Louisiana in trouble with big brother Texas over tax sharing scheme

Long and short is Ryan, an extremely aggressive tax consulting firm, came up with this scheme to use state sales tax laws against themselves. States, in order to increase revenue, try to source sales within their state, however possible. Including saying if title transfers within their state it should be sourced there. Well Ryan said cool, we'll set up these purchasing entities in Louisiana to transfer title there, but the goods never actually enter the state. For doing so, the companies (and Ryan) get a piece of the tax collected back.

Is it sketchy? Absolutely, but so are these states. They fricked around and got beat at their own game. Article is behind a paywall, excerpts below.

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In 2012 Louisiana created a novel tax incentive concept with promises of attracting new business activity, capturing hundreds of millions in new tax revenue, and channeling $30 million annually into the state’s premier research centers.

The program would encourage tax consultants to recruit out-of-state businesses to set up tiny purchasing subsidiaries in Louisiana to facilitate taxable sales transactions and remit the taxes to the state, even though goods would never change hands in Louisiana. Finally, the state would send a share of the sales tax revenue to the consultants and purchasing offices, and still retain millions for the research centers.

The legislation, propelled by lobbyists from the tax consulting industry, streaked through the 105-seat House and 39-member Senate with barely a negative vote.

Thirteen years later, the promises haven’t panned out. More than 90% of the tax revenue collected is routed back to the consultants and purchasing shops, according to two recent audits by the state. The research institutions have gotten nothing. And the program has triggered a tax feud with neighboring Texas, which argues the program operates as an “out-of-state kickback scheme” that has diverted millions of dollars in sales taxes that should have gone to that state.

“We’ve enabled companies to avoid paying Texas sales tax, but our cut isn’t even a good cut. It’s like you are just screwing over your neighbors for pennies,” said New Orleans City Council President Jean-Paul Morrell (D), who regrets voting for the bill while serving in the state Senate.

Glenn Hegar, who was Texas comptroller of public accounts before leaving office June 30 to become chancellor of the Texas A&M University system, called the program “nothing more than a shell game—an elaborate and manipulative scheme designed to enrich a few private interests at the expense of Texas taxpayers.” He said “the architects of the Louisiana scheme should be ashamed"—a reference to the Dallas-based tax firm Ryan LLC.

“Comptroller Hegar’s statements are false, defamatory, and malicious because they unlawfully suggest that Ryan and its clients are engaged in tax fraud or bribery, through presumptively unlawful and criminal ‘shell game(s)’, ‘manipulative scheme(s)’, and ‘out-of-state kickback scheme(s),’” the company wrote in a statement to Bloomberg Tax.

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“I’ve never heard of a structure where you have one state offering a sales tax rebate covering sales happening in another state,” said Greg LeRoy, executive director of Good Jobs First, which promotes transparency in state tax incentive and economic development programs. “That’s completely novel to me.”

Consultants, including Ryan, sold the idea by pointing to a feature of state law holding that sales can occur when title alone is transferred between parties. Under this distinction, Louisiana officials assert sales can occur with the shifting of papers in an out-of-state location rather than the exchange or delivery of goods.

A fiscal note attached to the original legislation, HB 754, gave the example of an Ohio company buying business supplies from a company in Florida, but routing the transactions through a subsidiary purchasing company in Louisiana. The supplies move from Florida to Ohio, but sales taxes are paid to Louisiana and then rebated to the consultants and the Ohio company.

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Now Texas trying to say the tax was legit in Louisiana and charge there as well

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Bettencourt’s request, prompted by an unidentified taxpayer, noted the comptroller had rejected the legitimacy of rulings from Louisiana that found sales tax was legally imposed and paid by Texas businesses. It provided a rationale for the legitimacy of the Louisiana sales transactions and asked the committee to approve use tax credits for sales taxes paid to Louisiana as a matter of “interstate comity"—mutual respect and recognition of each state’s taxing authorities.

“Texas law and policy appear to dictate that, in determining whether sales or use tax paid to another state was legally imposed by and legally due to that state, the Comptroller give weight and deference to the analysis and conclusions of that state’s taxing agency on the question—just as the Comptroller would expect another state to defer to a Comptroller determination that a taxpayer owed Texas tax,” Bettencourt wrote.

The committee has until Aug. 12 to respond with its opinion. It requested a briefing from the comptroller, but the comptroller’s attorneys asked the committee to stay silent because the dispute “will almost certainly be litigated.” They asserted the taxpayers under audit are being directed by consultants who have much to gain from a favorable opinion. They also objected to Bettencourt’s rationale because the transactions in question occurred entirely within Texas and should be taxed in Texas, regardless of any “paper transactions” in Louisiana.

“In this case, the economic reality was that the products never left the State of Texas, sales tax was due on the sale that occurred while the items were in Texas, and the Texas statute does not provide a sales tax credit for tax paid in other states,” the comptroller’s letter concluded.

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