The Louisiana Court of Appeal recently ruled that a corporation’s passive ownership interest in a limited partnership doing business in Louisiana is not sufficient to create Louisiana corporate franchise tax nexus. Utelcom, Inc. v. Bridges, Dkt. No. 535,407 (Division “D”, Ct. App., First Dist., Sept. 12, 2011). The court held that because capital contributed to a limited partnership is no longer owned or used by the contributing partner, an ownership interest in the partnership does not create franchise tax nexus.
The Louisiana Department of Revenue issued a corporate franchise tax assessment against two out-of-state corporate limited partners. The limited partnership was engaged in the business of long-distance telecommunications in Louisiana. The Department asserted that the corporations were subject to tax because they acted in unison with the general partner to conduct business through the limited partners’ capital contributions. The trial court upheld the assessment based on a Louisiana regulation, which provided that mere ownership of property in Louisiana through a partnership creates franchise tax nexus over an out-of-state corporation.
The Court of Appeal reversed the trial court decision and held that the regulation was an impermissible expansion of the portion of the franchise tax statute that imposes tax on foreign corporations that own or use a part of its capital in the state. The court emphasized that the franchise tax is not a tax on interstate business conducted in the state, but a tax on “doing business in Louisiana in a corporate form.” The court reasoned that once the capital was contributed by the foreign corporations to the limited partnership, the capital was no longer owned or used by the foreign corporations.