By Erin L. Kilgore

On July 17, 2018, the Equal Employment Opportunity Commission (“EEOC”) announced that Estée Lauder Companies will pay $1,100,000 and provide other relief to settle a class sex discrimination lawsuit filed by the EEOC.

In 2017, the EEOC filed suit against Estée Lauder in federal court in Pennsylvania.  The EEOC alleged that Estée Lauder discriminated against a class of 210 male employees in violation of the Equal Pay Act and Title VII of the Civil Rights Act of 1964, by providing them, as new fathers, less paid leave and related benefits for child bonding than it provided to new mothers. (The parental leave at issue was separate from the medical leave female employees received for childbirth and related issues). The EEOC also alleged that the company unlawfully denied new fathers certain return-to-work benefits that it provided to new mothers.

On July 17, the court entered a consent decree resolving the lawsuit.  Pursuant to the consent decree, Estée Lauder agreed: (1) to pay a total of $1,100,000 to the class of male employees who, under Estée Lauder’s parental leave policy, received two (2) weeks of paid parental leave when new mothers received six (6) weeks of paid leave for child-bonding after their medical leave ended; (2) to administer parental leave and related return-to-work benefits in a manner that ensures equal benefits for male and female employees and utilizes sex-neutral criteria, requirements, and processes; and (3) to provide training on unlawful sex discrimination and allow monitoring by the EEOC.

The EEOC’s full press release can be found here.

By David M. Whitaker

Employer compliance with the requirements of the Americans with Disabilities Act (ADA) has been among the EEOC’s top enforcement priorities under the Trump Administration. And a string of recent enforcement actions brought by the EEOC makes clear that the Agency will continue to be aggressive with respect to how employers manage employee return to work issues.  On June 6, 2018 the EEOC announced its entry of a $3.5 million consent decree against Dotty’s, a Las Vegas slot machine tavern operator, because the Agency found its return to work policies, which included a “100% healed” requirement, violated the ADA.

As most employers are aware, the 2008 amendments to the ADA greatly expanded the definition of what is considered a protected “disability.” As a result of this expansion, many injuries (whether suffered on or off the job) and illnesses that result in employee medical leaves of absence are the result of underlying conditions that may arguably qualify as a protected “disability” for ADA purposes – even where the condition is not permanent.

In many cases, an employee on medical leave of absence may be given a release to return to work with some restrictions (such a limits on lifting, maximum number of work hours, or other physical activities, like climbing). A key requirement of the ADA is that employers provide “reasonable accommodation” to an employee with a disability that will allow the employee to perform the essential functions of the job.  That might require the employer to make modifications to the workplace or to re-assign non-essential job duties to other employees.  What is a “reasonable” accommodation will depend upon the facts of each situation, but the ADA makes clear that an employer is required to engage in an interactive dialogue with the employee to determine what is reasonable under the circumstances.

In the return to work context, some employers have taken the position that an employee must be “100%,” or released to return to work “without restriction” before the employer will permit the employee to return to active employment. The reasoning of such employers is often out of concern that an employee who is less than fully recovered from an earlier injury or illness poses an increased threat to the health and safety of the employee and his co-workers. Notwithstanding these concerns, the EEOC’s longstanding position is that these kinds of policies are unlawful because they are inconsistent with the interactive reasonable accommodation dialogue that is at the heart of the ADA.  According to EEOC guidance regarding employer-provided leave, “An employer will violate the ADA if it requires an employee with a disability to have no medical restrictions — that is, be “100%” healed or recovered — if the employee can perform her job with or without reasonable accommodation…” Federal courts, including the Fifth Circuit, have likewise found return to work with “no restrictions” policies to be unlawful.

In addition to requiring the employer to discontinue these practices and assessing $3.5 million in monetary relief for the benefit of the affected employees, the consent decree also requires the employer to coordinate with the EEOC regarding re-employment opportunities for employees, to develop effective workplace disability leave policies, to engage a consultant to monitor its compliance with the terms of the consent decree and to provide ADA training to its employees and supervisors.

The EEOC has sued other employers in a string of cases that have ended with similar consent decrees that included substantial monetary awards to the affected employees: Lowe’s Company ($8.5 million); American Airlines ($9.8 million) and United Parcel Services ($1.7 million).

In a press release announcing the Dotty’s consent decree, the EEOC said the suit was filed as part of the Commission’s continuing “quest to identify and eradicate systemic disability discrimination.” The message from these EEOC enforcement actions is clear – ADA and return to work issues are a priority enforcement concern for the Agency, and employers should take the time to review their medical leave and return to work policies and practices to ensure they are ADA compliant.

By Michael J. deBarros

In asbestos-related injury claims, some states, including Louisiana, base an insurer’s liability for defense and indemnity on the amount of time an insurer is “on the risk.”  For instance, if a claimant was exposed to asbestos for a ten year period and the insurer issued policies covering five of those ten years, the insurer is “on the risk” for five of the ten years and should bear responsibility for 50% of the defense and indemnity absent additional grounds for denying coverage.

The allocation issue becomes more complex when the period of exposure to asbestos begins before, and ends after, 1986 or 1987.  In that situation, the following additional questions arise:

  1. When did insurance covering asbestos claims become “unavailable”;
  2. Must the insurers “on the risk” when insurance for asbestos claims was “available” bear responsibility for the years of exposure in which the insurance was “unavailable”; and
  3. Is the allocation affected if the insured continues to manufacture or sell asbestos-containing products after insurance for asbestos claims became “unavailable”?

