Business owners are still trying to make sense of Louisiana’s new tax code and how much it’s going to cost them
(Spillway Sportsman owner Scott Roe estimates the elimination of “Second Amendment Weekend Sales Tax Holiday” will cost his business about one month worth of revenue this year. Photography by Brian Baiamonte)
Like many business owners, Eric Lane supported Gov. John Bel Edwards’ push for a one-cent sales tax increase during the special session called earlier this year to balance the state budget.
It’s not that Lane—who is president of Gerry Lane Enterprises, which has Buick GMC, Cadillac, Chevrolet and FUSO dealerships in Baton Rouge—was particularly excited about the prospect of a sales tax hike. But given the $750 million budget shortfall lawmakers had to fill before the current fiscal year ends June 30, he didn’t see much choice.
In the final few hours of the session, however, the Legislature not only passed the penny sales tax but simultaneously removed dozens of exemptions and exclusions from the existing sales tax rolls. The result was not only a higher sales tax but a dramatically altered tax code that places a liability on all sorts of transactions that were not previously taxed.
In the case of car dealers, among the new taxes they have to collect is a 4% tax on manufacturer rebates, which makes no sense in Lane’s opinion. A rebate is a discount customers apply to the purchase price of their vehicle.
“Nobody ever actually takes the cash,” he says.
Nevertheless, dealers now have to collect tax on the rebate as if it were a cash giveback. Worse still, when the new fiscal year begins July 1, the 4% rate changes to 2%, where it will remain for the next two years.
“So all the car dealers have to reprogram all our computer systems to account for this new tax,” he says. “Then, 90 days from now we’ll have to reprogram the computers again.”
It may sound like a little thing in the face of the big budget problems the state is grappling with, but little things add up. In the case of the rebate tax, hiring an IT consultant to reprogram the computers at Lane’s three dealerships will cost an estimated $10,000. It’s just one of many administrative expenses the dealership will incur as a result of the new taxes it must now collect from its customers—to say nothing of the higher utilities and sales taxes for which it is now liable as a taxpayer.
Lane isn’t alone in his frustration. Two months after the special session ended, business owners across the state are still trying to make sense of the new tax code, what they’re responsible for and how much it is going to cost them. Most of them still have no idea.
The reason there’s so much confusion is largely because the changes, made in haste, are dizzyingly complex. There are multiple and varying tax rates on different products and services, each with different expiration dates. No one has any idea how the Louisiana Department of Revenue plans to enforce compliance. More troubling, no one can say for sure how much revenue all these new taxes will raise.
What is fairly certain is that businesses individually and the state’s business climate will collectively suffer. Companies need clarity and predictability. Louisiana’s tax code is convoluted and ever changing. This hampers the ability of companies to plan, hinders their willingness to make new investments and harms the competitive position the state has worked so hard to cultivate.
“Despite what people may think, businesses just want to comply,” says Jason DeCuir, director of the public affairs practice of Ryan, a Dallas-based global tax services firm. “They want clarity, consistency and a stable and predictable market to do business in. That’s the opposite of what we’ve had here the last couple of years.”
FALLING THROUGH THE CRACKS
Louisiana’s tax code has long been convoluted. Though there have been calls for reform in recent years, what happened during the special session only further complicated an already messy situation.
Consider that prior to the session three separate laws were already on the books authorizing the state’s four-cent sales tax—one creating the original two-cent tax and two others creating additional one-cent taxes. Each law has its own list of specific exclusions and exemptions. In theory, the three lists should be identical. In reality they are not. As a result, some transactions over the years have been exempt from some of the pennies but not necessarily all of them.
During the recent special session, the Legislature enacted a fourth law adding a fifth penny to the tax. Though billed as a “clean” penny, the law actually includes more than 60 exemptions and exclusions.
While lawmakers were deciding in a conference committee during the final hours of the session which exclusions and exemptions would be included in the bill, they were also horse-trading over a separate bill that called for removing most—though not all—of the 200 or so exemptions and exclusions from the other four pennies already on the books.
The scene in the conference committee meeting where all this was taking place was chaotic. So many changes to the two pieces of legislation were made so quickly that certain important details fell through the cracks.
“The lists of exemptions on the different bills became disconnected from each other towards the end,” says tax attorney Chris Dicharry, who heads Kean Miller’s governmental, legislative and administrative law practice. “The lists came in pretty late, and they kept getting changed but they weren’t getting reconciled.”
Adding to the confusion, lawmakers established different expiration dates for the various new taxes. One rate expires at the end of the current fiscal year. Another takes effect July 1 and lasts through June 30, 2018, when most of the new taxes will expire. Some, however, like the business utilities tax, remain in effect at a third, lower rate through March 31, 2019.
