Special Session Report: Dental School Funding and Temporary Sales Taxes (3/22/16)
Ward Blackwell, M.J., Executive Director, LDA
NOTE: The changes in tax law described below affect state sales taxes that dentists have previously have not had to pay, but will be paying in varying amounts for a very limited period of time. Dentists are not required to COLLECT sales taxes, and that has NOT changed. See below for details.
For the many in Louisiana who might have hoped that the recently concluded special session of the legislature would have featured a thoughtful examination and restructuring of the State’s taxation and budgeting, what actually took place had to be disappointing. A confusing, intrigue-filled standoff between the House and Senate (which for the most part, supported the governor) finally culminated in a rush to put a Band-Aid on the problem with temporary sales tax measures hurriedly passed as the session wound down. And, hurriedly is no exaggeration: more than $1 billion in taxes were finally passed within the final 10 minutes of the session.
The scramble at the end of the session left virtually everyone, including the LDA, trying to figure out what had actually passed. As the dust has settled, it’s become clear that there really were no winners; it’s just a matter of how badly certain interests lost.
The LDA had tried to strike a delicate balance throughout the session. On the one hand, LDA sought to protect the LSU School of Dentistry (LSUSD) from further cuts that could have been devastating. The worst-case scenario would have involved entirely shutting down the dental hygiene and dental lab tech programs. On the other hand, the LDA sought to protect the sales tax exemption dentists enjoy on many devices, materials and supplies that they purchase for their practices. After all, it was clear going into the session that increasing revenue would be part of the solution for eliminating the current budget year shortfall. And, it was equally clear that increasing sales tax revenue was the legislature’s most politically viable means of increasing revenue in the short amount of time before the current budget year ends on June 30.
This put the LDA in a very challenging lobbying position to say the least. Any urging during the special session to avoid further cuts to LSUSD was essentially lobbying for expanding the sales tax. Advocating that any sales tax increases should not affect dentistry could be interpreted as saying “we care about the dental school, but not so much that we’re willing to pay even a LITTLE bit more for it.” So, for most of the session, the LDA worked quietly with the LSU folks to get votes for select revenue-raising legislation and educated just a few trusted legislators in key positions about the need to minimize any exceptions to the sales tax exemption on dental devices. (The one exception to the LDA’s “stealth” strategy was lobbying successfully for increased taxes on tobacco, as the LDA House of Delegates long ago adopted a policy that still stands of supporting such taxes as a health issue. But it didn’t raise NEARLY enough revenue to eliminate the push for increased sales taxes.)
As the session ended, it appeared at first that the balance had been struck pretty much as the LDA wanted. Most capitol insiders thought that the combination of additional cuts, more “found” money and new taxes had eliminated all but about $30 million of the projected shortfall for the current budget year and reduced next year’s shortfall from $2 billion to roughly $800 million. That should have been good enough to ensure no devastating cuts to health care or higher education for now, with an opportunity to come back for a second special session in June to finish fixing the budget for next year. And, up until the last hour of the session, the worst that had happened with sales taxes is that dentists would have at most had to temporarily pay a new one percent sales tax on the devices and supplies that had previously been tax-exempt.
But fiscal analysts at the capitol began hinting within hours of the session’s close that the $30 million gap was actually larger. Estimates kept climbing until a full week after the session when the Revenue Estimating Conference set the official shortfall figure for this year at $70 million. (The official figure for next year is a $750 million shortfall.)
Likewise, amendments that were passed before the LDA ever saw them (indeed, before most legislators had actually read them) changed the sales tax situation substantially. It took LDA staff and lobbyists several days after the session ended to finish analyzing all the new language in the sales tax bills as they had finally passed. In the end, dentistry has joined a LONG list of business, industry, health care and non-profit interests – basically, everything but agriculture and items protected in the state constitution – who saw their state sales tax exemptions temporarily suspended.
Here is a summary of the special session’s impact on dentistry:
LSUSD Funding – The exact impact of the cuts that the dental school will face is still yet to be determined. While the consensus at the close of the session was that higher education would be spared any truly disastrous cuts in this fiscal year, the revised shortfall estimate makes that somewhat uncertain. LSUSD Dean Henry Gremillion has indicated that the school will probably be able to limp through the rest of this fiscal year without major issues, but the coming year is a giant unknown. He may know more soon, and will brief the attendees at Dentists Day at the Legislature next week (March 30). All LDA members are strongly encouraged to come to Dentists’ Day and take the LSUSD message directly to their senators and representatives. (For details, go to http://www.ladental.org/lda/ce-and-events/lda-eventsregistration/dentists-day-at-the-legislature.)
Sales Taxes – For a few more days, dental materials that stay in the patient’s mouth and most one-time use items utilized for treating patients will continue to be exempt from all sales taxes. But beginning April 1, 2016, those items will be subject to 5% of state sales tax for a three-month period (through July 1, 2016). And, for two years after that, those items will be subject to a 3% sales tax. On the plus side, those items will continue to be exempt from all local sales taxes.
One caveat to the sales tax situation: the language in the bill that created the new additional one percent sales tax is unclear, and it COULD be interpreted as not applying to items covered by the dental device exemption. The LDA is seeking guidance on this from the Louisiana Department of Revenue (LDR). Even though the odds don’t exactly favor the law being interpreted as we’d hope, LDA members will be informed immediately when we get a definitive response from LDR.
Franchise tax – Beginning in 2017, it is possible that a few large dental practices MIGHT be affected by Act. No. 12, which expanded franchise tax liability to include some LLCs. However, any LLC that can qualify to make election to be taxed as an S Corp for federal income tax purposes would remain exempt from franchise tax. The S Corp eligibility exemption is expected to apply to virtually all the dental practices set up as LLCs. If your practice is an LLC, you may wish to consult with your CPA, just to be sure.
Patients' Compensation Fund (PCF) Reduction in Surcharge (9/3/15)
At its July meeting, the Patients' Compensation Fund (PCF) voted on an 11.3% reduction for dentists in the PCF surcharge.
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