All of the foregoing issues have been decided in New Jersey, and they are ripe for consideration in Louisiana given that the Louisiana Supreme Court relied on Owens–Illinois, Inc. v. United Ins. Co., 650 A. 2d 974 (N.J. 1994), when it held, in Arceneaux v. Amstar Corp., 2015-0588 (La. 9/7/16), 200 So. 3d 277, that insurers may prorate defense expenses in Louisiana asbestos-injury suits.

In Owens–Illinois, the Supreme Court of New Jersey held that insurers can prorate defense and indemnity in asbestos-injury suits based on their time “on the risk” and their policy limits.  The Owens–Illinois Court also held that an insured is not responsible for the years in which insurance covering the risk at issue was not reasonably available for purchase.

In Continental Ins. Co. v. Honeywell Intern., Inc., 2018 WL 3130638 (N.J. June 27, 2018), the Supreme Court of New Jersey recently reaffirmed the Owens–Illinois “unavailability” rule and once again rejected the insurers’ attempt to apportion liability to their insured for exposures occurring during the period of insurance unavailability.  The insurers in Honeywell argued that Honeywell should bear responsibility for asbestos exposures after April 1, 1987 (the date excess insurance for asbestos claims became unavailable) because Honeywell continued to manufacture asbestos-containing products until 2003.  The Court rejected the insurers’ argument and apportioned liability for the years in which insurance was unavailable to the insurers who were “on the risk” when the insurance was available.

Considering the Louisiana Supreme Court’s reliance on  Owens–Illinois in Arceneaux, a Louisiana court may be persuaded to adopt New Jersey’s “unavailability” rule and require all insurers “on the risk” when insurance for asbestos claims was “available” to bear responsibility for the years of exposure in which insurance was “unavailable.”  If your company needs help navigating these issues, Kean Miller’s Insurance Coverage and Recovery team can help.  We have recovered millions for policyholders in environmental and toxic tort actions, legacy lawsuits, products liability lawsuits, professional liability claims, governmental investigations, intellectual property claims, directors’ and officers’ disputes, property losses, and business interruption losses.

By A. Edward Hardin, Jr.

Bloomberg Law and the Tampa Bay Times reported that Florida Senator Marco Rubio announced the he would soon release proposed federal legislation creating paid family leave.  No details regarding the proposed legislation were released.  The Family and Medical Leave Act of 1993 (or as its commonly known – the FMLA) established a federal system for leave under certain circumstances for eligible employees who worked for covered employers.  FMLA leave is unpaid leave, but employees can elect, or employers can require, that certain periods of paid leave be substituted for unpaid FMLA leave.  Unlike the FMLA, Sen. Rubio’s legislation apparently would provide for paid leave.  Stay tuned.  For more click here.

BY: Jaye Calhoun, Jill Gautreaux and Willie Kolarik

Sales Tax Changes:

The Louisiana Legislature has simplified the effective state tax rates for most taxable transactions, eliminating the previous five potential tax rates (as applicable to various exemptions) to two possible rates: either fully exempt from state tax or  4.45% for most purchases (down from 5%).  Effective July 1, 2018, House Bill (“HB”) 10 of the 2018 Third Extraordinary Session of the Louisiana Legislature has amended La. R.S. 47:321.1(A), (B), and (C) reducing the Louisiana state sales tax rate from 1 % to 0.45%. Accordingly, Louisiana sales at retail, taxable use and rentals of tangible personal, as well as taxable services will be subject to tax at this rate.  Accordingly, sellers qualifying as “dealers” under state law should collect state taxes at the 4.45% rate as of the effective date of July 1, 2018.  The Louisiana Department of Revenue quickly issued guidance, Revenue Information Bulletin No. 18-016 (June 24, 2018), providing that, if a dealer mistakenly collects at the 5 percent (5%) rate on or after July 1, 2018, then the dealer must remit the excess sales tax collected to the Louisiana Department of Revenue, and that any excess sales taxes collected should be reported on Line 8 of the Sales Tax Return Form R-1029.

With respect to hotel or room rentals in Orleans or Jefferson parish, the sales tax collected by LDR on room rentals decreased to 9.45% (Column D of the applicable return decreased to 2.45%). For lodging facilities with less than 10 rooms, the rate is now 4.45%.

Also, beginning July 1, 2018, the overall state sales tax rate for business utilities will be 2% under La. R.S. 47:302. The rate remains 4% through June 30, 2018 (the rate had previously been scheduled to be reduced to 1% on July 1 through March 31, 2019).   Residential uses remain exempted.  Both the new additional tax rate of 0.45% pursuant to La. R.S. 47:321.1 and the sales tax rate of 2% on business utilities under La. R.S. 47:302 are set to sunset on June 30, 2025, unless the Legislature decides at some point to make additional changes.

