Don’t Leave Money on the Table: Beating the Louisiana Department of Revenue at its Own Game

Tax season is well underway, and after a tumultuous year in 2020, businesses may be looking to save money any way they can. Last year presented a different, though equally difficult, set of challenges for state and local governments. Indeed, many experienced financial troubles from shrinking revenues and increased costs stemming from COVID-19 and natural disasters. Louisiana was not immune from these troubles. Tax collectors may review tax filings with more scrutiny this year than in the past to increase revenues. They may also adopt new regulations and re-interpret others, resulting in higher tax bills for taxpayers. A recent case from Louisiana’s First Circuit provides a telling example of how one company who paid taxes in Louisiana challenged the system and won.

In Davis-Lynch Holding Co., Inc., v. Robinson, No. 2019-1574 (La. App. 1 Cir. 12/30/2020), the circuit court affirmed a Louisiana Board of Tax Appeals (Board) judgment invalidating a regulation enforced by the Louisiana Department of Revenue (DOR). The dispute arose after Davis-Lynch, a Texas entity, sold an interest in a Louisiana LLC and recorded the sale’s income as gross apportionable income in the applicable revenue-ratio calculation outlined in La. R.S. 47:287.95.

Apportionable income was defined as the “net ratio of net sales made in the regular course of business and other gross apportionable income attributable to this state to the total net sales made in the regular course of business and other gross apportionable income of the taxpayer.” Both parties agreed that income from the LLC’s sale was not earned in Davis-Lynch’s regular course of business.

The DOR argued that under the Louisiana Administrative Code, apportionable income included only the income earned in the regular course of business. During an audit, the DOR removed Davis-Lynch’s income gained by LLC’s sale from its apportionment-income calculation, resulting in a higher tax assessment.

Davis-Lynch challenged the DOR’s audit results at the Board, asking to vacate the tax assessment because the DOR’s regulation contravened state law. The Board agreed, noting that La. R.S. 47:287.92(c) divided all income into two general categories: allocable income and apportionable income. The Board asserted that enforcing the rule as the DOR proposed would exclude all apportionable income from the revenue ratio, rendering the phrase “other gross apportionable income” meaningless. The Board reasoned the regulation did not comport with legislative intent, so it vacated the DOR’s assessment. The DOR then appealed the Board’s decision.

Using statutory interpretation principles, the appeals court held the DOR’s regulation extended beyond the statute’s text and purpose. It explained taxes could only be levied on items the legislature expressly and unambiguously designated, absent evidence to the contrary. Additionally, in tax-law disputes, Louisiana courts would liberally interpret tax statutes in taxpayers’ favor. Finally, though agency regulations could indeed have the same full force and effect as law, the regulation had to be limited to the scope of the statute authorizing the agency’s action. In this case, the DOR’s rule exceeded those bounds, and so the appeals court affirmed the Board’s judgment, vacating the DOR’s tax assessment of Davis-Lynch.

The takeaway here is businesses, especially those filing complex and sophisticated tax returns in Louisiana, should scrutinize their tax bills to determine whether the taxing agency performed its assessment within limits allowed by law. More broadly, businesses should understand their financial exposure when dealing with the Louisiana Department of Revenue and be vigilant against agency overreach. Those who ignore these considerations risk leaving money on the table.