Inventory Tax Credit Poses Financial Risks Because of Unclear Eligibility Criteria and Lax Oversight

An examination of Louisiana’s Inventory Tax Credit found that the state does not clearly define what businesses are eligible, allows companies to self-report the information used to calculate the amount of the credit, and does not require businesses to provide supporting documentation for the inventory amounts they claim, the Legislative Auditor said in a report released today. Auditors found that between 2007 and 2014, the amount the credit cost the state increased almost 50% – from $271 million in 2007 to a projected $405 million in 2014.

The report said that if officials tightened the Inventory Tax Credit law so that only companies with a primary business activity in the manufacturing, distributing, or retailing sectors were eligible, the state could save money while still allowing local governments to levy the tax. Between 2007 and 2013, at least $229.5 million in credits were claimed by companies whose primary business activity could not be categorized as manufacturing, distributing, or retailing, such as those involved in air transportation, securities and commodities, and gaming and other amusement industries. In contrast, other state tax credits and exemptions are limited to companies that meet specific criteria, including what sector their primary business activity is in.

The performance audit also found that the amount of the inventory tax credit granted to each business is based on the local assessment, which, in turn, is calculated using information self-reported by the company. Neither the local tax assessors nor the Louisiana Tax Commission verify the accuracy of the information, which could increase the risk that the state is granting more in credits than it should, the report said.

The Tax Commission also does not require that companies itemize or report the descriptions of the inventory amount they file with local assessors. The audit found that the lack of detailed information means some non-eligible property may be reported as inventory, which also could increase the risk that the state is granting more in credits than it should, the state auditor said. The report noted that since the credit was implemented, the percentage of personal property classified as inventory has increased while other categories of taxable personal property have decreased.

In addition, auditors analyzed the expected cost of the Inventory Tax Credit program compared to the actual cost from 1996 to 2014 and found that, between 2007 and 2014, the credits claimed were 6% higher than could be explained by underlying economic conditions, representing an excess of $157 million, or an average of $19.5 million per year. This could also mean there is not enough oversight to ensure the accuracy of the information the state is using to calculate the credits, the report said.