The bill also removes various exemptions by listing those items that remain exempt, or will become exempt, which include but are not limited to:

  • Other constructions permanently attached to the ground (2% –> 0%)
  • Sales of electricity for chlor-alkali manufacturing (3% –> 0%)
  • Rentals or leases of oilfield property for re-lease or re-rental (3% –> 0%)
  • Labor, materials, services and supplies used for repair, renovation or conversion of drilling rig machinery and equipment (3% –> 0%)
  • Repairs and materials used on drilling rigs and equipment (3% –> 0%)
  • Installation charges on tangible personal property (0% –> 0%)
  • Tangible personal property intended for resale (0% –> 0%)
  • Sale of property for lease or rental (2% –> 0%)
  • Sales of materials for further processing (0% –> 0%)

For the full list of changes in tax rates set to take effect on July 1, 2018 see Louisiana Department of Revenue’s publication, R-1002(07-18).

Beer League Decision – Gallonage Tax

Are retailers off the hook when it comes to the City of New Orleans gallonage tax? On June 27, 2018, the Louisiana Supreme Court handed down its decision in Beer Industry League of Louisiana, et al. v. The City of New Orleans, et al., which challenged the constitutionality of a recently amended City of New Orleans ordinance that levied a “gallonage tax” upon “dealers” who handle high content alcoholic beverages in the City of New Orleans.  New Orleans City Code Section 10-501 imposes “excise or license taxes” upon “dealers of alcoholic beverages” pursuant to the prices and rates outlined in the ordinance.  New Orleans City Code Section 10-511 states that the taxes are to be collected:

… from the dealer who first handles the alcoholic beverages in the City. If for any reason the dealer who first handled the taxable alcoholic beverages has escaped payment of the taxes, those taxes shall be collected from any dealer in whose hands the taxable beverages are found. 

A “dealer” is defined in the New Orleans Code of Ordinances at Section 10-1 as:

… any person who, as a business, manufactures, blends, rectifies, distills, processes, imports, stores, uses, handles, holds, sells, offers for sale, solicits orders for the sale of, distributes, delivers, serves or transports any alcoholic beverage in the city or engages therein in any business transaction relating to any such beverage.

The Beer Industry League of Louisiana, Wine and Spirits Foundation of Louisiana, Inc. and Louisiana Restaurant Association, Inc. (collectively, “Plaintiffs”) claim that the ordinance is unlawful and unconstitutional because it imposes an occupational license tax or excise tax upon wholesale dealers of alcoholic beverages. The City claims that the tax is a lawful occupational tax.  The tax in question has existed for years, but it was not previously enforced or collected.  After the trial court denied Plaintiffs’ request for an injunction prohibiting the collection of the gallonage tax, the City began collecting the gallonage taxes from wholesale dealers last spring.

In considering cross-motions for summary judgment, the trial court held that the ordinance was unlawful and unconstitutional because it was a direct tax on alcoholic beverages as opposed to an occupational tax on a particular activity. The trial court reasoned that the tax was not exclusively imposed upon the wholesale dealer, but could be collected from any dealer in whose possession the alcoholic beverages are found.

The Louisiana Supreme Court focused solely upon the issue of whether the gallonage tax was to be considered an occupational license tax. The Court sided with the City and overruled the trial court, holding that the gallonage tax was an occupational license tax, and that the City was permitted to impose occupational license taxes in an amount not greater than that imposed by the State.  The Court did not discuss the possibility that the tax could be imposed upon a retailer pursuant to New Orleans City Code Section 10-511, which was one of the considerations of the trial court.

The City of New Orleans has been collecting the gallonage tax from wholesalers who have warehouses in or deliver alcoholic beverages of high alcoholic content to the City of New Orleans. However, the definition of dealer found in the New Orleans City Code and the language of Section 10-511 could be read expansively to cause retailers to be responsible for the gallonage tax if the wholesaler does not pay it.  While not explicitly stated, the Louisiana Supreme Court ruling suggests that wholesalers are the only class of dealer that would be responsible for this gallonage tax as an occupational license tax (despite the language of New Orleans City Code Section 10-511), as retailers are already subject to an occupational license tax imposed by City ordinance based upon gross revenues.

If you have questions or are not sure if these changes affect you or your business, please contact Kean Miller attorneys, Jaye Calhoun (504.293.5936), Jill Gautreaux (504.620.3366) or Willie Kolarik (225.620.3197).

By Jaye Calhoun, Jason Brown, Angela Adolph, Phyllis Sims, Willie Kolarik, and Jason Seo

The Louisiana Legislature has simplified the effective state tax rates for most taxable transactions, eliminating the previous five potential tax rates (as applicable to various exemptions) to two possible rates: either fully exempt from state tax or 4.45% for most purchases. Effective July 1, 2018, House Bill (“HB”) 10 of the 2018 Third Extraordinary Session of the Louisiana Legislature has amended La. R.S. 47:321.1(A), (B), and (C) reducing the Louisiana state sales tax rate from 1% to 0.45%. Accordingly, Louisiana sales at retail, taxable use and rentals of tangible personal, as well as taxable services will be subject to tax at this rate. This bill was sent immediately to, and signed by, Governor Edwards. Accordingly, sellers qualifying as “dealers” under state law should collect state taxes at the 4.45% rate as of the effective date of July 1, 2018. Nevertheless, the Louisiana Department of Revenue has quickly issued guidance, Revenue Information Bulletin No. 18-016 (June 24, 2018), providing that, if a dealer mistakenly collects at the 5% rate on or after July 1, 2018, then the dealer must remit the excess sales tax collected to the Louisiana Department of Revenue, and that any excess sales taxes collected should be reported on Line 8 of the Sales Tax Return Form R-1029.

