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The state of Louisiana might be losing millions of dollars in taxes that are owed, but never paid. Want to help them collect?

In March, the Department of Revenue proposed a regulation that would have required businesses to withhold Louisiana income tax on payments to independent contractors, payments of natural resource royalties to nonresidents, rent to nonresident lessors and royalties for the use of intangible property. Collecting taxes on those sorts of payments can be difficult and costly, especially when the corporations getting the payments are based outside Louisiana, so the idea was to get the state’s cut from the source.

The Legislature approved such a regulation in principle in 1934, but one was never enacted. The regulation was proposed this spring but quickly rescinded out of concern that it would be too much of a burden on Louisiana businesses. But an LSU law professor who specializes in tax issues argues the burden would have been insignificant compared to the money the state is losing.

“It’s money that’s due,” Susan Kalinka says. “It makes it more expensive for people in Louisiana who have to make up for taxes people aren’t paying, and it’s an unfair disadvantage for small businesses in Louisiana who pay the full burden of Louisiana income tax.”

Kalinka published an article last month in State Tax Notes, available at taxanalysts.com, arguing that the withholding regulation should have been adopted.

The Multistate Tax Commission (mtc.gov) estimated that Louisiana lost $293 million in 2001 alone thanks to various corporate tax shelters. If that number is accurate, it stands to reason the state may be losing more these days, considering the major role independent contractors are playing in the ongoing construction boom in South Louisiana.

“Every year we’re losing hundreds of millions of tax dollars,” Kalinka says. “Think of what we could do with that money. Think of the roads we could build … Everybody has to pay their fair share.”

Let’s say an out-of-state contractor is hired by a Louisiana business for $1 million to construct a building. After expenses, the contractor nets $500,000. At the 6% state income tax rate, he would owe the state $30,000. But he doesn’t file a Louisiana state income tax return, so he pays nothing. Illegal, but it happens. Under the current system, the state would likely have to go to court to get that money, which can be extremely costly and time-consuming. In many cases, it can be difficult to determine whether a nonresident even has Louisiana income, Kalinka says.

Had the proposed regulation been adopted, the Louisiana business would be required to withhold 2% of the original $1 million payment and pay that $20,000 to the state. So the state would at least get some of what it would have been owed. The Louisiana business would submit a withholding tax receipt to the state with the contractor’s information, creating a paper trail that could make it easier to audit the contractor if necessary, Kalinka says.

The Louisiana business is already filing a 1099 to the IRS reporting the $1 million payment, so it’s just one extra step, she argues; how big could the compliance cost possibly be? Small businesses with less than $1 million in gross revenue would not have been required to withhold, and non-business expenses, such as rent for an apartment used for personal reasons, would have been exempt.

“It doesn’t seem like rocket science to me,” she says.

Robert Angelico, a New Orleans-based attorney with Liskow & Lewis whose practice areas include taxes and business law, says the compliance costs would be “massive.”

While non-residents might be the most difficult enforcement problem for the Department of Revenue, payments to all sorts of contractors and corporations based in the state would have been subject to withholding.

“It’s sort of like killing a gnat with a sledgehammer,” Angelico says, noting the state is currently running a surplus and doesn’t seem to be hurting for tax revenue. He says every state deals with the same problem, but they don’t necessarily place the burden on their businesses to solve it. Angelico suggests some sort of national legislation might be the solution.

One could also argue it’s not a private company’s job to do the Department of Revenue’s job for them.

Al Suffrin, spokesman for the Society of Louisiana Certified Public Accountants, says his organization met with department Secretary Cynthia Bridges and staff shortly after the regulation was proposed to express their concerns. The LCPA, like Angelico, believes the cost of compliance would be a significant burden, although they don’t have an official estimate of how much money or time would be involved. That very day, the department announced they were dropping the idea, Suffrin says.

Suffrin says the department recently told him that it’s still a dead issue. A spokeswoman for the Department of Revenue was unable to arrange an interview in time for this story.