The Louisiana Department of Revenue has revised its proposed market-based sourcing regulation and issued a proposed throwout rule.
Submitted in the September issue of the Louisiana Register, the revised regulations would implement 2016 legislation (H.B. 20) establishing market-based sourcing for sales other than sales of tangible personal property. The DOR also issued a proposed reg on the exclusion of some sales from the sales factor.
The DOR proposed regs in October 2016 to address market-based sourcing, addbacks, and the corporate franchise tax, but none of the regs were advanced after business and industry representatives raised concerns during a November 2016 hearing.
The DOR reissued the proposed addback regs in January and the franchise tax regs in June.
The proposed sourcing reg says that under state law, if a taxpayer cannot ascertain the state to which the sales are to be assigned through the applicable rules or a method of reasonable approximation, the receipts must be excluded from the numerator and denominator of the taxpayer’s sales factor.
Jaye Calhoun of Kean Miller LLP told Tax Notes on September 19 that much determination of whether a sale would be thrown out is subjective. She said that one concern is that a taxpayer will take their best guess and, using a method of reasonable approximation, take a position that a sale should be assigned to a state, but an auditor will later say that their own guess is better and throw out the sale.
William Kolarik II, also of Kean Miller, told Tax Notes that the DOR added language in the proposed reg to define what is taxable in another state, which he said seemed to be addressing Whirlpool Properties Inc. v. Div. of Taxation, a case in which the New Jersey Supreme Court held that it was unconstitutional for that state’s throwout rule to be used to exclude receipts that were not taxed by another state that doesn't impose an income tax. Kolarik said that several subsequent New Jersey cases have further restricted the throwout rule.
Kolarik also pointed to language in the proposed reg that says information that a related-party customer has that is relevant to the sourcing of receipts will be imputed to the taxpayer. He said that it is unclear what the provision means, but said it could be an overreach of the DOR’s authority if it was intended to allow the department to get information it could not otherwise receive, such as information from out-of-state companies that are related to an in-state company.
Safe Harbor
Kolarik said taxpayers should be concerned that the reg was revised to remove a large-volume-of-transactions safe harbor for services delivered to an unrelated business entity.
As initially proposed, the reg would have allowed a taxpayer to assign its sales to a customer based on the customer’s billing address in any tax year that the taxpayer engages in substantially similar service transactions with more than 250 customers and does not derive more than 5 percent of its receipts from sales of all services from that customer.
Both Kolarik and Calhoun said that much of the language in the reg is subjective and that some of the terms used in the reg are unclear, which will be frustrating for taxpayers. Kolarik noted that the proposed reg does not provide any guidance on what constitutes a related party, though the DOR heavily revised the subsection regarding services delivered to an unrelated party.
Public comments on the proposed reg are due to the DOR by October 26. A public hearing is scheduled for October 29.