The Legislature also reduced the reduction in tax on business utilities. That is, business utilities are currently taxed at 4% through June 30, 2018. That rate was scheduled to be reduced to 1% on July 1 through March 31, 2019. As a result of HB 10, the rate on business utilities will be 2% until June 30, 2025. Business utilities include steam, water, electric power or energy, natural gas, or other energy sources for non-residential use. The exemptions for steam, water, electric power or energy, natural gas, or other energy sources for non-residential use in La. R.S. 47:305(D)(1)(b), (c), (g), and (h) will continue to apply to the sales tax levies under La. R.S. 47:321, 321.1, and 331 and residential uses remain exempted.

Both the new additional tax rate of 0.45% pursuant to La. R.S. 47:321.1 and the sales tax rate of 2% on business utilities under La. R.S. 47:302 are set to sunset on June 30, 2025, unless the Legislature decides at some point to extend the additional tax or to make it permanent.

The bill also removes various exemptions by listing those items that remain exempt, or will become exempt, which include but are not limited to:

  • Other constructions permanently attached to the ground (2% –> 0%)
  • Sales of electricity for chlor-alkali manufacturing (3% –> 0%)
  • Rentals or leases of oilfield property for re-lease or re-rental (3% –> 0%)
  • Labor, materials, services and supplies used for repair, renovation or conversion of drilling rig machinery and equipment (3% –> 0%)
  • Repairs and materials used on drilling rigs and equipment (3% –> 0%)
  • Installation charges on tangible personal property (0% –> 0%)
  • Tangible personal property intended for resale (0% –> 0%)
  • Sale of property for lease or rental (2% –> 0%)
  • Sales of materials for further processing (0% –> 0%)

Food for home consumption, natural gas, electricity, water, prescription drugs, articles traded in on new articles, and gasoline remain nontaxable under the Louisiana Constitution.

The rate of state tax on purchases of manufacturing machinery and equipment was scheduled to be is currently 1% but is now fully exempt.

For the full list of changes in tax rates set to take effect on July 1, 2018 see Louisiana Department of Revenue’s publication, R-1002(07-18).

If you have questions or are not sure if these changes affect you or your business, please contact Kean Miller tax attorneys, Jaye Calhoun (504.293.5936), Jason Brown (225.389.3733), Angela Adolph (225.382.3437), Phyllis Sims (225.389.3717), Willie Kolarik (225.382.3441) or Jason Seo (504.620.3197).

 

 

By Michael J. O’Brien

Punitive damages are designed to punish a tortfeasor. They are available as a remedy in general maritime actions where a tortfeasor’s intentional or wanton and reckless conduct amounted to a conscious disregard for the rights of others. The punitive damage standard requires a much higher degree of fault than simple negligence. The amount of a punitive damage award must be considered on a case-by-case basis; however, prior punitive damage awards can provide insight as to what is appropriate.  In the matter of Warren v. Shelter Mutual Ins. Co., et al., 233 So 3d 568 (La. 2017) the Louisiana Supreme Court provided guidance as to when a jury’s punitive damage award was grossly excessive.

The Warren case centered around the wrongful death of Derrick Hebert in a recreational boating accident.  The facts surrounding Derrick Hebert’s death are tragic.  In May 2005, Hebert was a passenger in a boat that suddenly, and without warning, turned violently when the hydraulic steering system failed.  Hebert and four of the other passengers were ejected from the boat. The boat continued to spin around (the kill switch had not been engaged) and its propeller struck Hebert 19 times. Hebert died at the scene. The decedent’s family and estate sought to recover damages under the General Maritime Law and Louisiana Products Liability. Included in the Warren Plaintiffs’ demand was a punitive damage claim under the General Maritime Law.

Nine years after Warren’s untimely death later, the case was tried.  At the close of the 2014 litigation, the jury returning a finding of no liability on the part of the Defendants.  However, the trial court granted the Warren Plaintiffs a new trial based on what it believed to be prejudicial error during the first trial. The second trial resulted in a jury verdict in favor of the Warren Plaintiffs.  The jury awarded compensatory damages of $125,000 and punitive damages of $23,000,000. The Louisiana Third Circuit later affirmed the punitive damage award. A full discussion of the Third Circuit’s decision can be found here.

Defendants successfully applied for writs to the Louisiana Supreme Court.  The Louisiana Supreme Court addressed several assignments of error proffered by the Defendants; however, this article will only address the punitive damage review. After reviewing the record, the Louisiana Supreme Court held that an award of punitive damages was correct. The tortfeasor knew of the serious risks of its steering system and failed to warn its customers that ejection, severe injury, and death could result. Further, the Louisiana Supreme Court agreed with the Third Circuit that the tortfeasor’s conduct was reprehensible and resulted in great harm to the decedent and his family. However, Plaintiffs failed to prove that Defendant acted maliciously or that its behavior was driven primarily for design or gain. While the compensatory damages of $125,000 were deemed low, the harm caused was great and opened the door to higher awards. Yet, the Louisiana Supreme Court found that the award of punitive damages in the amount of $23,000,000 (a ratio of 184:1) was higher than reasonably required to satisfy the objective of punitive damage awards, namely punishment, general deterrence, and specific deterrence. Indeed, the $23,000,000 in punitive damages awarded by the jury did not, in the eyes of the Louisiana Supreme Court, further the goals of punitive damages. While the Defendant was considered a “wealthy corporation,” wealth should not be a driving factor between a punitive damage award and the absence of a showing that the Defendant’s conduct was motivated by greed or malice.  Accordingly, the Louisiana Supreme Court found that the award of $23,000,000 violated the Defendant’s due process rights.