“Basically, a conference committee can do anything it wants to do,” says Dicharry, who estimates the state now has 11 different sets of tax rates. “Once bills go to conference committee anything can happen. In this case, a lot of stuff did.”
The result is a list of nearly 200 new sales taxes with varying rates and expiration dates. There’s the tax on rebates from vehicle manufacturers. A tax on custom software. A tax on machinery and equipment purchased for lease, though rental cars are not included. There’s also a tax on prescription eyeglasses, prosthetics and wheelchair lifts.
Many of the new taxes take specific aim at industry. There are taxes on byproducts. Taxes on the lease of pallets used by manufacturers. Taxes on the raw materials used in printing. Two new taxes are particularly worrisome to oil and gas companies: a tax on the lease of vessels used in offshore mineral production, and a tax on the repairs and renovations made to offshore drilling rigs. The latter was set at 5% for the three months remaining in the fiscal year and drops to 3% beginning July 1.
“A 3% tax on renovations to a huge rig is going to be a lot of money,” Dicharry says. “This opens the door for rig owners to go to alternative states where there is no tax or a lower tax.”
Company executives say the taxes are problematic. Far worse, however, is the fact that the rates keep changing. A whole series of anti-business taxes were passed during the 2015 session. Then there was this year’s special session.
“Now the governor is talking about another special session to raise more taxes later this summer and then, possibly, a special tax reform session next year,” says Bob Johnston, ExxonMobil’s site manager. “It keeps changing and doesn’t come to closure anytime soon.”
COPING WITH CHANGE
Of all the new sales taxes, the two most concerning to business and industry are the tax on utilities and the tax on manufacturing, machinery and equipment, or MM&E. For more than a decade, businesses were exempt by law from both, and business groups fought hard during the special session to oppose removing the exemptions.
They didn’t succeed. Lawmakers imposed a 5% tax on business utilities for the remainder of the fiscal year. The rate drops to 4% from July 1 to June 30, 2018, and then to 1% from July 1, 2018 through March 31, 2019.
That may not sound like a lot to an individual who pays a monthly electric bill of $100 or so. But it starts to add up quickly for a company like ExxonMobil, which spends “hundreds of millions of dollars” a year on natural gas to power the co-generation facility that keeps its refinery running, according to Johnston.
“When you do the math you can start to see the impact a 4% or 5% tax will have,” Johnston says.
The utility bill at Associated Grocers isn’t quite as massive as ExxonMobil’s, but it’s still a whopping six figures every month. The tax will hurt, says Associated Grocers Executive Chairman Jay Campbell, not so much because of the added expense but because the wholesale company didn’t have time to plan or budget for what will now be a major expense this year.
“We were not prepared for that in our budgeting and expense management cycle,” he says. “So now you have to go back and make adjustments.”
AG likely will eat the cost, as it doesn’t want to pass it on to its customers—independent supermarkets, which, themselves, are now paying higher taxes and trying not to pass on their added expenses to shoppers.
“Generally, it’s going to come out of profits,” Campbell says. “Because if you try to adjust your retail pricing to the consumer, the consumer has choices and can shop around. So it puts everyone at a disadvantage.”
The MM&E tax is another doozie, particularly for industry. The exemption was created in the 1990s to stimulate manufacturing and investment in the industrial sector and followed the trend of most other states at the time, which were also doing away with such taxes.
During the special session, however, the Legislature removed the exemption, taxing MM&E at 2% for the remainder of the fiscal year and 1% for two years after that. For companies making capital investments in the billions of dollars, a 2% tax can easily run into the hundreds of millions. Not surprisingly, some companies have already decided to hold off on certain projects and purchases.
“There are some capital expenditures we’re just not doing right now,” Turner Industries CEO Roland Toups says. “It might be a temporary hold, but the big thing a company like ours has to do is conserve cash flow and we can’t afford to take that risk right now.”
It’s hard to say just yet how many other companies are putting the brakes on capital projects and whether that will have a chilling effect on the much-hyped industrial construction boom, which, three years ago, was projected to bring $150 billion in new investment to Louisiana. But some of the biggest projects have already been shelved or delayed because of the drop in oil prices. Now that the billions of dollars in machinery and equipment those companies would be bringing to the state are liable to taxation, there’s an additional reason to rethink the investment.
“These are very significant taxes,” says David Dismukes, director of the Center for Energy Studies at LSU. “Companies that have options on the machinery and equipment they’re planning to bring here in some cases may decide it is cheaper to forgo the option and walk away from the deal than to pay the taxes.”
