Louisiana Single-Sales Factor Apportionment Formula, Market-Based Sourcing Adopted

Louisiana Gov. John Bel Edwards has signed income tax legislation that adopts:

  • a single-sales factor apportionment formula for most taxpayers,
  • a four-factor apportionment formula for oil and gas companies, and
  • market-based sourcing for sales other than sales of tangible personal property and sales of services.

These corporate income tax amendments apply to all tax periods beginning on and after January 1, 2016.

Single-Sales Factor Formula

For transportation companies (other than pipeline transportation companies) and service enterprises, the new single-factor apportionment formula is equal to the ratio of gross apportionable income from Louisiana sources to the taxpayer’s total gross apportionable income. For most other taxpayers, the new formula is equal to the ratio of (1) net sales made in the regular course of business and other gross apportionable income attributable to Louisiana to (2) the taxpayer’s total net sales made in the regular course of business and other gross apportionable income.

Oil and Gas Companies

A three-factor (property, payroll, and sales factors) apportionment formula with the sales factor counted twice (double weighted) is now used for taxpayers whose net apportionable income is derived primarily from the exploration, production, refining, or marketing of oil and gas. “Exploration, production, refining, or marketing of oil and gas” means:

  • any taxpayer whose income is primarily derived from the production or sale of unrefined oil and gas; or
  • any taxpayer defined as an integrated oil company under IRC §291(b)(4), or integrated oil companies that refine, produce, and have marketing operations, whose income in Louisiana is principally derived from production and sale of unrefined oil and gas, and who also engage in significant marketing of refined petroleum products in Louisiana.

However, any taxpayer whose activities during the taxable year do not include any “gross receipts from retail sales of oil and/or natural gas” or any “refinery activities of oil and/or natural gas” will not be considered an integrated oil company, not withstanding that the taxpayer may be a related party or a member of the federal consolidated group under federal law.

Market-Based Sourcing

Under the new legislation, sales other than sales of tangible personal property are to be sourced to Louisiana for sales factor purposes if the taxpayer’s market for the sale is in the state. The taxpayer’s market for a sale is in Louisiana according to the following rules:

  1. For the sale, rental, lease, or license of immovable property, the sale is sourced to Louisiana if and to the extent the property is located in the state;
  2. For the rental, lease, or license of tangible personal property, the transaction is sourced to Louisiana if and to the extent the property is located in the state
  3. For the sale of a service, the sale is sourced to Louisiana if and to the extent the service is delivered to a location in the state (the delivery of a tangible medium representing the output of a service does not control the sourcing of receipts from the underlying service);
  4. For the lease or license of intangible property, the transaction is sourced to Louisiana if and to the extent the intangible property is used in the state; and
  5. For the sale of intangible property where the property sold is a contract right, government license, or similar intangible property that authorizes the holder to conduct a business activity in a specific geographic area, the sale is sourced to Louisiana if and to the extent that the intangible property is used in or otherwise associated with the state (any other sale of intangible property is excluded from the sales factor).

Where the taxpayer’s customer is an individual, the taxpayer must source receipts from the sale of a service as follows:

  • Where a taxpayer’s customer is a natural person and the service provided is a direct personal service, the sale is sourced to the state where the customer received the direct personal service; and
  • Where services that are not direct personal services are delivered to customers who are natural persons with a Louisiana billing address, the sales is sourced to Louisiana.

If the taxpayer’s customer is an unrelated entity, the taxpayer must source receipts from the sale of a service as follows:

  • To the extent a service is provided to an unrelated entity and the service being provided has a substantial connection to a specific geographic location, the income is sourced to Louisiana if the geographic location is in the state (if the service receipts have a substantial connection to geographic locations in more than one state, the sales are reasonably sourced between those states); and
  • To the extent a service is provided to an unrelated entity and the service being provided does not have a substantial connection to a specific geographic location, sales from services delivered to unrelated entities are sourced to the taxpayer’s commercial domicile.

For sales of services, if the sourcing methods above fail to clearly reflect the taxpayer’s market in Louisiana, the taxpayer may be allowed or required to use other criteria and methodologies that will reasonably approximate the taxpayer’s market in the state. If an alternate approach is used, the taxpayer must attach to its tax return a detailed explanation of why it was unreasonable to use the methodology specified by law and an explanation of the methodology used.

Whenever a taxpayer is subjected to different sourcing methodologies regarding intangibles or services by the Louisiana Department of Revenue (LDR) and one or more other state taxing authorities, the taxpayer may petition for, and the LDR must participate in, and encourage the other state taxing authorities to participate in, nonbinding mediation.

If a taxpayer is not taxable in a state to which a sale is assigned, or if the state of assignment cannot be determined or reasonably approximated, the sale will be excluded from the sales factor.

Act 8 (H.B. 20), Laws 2016, Second Extraordinary Session, effective June 28, 2016, applicable as noted

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