louisiana A Primer on the Law and Collections Statistics Presented to Louisiana Tax Institute November 13, 2017 Kevin Richard, CPA Deputy Secretary

Pertinent Statutes R.S. 47:601 Imposition of Tax R.S. 47:602 Determination of Taxable Capital R.S. 47:603 Repealed (2008 2ndExtraordinary Session Act 10) R.S. 47:604 Capital Stock R.S. 47:605 Surplus and Undivided Profits R.S. 47:606 Allocation of Taxable Capital R.S. 47:608 Exempt Corporations R.S. 47:611 Newly Taxable Corporation

Current Franchise Tax Structure Tax imposed on the privilege of doing business in Louisiana. Taxable capital equals corporation s issued and outstanding capital stock, surplus, and undivided profits. Tax Rate $1.50 for each $1,000 on first $300,000 of taxable capital $3.00 for each $1,000 which exceeds $300,000 of taxable capital

Major Changes to the Corporation Franchise Tax Since 2000

2004 First Extraordinary Session Act 2 Phase Out of the Debt Portion of the Corporation Franchise Tax Base Return Debt Included 86% of Total Debt Included 2005 Income/2006 Franchise Tax Return 2006 Income/2007 Franchise Tax Return 72% of Total Debt Included 2007 Income/2008 Franchise Tax Return 58% of Total Debt Included 2008 Income/2009 Franchise Tax Return 44% of Total Debt Included 2009 Income/2010 Franchise Tax Return 30% of Total Debt Included 2010 Income/2011 Franchise Tax Return 16% of Total Debt Included 2011 Income/2012 Franchise Tax Return No Debt Included

2005 Regular Session Act 401 LA Headquarters and Growth Act Certain manufacturing businesses use a single revenue apportionment factor.

2008 Second Extraordinary Session Act 10 Corporation Franchise Tax Phase Out of Debt (accelerated) Return Borrowed Capital Included 2008 Income/2009 Franchise Tax Return 44% of Borrowed Capital Included 2009 Income/2010 Franchise Tax Return 30% of Borrowed Capital Included 2010 Income/2011 Franchise Tax Return No Borrowed Capital Included

2009 Regular Session Act 476 Minimum Corporation Franchise Tax Eliminated the $10 minimum corporate franchise tax Changed the $10 minimum corporate franchise tax to a $10 initial tax

2010 Utelcom Decision Utelcom and Ucom Inc. owned limited partnership interests in three limited partnerships, Sprint Communications LP, Sprint Enterprises LP and SprintCom Equipment Co LP. Utelcom and Ucom filed franchise tax returns in LA. The taxpayers were audited and assessed additional taxes due. The taxpayer made a payment under protest and filed for recovery of the payment. First Circuit ruled in favor of the taxpayers; Supreme Court denied supervisory writs to review the lower courts.

2016 First Extraordinary Session Act 12 Franchise Tax with Respect to LLCs For corporate income tax and franchise tax, a limited liability company is treated in the same manner it is treated and taxed for federal income tax purposes. Franchise tax liability cannot be assessed on an LLC qualified and eligible to make an election to be taxed as a Subchapter S corporation With respect to the imposition of tax, the definition was expanded to include the direct or indirect ownership in a related party including partnerships, joint ventures and other business organizations.

2016 First Extraordinary Session Act 12 Franchise Tax with Respect to LLCs Limited liability companies qualified and eligible to make an election to be taxed as an S-Corporation under federal law remain excluded from the imposition of the tax. Act 12 expands the holding company deduction to all holding companies instead of those specific ones provided by law (i.e. public utility). The holding company is entitled to deduct from its taxable capital its investments in and advances to one or more subsidiaries for purposes of calculating franchise tax. Increased the initial minimum franchise tax for corporations from $10 to $110.

Task Force on Structural Changes in Budget and Tax Policy: Franchise Tax Recommendation Because the corporate franchise tax as it is utilized in Louisiana differs substantially from how it is used in other states, the Task Force recommends restructuring, phasing out or eliminating the tax provided the state identifies replacement revenue to coincide with those changes. The determination of the appropriate restructure, elimination or phase out would be through a study conducted by the Louisiana Department of Revenue and the Louisiana Tax Institute. The appropriate timeframe for any phase out or elimination will also be determined by the study. The study of the franchise tax and the combined reporting evaluation are to be completed within two years and recommendations based on the findings are to be made to the Legislature by 2019. Excerpt from Final Report issued January 27, 2017

2017 Legislative Efforts HB/SB Author Legislation Status Phase out CFT over 10 year period Pending House Appropriations HB 80 Hilferty Phase out CFT over 4 years Subject to call House final passage HB 361 Ivey Pending House Ways and Means HB 385 Broadwater Repeal CIT and CFT Phase out CFT over 10 year period Pending House Ways and Means HB 433 Shadoin

Capital Stock Tax Rates State Tax Rate Max Payment Alabama 0.175% $15,000 Arkansas 0.300% Unlimited Connecticut (a) 0.310% $1,000,000 Delaware 0.035% $180,000 Key Georgia (b) $5,000 Illinois 0.100% $2,000,000 (a) Greater of CIT or CFT (b) Different rates (c) Phase out of tax (d) Fully phased out by 2027 Louisiana 0.300% Unlimited Massachusetts 0.260% Unlimited Mississippi (d) 0.250% Unlimited Nebraska (b) $11,995 Rates as of January 1, 2017 New York (a, c) 0.100% $5,000,000 North Carolina 0.150% Unlimited Oklahoma 0.125% $20,000 South Carolina 0.100% Unlimited Tennessee 0.250% Unlimited Wyoming 0.020% Unlimited

Corporate Income and Franchise Tax Collections (2011 2015)

Corporate Income and Franchise Tax Collections (2015)

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