Like big companies, small businesses are also trying to figure out how best to deal with the changes the tax code has wrought. For independent retailers like the Port Allen-based sporting goods and convenience store Spillway Sportsman, one of the most problematic changes is the suspension of the state’s “Second Amendment Weekend Sales Tax Holiday.” The annual three-day event in September, during which purchases of firearms, ammunition and hunting supplies are exempt from the state and local sales tax, is the single-busiest weekend of owner Scott Roe’s year. Bigger, even, than Black Friday.
“We’re losing what equates to about a month worth of revenues from the (suspension of the) sales tax holiday,” says Roe, who plans to hold the tax-free sale this fall anyway because his customers are so accustomed to it. “I’m just going to end up paying the tax and eating the cost myself.”
For others, like IT services company Turn Key Solutions, the complexity of the new code is the real problem. Turn Key’s customers are varied, including health care firms, manufacturers and retailers, among others. The firm has to act as an agent of the state, collecting different taxes for them all.
“We have three different time tables in which countless new tax rates apply, and we have clients in numerous industries,” Turn Key Solutions CEO John Overton says. “We’re trying to figure out how do we be effective as the uncompensated collection arm of the Department of Revenue and not alienate any clients? It really puts a lot of pressure on the small businesses.”
Business groups say the biggest problem with all these changes is the harm they do to the state’s competitiveness. Though Louisiana ranks relatively well compared to other states in terms of the cost of doing business, it fares poorly in national studies that measure its business tax climate against that of other states. The issues have to do with clarity and predictability, which are impossible to achieve when the state is redoing its tax code every few years.
“Any time you have a tax policy change you have concerns about the predictability and the consistency of the policy because you have to plan and business people are planners,” Campbell says.
Adding to the sense of frustration is the fact that the state has no idea how much money some of these new taxes will bring in. Greg Albrecht, chief economist in the Legislative Fiscal Office, says his staff deliberately low-balled their estimates because of the uncertainty associated with some of the new taxes.
“We went with the numbers we had confidence in and the ones we don’t we took small percentages of and balanced the budget that way,” he says. “We took a conservative approach on the revenue side with respect to these bills.”
That may be the smart way to budget, but it calls into question the need for another special session to raise more taxes, at least in the minds of some. Louisiana Association of Business and Industry President Stephen Waguespack, for one, says it doesn’t make any sense for Edwards to tell lawmakers they need to raise more taxes when no one is quite sure how much the recently enacted tax increases will generate.
“How can they say we’re $750 million short or $600 million short?” he says. “We have no idea.”
As a practical matter it likely will be several months before anyone knows for sure. Sales tax returns for April, the first month under which the new tax rate was enacted, are not due until May 20. But the month doesn’t officially close until three business days after that, and it likely will be the first week of June before the Department of Revenue can provide the Legislative Fiscal Office with a dollar figure that reflects the first month’s collection, Albrecht says.
“So we’ll be into June before we get a number, but even then, that figure will only reflect the first month after all these changes, so that number won’t be very meaningful,” he says. “We won’t be able to make any changes to the revenue forecast based on that number.”
Albrecht estimates it will be well into the third quarter before state economists have a firm handle on the amount the tax increases have generated.
There are also questions about audit and compliance. While businesses are trying to adjust their IT and accounting systems to remit the new returns, the Louisiana Department of Revenue is doing the same thing in preparation for collecting the new taxes. There will be a learning curve and, likely, delays on both ends. It could well be midsummer by the time everyone is up to speed. By then the new tax rate for the 2017 fiscal year will be in effect. How aggressively will the department go after noncompliers, assuming it is able to identify them in a timely fashion?
Revenue Secretary Kimberly Robinson isn’t prepared to say at this point. She’s more focused on encouraging compliance on the front end. To that end, her department has been advertising the new tax code in traditional media and online, constantly updating its website with bulletins and information. It has sent out information to industry associations around the state and recently held a webinar.
“We are hoping for voluntary compliance,” Robinson says. “If at some point in the future, through our normal audit process, we find a taxpayer that didn’t comply then we would go through the normal process of informing them that they had not paid the proper amount.”
Still, plenty of administrative challenges lie ahead, a fact not lost on some in the Legislature. In the wake of the special session, a commission was created to study the tax code and suggest ways to streamline it and make it more competitive. Two other groups, meanwhile, have also been formed in the past year to study various issues related to the state’s tax code and the administration of sales tax collections.
Business leaders see that as a potentially positive development, especially if meaningful reform emerges from any of the three efforts. Whatever may come about, however, the most important thing is for the laws on the books to be clear and consistent, something that’s been missing for a long time.
“Consistently bad tax policy is one thing,” Waguespack says. “Consistently changing tax policy is worse. It’s a death knell.”