Thereafter, the Louisiana Supreme Court took it upon itself to set the punitive damage award. In its view, based on the actual harm, it found that a punitive damage award of $4,250,000 (a reduction of $18,750,000) more appropriately furthered the goal of punitive damages while protecting the Defendant’s right to due process. Otherwise, the decision of the Third Circuit was affirmed.

By James R. “Sonny” Chastain, Jr.

On June 21, 2018, the Louisiana First Circuit Court of Appeals addressed the right of publicity and right of privacy in connection with Barry Seal (“Seal”) and the movie titled “American Made”.  In 2014, Universal City Studios, LLC (“Universal”) entered an agreement to purchase the life story of Barry Seal from his surviving spouse and children of his third marriage (“Seal Defendants”). Thereafter, Seal’s daughter from his first marriage, Lisa Seal Frigon (“Frigon”), as the administratrix of the estate of Adler Berriman Seal, filed suit against Universal and the Seal defendants seeking to nullify the agreement and claiming violation of right of privacy, right of publicity and asserting other causes of action.  Frigon claimed the right to control the commercial appropriation of her father’s identify and public image.  In response, Universal and the Seal Defendants filed a peremptory exception of no cause of action seeking dismissal of the claims which was granted by the district court.

On appeal, the First Circuit affirmed the district court ruling concluding that the right of privacy protects the individual.  Seal’s right of privacy was held to be strictly personal, not heritable, and died with Seal.  Moreover, the Court found no right of publicity has been recognized under Louisiana state law.  The court cited Prudhomme v. Procter & Gamble Co., 800 F.Supp. 390 (E.D. La. 1992) in which a federal court noted the possibility of a civil action to enforce a right publicity being recognized in Louisiana. However, the First Circuit said it could not find where such recognition had occurred.  The Court noted that judicial decisions are not intended to be an authoritative source of law in Louisiana, but are secondary.  The Court concluded, “Hence, for us to hold jurisprudentially that a right of publicity exists would constitute an unwarranted intrusion into an area in which the legislature has not seen fit to act”.  It declined to supply a cause of action through jurisprudence that it concluded Louisiana law does not.

We will see if Frigon files for a rehearing or seeks review at the Louisiana Supreme Court.

By Jaye Calhoun, Jason Brown, and Willie Kolarik

The Louisiana Legislature is considering last minute legislation to change the effective date of legislation allowing the State to tax remote sellers but has not acted to make other centralized collection legislation operative.  It may not have to.

Today, in a 5-4 decision with far-reaching implications, the Supreme Court of the United States issued its most significant ruling on the constitutional limits – or expanse, as some may view it – of the states’ rights to impose sales/use tax since its 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  Indeed, in today’s South Dakota v. Wayfair, et al., __ U.S. __ (2018) decision, the Court expressly overruled Quill (and National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U.S. 753 (1967)), finding that Quill’s “physical presence rule…is unsound and incorrect.”  In overruling the “physical presence” (nexus) test, the Court relied on its long-standing test for whether state taxes meet constitutional scrutiny under the Commerce Clause, as set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)).  The Court abandoned the “physical presence” standard previously applied to the first prong of the Complete Auto test – whether a tax appl[ies] to an activity with a substantial nexus with the taxing State” – in favor a new standard (i.e., whether the taxpayer (or vendor) “avails itself of the substantial privilege of carrying on business in the taxing jurisdiction.”).  The implications of the new, broad test – which seems to overlap even more than before with the Due Process test for state taxation – are not yet fully clear. But there is no question they are significant.

For a full discussion of the Wayfair decision, click here.

States’ Inability to Collect Sales Tax From Online Retailers, Background

Since the advent and, later, explosion of e-commerce, most states have bemoaned the loss of sales/use tax revenues that the Quill decision prevented them from collecting, because an online retailer selling into a state with which it had no physical presence did not have the “substantial nexus” required by Complete Auto.  Attempts at a legislative (Congressional) fix – which the Supreme Court actually invited in 1992 in its Quill decision – have effectively gone nowhere.  Recently, many states, like South Dakota, have enacted laws requiring online retailers selling into their state to register for and collect sales/use taxes if the retailer meets a minimum annualized threshold of sale amounts and/or number of sales.  Many of these laws were enacted specifically to force a showdown at the Supreme Court.  And while several states like South Dakota were in the vanguard of this new fight, states like Louisiana were watching on the periphery and preparing for a favorable decision.

