K. Todd Wallace comments on a recent Louisiana Supreme Court case with income tax implications
In Smith v. Robinson, the Louisiana Supreme Court decided the constitutionality of 2015 La. Acts No. 109 ("Act 109") and its implication on credit for taxes paid in other states
In Smith v. Robinson, the Louisiana Supreme Court decided the constitutionality of 2015 La. Acts No. 109 (hereinafter "Act 109") and its implication on credit for taxes paid in other states. The plaintiffs were Louisiana residents who had ownership in several pass-through entities that operated in Texas, Arkansas, and Louisiana. The defendant is the Secretary of the Louisiana Department of Revenue.
In 2015, the plaintiffs paid over $20,000 in Texas franchise taxes for Texas-sourced income of their pass-through entities. As Louisiana residents, they paid Louisiana income tax on all of their income, including the Texas-sourced income. Louisiana, however, denied the plaintiffs a credit against their Louisiana income tax for franchise taxes paid to Texas. The Plaintiffs paid the tax under protest and filed suit against the Department to recover the tax paid. (NOTE: A prior version of this article incorrectly stated which party brought this action initially. We received a request for correction, clarifying that the taxpayer paid the tax under protest and filed suit against the Department to recover the tax paid).
At issue is Act 109, which only provides credit for income taxes paid to other states if said state provides "reciprocal credit to that state's own residents who transact business in Louisiana." Because Texas does not offer such credit, the plaintiffs' claim for credit was denied under Act 109. Plaintiffs sued based on the argument that "Act 109 is unconstitutional because the Texas franchise tax imposes a tax on income, and Taxpayers would be entitled to a credit for the amount of Texas franchise taxes paid absent Act 109. Additionally, because Act 109 levels a double tax on interstate income, but not intrastate income, it violates the dormant Commerce Clause." The State of Louisiana argued that "[the] Texas franchise tax is not a tax on net income because it contains both a net income component and a net capital component, which are not divisible..."
Mr. Wallace notes that similarly-situated Louisiana residents should review the implications of the Louisiana Supreme Court's decision in the Smith case with a qualified professional to see whether they are getting full credit for income taxes paid to other states.
*** K. Todd Wallace is an attorney and founding partner of the law firm Wallace Meyaski, LLC, in New Orleans, Louisiana.
Blog at: https://ktoddwallaceblog.blogspot.com/
Wallace Meyaski Law Firm
K Todd Wallace, Esq.