This Week in State Tax

Amid a flurry of activity, the Louisiana Legislature adjourned its special session on November 22 after approving several measures to flatten and reduce the rates of both the personal and corporate income tax as well as make significant changes in the base and rate of the sales and use tax. At this writing, Governor Landry has not signed the bills into law, but he is expected to do so in that they embody many of the recommendations he made when he called the legislature into session on November 6. The bills before the governor include:

House Bill 2 – The bill replaces the current graduated corporate income tax rate structure with a single rate of 5.5 percent on all taxable income, effective for tax years beginning on or after January 1, 2025. The measure provides a $20,000 deduction from gross income for all taxpayers and allows taxpayers to elect bonus depreciation investments in qualified property and qualified improvement property, as well as bonus amortization for research and experimentation expenses. Finally, the measure repeals the credit for local inventory taxes for C Corporations for tax years beginning on or after July 1, 2026, as well as limiting or repealing several other credits, deductions, exemptions, and incentives in the current structure.

House Bill 3 – The measure repeals the state corporation franchise tax, effective for franchise periods beginning on or after January 1, 2026.

House Bill 7 – The bill provides for a proposed constitutional amendment to restructure and revise the Finance and Revenue Article of the Louisiana Constitution. The measure will be presented to the voters at a special election on March 29, 2025. It does not affect implementation of the other measures passed in the special session.

House Bill 8 – This measure imposes state and local sales and use tax on certain digital products and services. As defined, digital products include “digital audio works, digital audiovisual works, digital books, digital applications and games, digital periodicals and discussion forums, and any otherwise taxable tangible personal property transferred electronically, whether digitally delivered, streamed, or accessed.” The term does not include intangible property, the work product of a professional service delivered electronic form, or various telecommunications and video services. There are exemptions or exclusions for digital products and services when purchased exclusively for commercial purposes and used directly in producing taxable services and products for customers, as well as for certain uses by FDIC-insured financial institutions and health care facilities. The bill is effective for taxable periods beginning on or after January 1, 2025.

House Bill 10 – This bill overhauls the individual income tax system as well as makes changes in the state sales tax rate and expands the sales tax base to include a variety of heretofore excluded services. As to the individual income tax, the bill replaces the current graduated rate structure with a flat rate of 3.0 percent on taxable income, effective for tax year 2025. A standard deduction of $12,500 is allowed for single individuals and $25,000 for married filing joint taxpayers.

The bill increases the state sales and use tax rate to 5.0 percent, effective January 1, 2025, for five years, after which it will decrease to 4.75 percent on January 1, 2030. The measure also extends permanently a 2.0 percent tax on business utilities that was set to expire in 2025. It also gathers the codification of various services into a single location and imposes the tax on two new services. Taxable services now include: 

•       Rental of a range of accommodations,

•       Charges for admissions, including places of amusement, recreational events, entertainment, and participations in games and amusement activities,

•       Parking and storing of motor vehicles,

•       Printing and copying services,

•       Laundry, cleaning, pressing, alterations, repair and dyeing,

•       Cold storage,

•       Repairs and maintenance of tangible personal property, including vehicles, vessels, appliances, and other items,  

•       Prewritten computer access services (new), and

•       Information services (new), meaning electronic data retrieval or research and collecting, compiling, analyzing, or furnishing information of any kind, regardless of the means used, including access through data bases or subscriptions. Information services does not include certain information sold to a newspaper or FCC-licensed radio or television station, certain charges by financial institutions, and data processing.

Taken together, the measures represent a substantial revision of the Louisiana state tax structure by inaugurating a flat-rate corporate and personal income tax as well as revising the rates and base of the state sales and use tax. They accept many, but not all, of Governor Landry’s earlier recommendations, and many expect that there will be discussion of further changes in the 2025 legislative session. For further information, please contact Randy Serpas or Harley Duncan. Please note that KPMG will release a SALT Alert, following the Governor’s action and the gathering of further information.

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The Maryland Court of Appeals recently ruled that certain of Potomac Edison’s electricity transmission equipment qualified for a sales and use tax exemption as equipment used directly and predominantly in a production activity. Potomac Edison purchased electricity from a generating plant outside Maryland and used its transmission and distribution system (T&D system) to carry the electricity to its Maryland customers. As the electricity traveled from the generating plant to the customers, Potomac Edison adjusted the voltage up and down to enable efficient travel and make the electricity usable for customers of various types.

Potomac Edison claimed its activities qualified for an exemption in Maryland for tangible personal property purchased for use directly and predominantly in a production activity. However, on audit, the Comptroller assessed sales and use tax, based on the finding that Potomac Edison was not entitled to the exemption. Potomac Edison appealed, and after a series of legal proceedings, the matter arrived at the Court of Appeals for a second time, with the primary substantive issue before it being whether the Maryland Tax Court had erred in finding on remand that substantial portions of Potomac Edison’s T&D system was used in a production activity and was therefore exempt from sales and use tax.

In a prelude to the current matter, the case arrived on its first trip to the Court of Appeals after the state Tax Court had denied Potomac Edison’s claim. In that case, the Tax Court focused on definitions that categorized the transmission, distribution, and delivery of electricity as a taxable service, determining that Potomac Edison was not engaged in processing or manufacturing, and thus did not qualify for the exemption. The appellate court reversed and remanded the initial Tax Court decision, finding that there was definitely processing involved in the transmission and delivery of the electricity and that the Tax Court had erred in finding that none of the equipment qualified for exemption.

On remand at the Tax Court, an expert witness categorized the assets purchased by Potomac Edison into five groups as to whether they were used directly and predominantly in changing the form or characteristics of energy. After reviewing each category, the Tax Court concluded that conductor wires and cables continually processed electricity by organizing and directing the movement of electrons. Absent this, the electricity in the form used and consumed by customers could not have been produced, thus qualifying it for   exemption. The Tax Court also found that transformer and substation equipment were exempt because they constantly processed the voltage of electricity that customers purchased and consumed. Conversely, the distribution and foundation support equipment were not exempt, as they primarily consisted of electric meters used to measure customer usage rather than to process electricity. In the instant decision, the appellate court held that the Tax Court’s decision on remand was supported by substantial evidence in the record and denied the Comptroller’s arguments. For more information on In the Matter of the Comptroller of Maryland, contact Justin Mikol.

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