Louisiana’s Remote Seller (Online Retailer) Taxing Regime, Generally

In 2018, the Louisiana Legislature passed a law (Act No. 5, Second Extra. Sess. of 2018) that would expand the definition of “dealer” to include any online retailer having no physical presence in the state, but who, “during the previous or current calendar year,” had either (i) gross revenues from sales or services delivered into Louisiana exceeding one hundred thousand ($100,000) dollars; or (ii) at least two hundred (200) sales into the state.  Online retailers meeting the expanded definition of “dealer” would then be required to register with the State for sales tax purposes and to collect state sales taxes on the transactions.  The law expressly provides, however, that Act No. 5 “shall apply to all taxable periods beginning on or after the date of the final ruling of the United States Supreme Court in [South Dakota v. Wayfair] finding South Dakota 2016 Senate Bill No. 106 constitutional.”  So, before the Wayfair decision was issued, it could not have applied.  While legislation has been introduced to change the effective date (discussed below), arguably, though, the law can still not be applied.  The results of the Legislature’s efforts to create a workable effective date will determine whether there is  a safe harbor economic nexus threshold in Louisiana and all businesses with a sufficient economic and virtual contacts to the state should evaluate whether they are subject to sales and use tax and remain alert to developments in this area.

Louisiana’s Remote Seller (Online Retailer) Tax Regime, However, is Inoperative Under its Terms, But Nonetheless (if the Effective Date is Fixed) May Not be Constitutional under Wayfair

Justice Kennedy, for the majority in Wayfair, wrote:

The question remains whether some other principal in the Court’s Commerce Clause doctrine might invalidate the Act. Because the Quill physical presence rule was an obvious barrier to the Act’s validity, these issues have not yet been litigated or briefed, and so the Court need not resolve them here.

Justice Kennedy went on to write that “[a]ny remaining claims regarding the application of the Commerce Clause in the absence of Quill and Bellas Hess may be addressed in the first instance on remand.”  So, while the Court ruled on the “physical presence” issue, it did not definitively rule that the South Dakota law was constitutional.

Act No. 5 is specific – it will only apply to taxable periods “beginning on or after the date of the final ruling by the United States Supreme Court in [Wayfair] finding [the South Dakota law] constitutional.”  As of this writing, that has not happened.  And unless and until the U.S. Supreme Court specifically rules that the South Dakota law is constitutional, Act No. 5’s provisions will never be triggered.  Without that trigger, the definition of “dealer” will not include online retailers (as described in the Act) and the current taxing regime in Louisiana will remain.

As noted above, late last evening (June 21, 2018) a bill (SB 1) was introduced in the Louisiana Senate that would remove the quoted language and replace it with “beginning on or after August 1, 2018,” which seems designed to correct the limitation in current law.  The late-filed bill is nevertheless constitutionally dubious, because, under the Louisiana constitution, bills that raise revenues must originate in the Louisiana House of Representatives.  SB 1 appears designed to raise revenues because it’s intent could be interpreted as ensuring that Louisiana’s existing sales tax regime survives Commerce Clause scrutiny with respect to remote sellers. If SB 1 is passed by the Louisiana Legislature, it will be subject to court challenge.  Unless and until the Senate bill is passed, current law holding Act No. 5’s application until the United States Supreme Court declares in Wayfair that the South Dakota law is constitutional remains in effect.  As a result, the U.S. Constitution appears to be the only limit on the state’s powers to impose the tax on remote sellers.

If SB 1 does not pass the Legislature (or passes and is met with a court challenge), but the United States Supreme Court makes a definitive ruling that the South Dakota law is constitutional, thereby triggering Act No. 5, Louisiana’s proposed remote seller tax regime will nevertheless be subject to challenge, because its system of centralized administration, collection and enforcement cannot be implemented under current law.

La. R.S. 47:339 establishes the Louisiana Sales and Use Tax Commission for Remote Sellers (the “Commission”) within the Department of Revenue “for the administration and collection of the sales and use tax imposed by the state and political subdivisions with respect to remote sales.” La. R.S. 47:339(A)(2) provides, further:

The Commission shall…[w]ith respect to any federal law as may be enacted by the United States Congress authorizing states to require remote sellers, except those remote sellers who qualify for the small seller exceptions as may be provided by federal law, serve as the single entity in Louisiana to require remote sellers and their designated agents to collect from customers and remit to the commission sales and use taxes on remote sales sourced to Louisiana on the uniform Louisiana state and local sales and use tax base established by Louisiana law. (emphasis supplied)

Should the Supreme Court ultimately rule in the Wayfair case (on later writ of certiorari) that the South Dakota law is constitutional, remote sellers qualifying as “dealers” under Act No. 5 would then be subject to the Louisiana’s registration and reporting/collecting/remitting requirements.  But unless and until the Congress enacts a federal law dealing with sales tax reporting and remitting requirements for remote sellers, the Commission, by the express terms of La. R.S. 47:339, will have no authority to implement the centralized system the Legislature envisioned.  Such a system appears essential under Wayfair, however, for the state to constitutionally impose its proposed remote seller tax regime on nonresident businesses with no physical presence in the state.

Justice Kennedy made clear that the South Dakota law would likely survive Commerce Clause scrutiny because (i) it has a safe harbor provision; and (ii) that the taxes would not be applied retroactively. But his ultimate conclusion rested in no small part on South Dakota’s centralized system.  He wrote:

South Dakota is one of more than 20 States that have adopted the Streamline Sales and Use Tax Agreement.  This system standardizes taxes to reduce administrative and compliance costs.  It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State.

Under current Louisiana law, unless and until (i) the United States Supreme Court expressly finds the South Dakota law constitutional (at the very least by denying certiorari from a lower court decision ruling the same); and (ii) the Congress passes a federal law specifically providing for taxation of remote sellers (as unambiguously required by La. R.S. 47:339(A)(2), Louisiana’s proposed centralized system (for so-called remote sales) will have no statutory basis for implementation and administration. The Wayfair decision suggests that the lack of such a centralized system would not withstand Commerce Clause scrutiny in the remote seller context because such a scenario may present discrimination against or undue burdens on interstate commerce.

All that being said, and despite the fact that neither of these two Louisiana statutes are (yet) effective according to their terms, remote vendors must nonetheless understand that the Supreme Court’s decision in the Wayfair case changes the landscape dramatically.  The Supreme Court in Wayfair introduced a new “substantial nexus” test under the Commerce Clause.  Undoubtedly the Louisiana Department of Revenue and each one of the sixty-three Louisiana parishes that impose sales and use tax are evaluating this new test and considering the possibilities.

The majority opinion leaves open that “[c]omplex state tax systems could have the effect of discriminating against interstate commerce.” There may be issues with undue burdens or outright discrimination. So conceivably the same nexus thresholds that on balance justify South Dakota’s sales and use tax collection obligation might not apply in a more complex state like Louisiana or Colorado.  Vendors should be on notice, however, that there is a high probability that neither the State nor the Parishes will feel constrained by these concerns.

Wayfair’s impact on Marketplace Facilitator’s in Louisiana

In March 2018, the Louisiana 24th Judicial District Court issued an unusual opinion that addressed the application of Louisiana’s existing sales and use tax laws to a marketplace facilitator.[1]  Specifically, the district court held that a marketplace facilitator was a dealer for purposes of Louisiana sales and use tax laws solely because it engaged in solicitation of a customer market and despite that fact that it never owned or sold the good at issue.  This case is unusual because it implies that both the remote seller and the marketplace facilitator are dealers and it could be read as standing for the proposition that any third party that plays any role in facilitating a transaction could be a dealer with respect to that transaction.

The Court’s decision in Wayfair, does not directly address how the Wayfair test would apply in the context of a marketplace facilitator.  So it is not clear whether an indirect virtual contact, e.g., a situation where the seller’s only contact is indirect through the marketplace facilitator’s website, could result in substantial nexus for the seller.  Nor is it clear whether a marketplace facilitator can be construed as a dealer for purposes of collecting use tax on a sale made by an unrelated third party using its platform.  This issue will likely continue to be litigated in Louisiana and throughout the country.

Louisiana’s Notice and Information Reporting Law Remains in Place

While it seems like piling on, Louisiana’s notice and information reporting statute remains in place, Louisiana law, specifically, La. R.S. 47.309.1 remains in effect for remote dealers selling $50,000.00 or more into the state.  Assuming, qualifying vendors do not voluntarily register to collect and remit state and local use taxes, they will have to consider the implications of the notice and information reporting statute.

For a more full discussion of the Wayfair decision’s effects on Louisiana state and local tax, contact Jaye Calhoun, Jason Brown, or Willie Kolarik.

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[1] Newell Normand, Sheriff and Ex-Offico Tax Collector For The Parish of Jefferson v. Wal-Mart.com USA, LLC, Dkt. No. 769-149 (La. 24th Judicial Dist. Ct. March 2, 2018).

By the Kean Miller State and Local Tax Team

On June 21, 2018, the Supreme Court of the United States issued its opinion in South Dakota v. Wayfair, Inc., Dkt. No, 17-494, 585 U.S. __ (June 21, 2018).  In addition to overturning the physical presence substantial nexus standard applicable to use tax collection requirements articulated by the court in Quill[1] and Bellas Hess[2], the Court’s far reaching opinion in Wayfair creates an undefined sufficiency test for determining when a taxpayer has substantial nexus with a state for purposes of the dormant Commerce Clause.  The new test appears to apply to all state tax regimes, including income, franchise, sales and use and property taxes, and may have substantial and significant implications for taxpayers.  And the Court’s decision may signal that the Court intends to provide significantly more deference to state tax regime in the future.

In conjunction with this article, the Kean Miller tax group is also releasing a detailed article explaining the Louisiana specific implications of Wayfair.  That article may be found here.

Background and Procedural History

The issue in Wayfair was whether South Dakota could impose a use tax collection obligation on an out-of-state company with no in-state physical presence when that company engaged in taxable transactions of goods or services to be delivered into South Dakota.  South Dakota and many other states and localities impose a sales tax on sales of tangible personal property and taxable services that occur in that state.  The sales tax is imposed on the purchaser but collected by the seller, as an agent of the state, who then remits the tax to the state.

To prevent a taxpayer from thwarting the sales tax by purchasing a good outside the state for use in the state, South Dakota and many other states[3] impose a complimentary use tax on the purchaser’s use of the property in the state.  The use tax is imposed on the purchaser of the good or service but, historically, states have struggled to enforce the tax against individual purchasers.  Because of the difficulties in enforcing state use tax laws against their own citizens, states have enacted a variety of laws to impose a use tax collection obligation on sellers of taxable goods or services.  Remote vendors with no in-state physical presence have challenged state attempts to impose use tax collection obligations on them.  The law applicable before today, the Supreme Court’s decisions in Bellas Hess (1967) and later in Quill (1992), held that a state may not impose a use tax collection obligation on an out-of-state taxpayer unless that taxpayer has more than a de minimis physical presence in the state.

In 1977, in between its decisions in Quill and Bellas Hess, in Complete Auto[4], the Court created a four prong test to determine whether a state tax on interstate activity satisfied the dormant Commerce Clause.  According to the Court, to withstand dormant Commerce Clause scrutiny, a state tax must applied to an activity with a substantial nexus with the taxing state, be fairly apportioned, not discriminate against interstate commerce, and be fairly related to the services provided by the state.[5]

With one exception, the Court has never articulated a standard for what type of contacts satisfy the substantial nexus prong of the dormant Commerce Clause test.  In Quill, the Court explored the substantial nexus requirement of the dormant Commerce Clause and concluded that the substantial nexus standard was different than the minimum contacts standard for the Fourteenth Amendment Due Process Clause and held that for use tax collection purposes, substantial nexus required an in-state physical presence.[6]  Because the Court never articulated a substantial nexus standard, with the exception of the narrow standard in Quill, states have adopted increasingly aggressive nexus standards for non-sales and use taxes, such as economic presence and factor presence standards for state income taxes, and other nexus theories, for sales and use taxes and other taxes, such as affiliate nexus and clink-through nexus standards.

Since Quill was decided, in 1992, the substantial increase in electronic commerce has changed how goods and services are provided.  And states have been increasingly concerned about revenue they perceive to be lost because of their inability to enforce their use tax against purchasers.  In addition, merchants with an in-state physical presence have been concerned about their ability to complete with on-line sellers with no in-state physical presence, that were not required to collect use tax on sales to in-state customers.

In 2016, South Dakota enacted a law that directly contradicted the Court’s decision in Quill for the purpose of forcing the court to revisit the physical presence in Quill and Bellas Hess.  South Dakota’s law required an out-of-state seller to collect and remit use tax as if the seller had an in-state physical presence if the seller, on an annual basis, either delivered more than $100,000 of goods or services into the state or engaged in 200 or more transactions for the delivery of goods or services into the state.[7]  South Dakota’s law was tailored to foreclose the possibility of retroactive application and to provide a means for the law to be stayed until its constitutionality was established.

Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc. (collectively, “remote sellers”) are large on-line retailers with no physical presence in South Dakota that satisfied the minimum sales or transactions requirements of the law refused to collect the tax and South Dakota filed a declaratory judgment action against them in state court.  The remote sellers moved for a summary judgment, arguing the law was unconstitutional.  The trial court agreed with the remote sellers and granted a summary judgment in its favor.  The South Dakota Supreme Court affirmed.

South Dakota petitioned the US Supreme Court for certiorari.  The Court granted certiorari to reconsider the scope and validity of the physical presence rules mandated by Quill and Bellas Hess.

The Court’s Rejection of the Physical Presence Rule in Quill

Justice Kennedy delivered the opinion of the court; writing for a majority that included Justices Thomas, Ginsburg, Alito, and Gorsuch.[8]  Chief Justice Roberts filed a dissenting opinion in which Justices Breyer, Sotomayor, and Kagan joined.

The majority began by explaining the history of the Court’s dormant Commence Clause jurisprudence.  And they concluded that modern dormant Commerce Clause precedents rest on two primary principles that mark the boundaries of a state authority to regulate interstate commerce.[9]  “First, state regulations may not discriminate against interstate commerce; and second, States may not impose undue burdens on interstate commerce.”[10]  A state law that discriminates against interstate commerce is per se invalid, but a state law that burden’s interstate commerce will be upheld unless the burden is clearly excessive in relation to the putative local benefits.[11]  According to the majority, these two principle guides the courts in all cases challenging state law under the Commerce Clause, including the validity of state taxes.[12]

After articulating the guiding principles of the Courts analysis, the majority then explained the history of the Court’s state tax dormant Commerce Clause jurisprudence in Bellas Hess, Complete Auto, and Quill, and noted that three justices based their decision to uphold the physical presence standard for use tax collection obligations in Quill on stare decisis alone.  The majority then noted that economic changes that have occurred since Quill and stated that the physical presence rule, both as first formulated and as applied today, was an incorrect interpretation of the Commerce Clause.[13]  The majority then proceeded to explain why the physical presence rule was incorrect.

The majority began by explaining that Quill is flawed on its own terms because (1) the physical presence rule was not a necessary interpretation of the substantial nexus requirement; (2) the rule creates rather than resolves market distortions; and (3) the rule imposes an arbitrary, formalistic distinction that modern Commerce Clause precedents disavow.[14]

With respect to his first point, the majority explained that the question in Wayfair is whether a state may require a remote seller to collect and remit use tax and not whether the state has jurisdiction to tax the underlying sale of the good or service.  According to the majority, the substantial nexus requirement is closely related to the due process minimum contacts requirement and that it is well settled that a business need not have a physical presence to satisfy the due process requirement.  Thus, even though the due process or Commerce Clause standards may not be identical or coterminous, when considering whether a state may levy a tax there are significant parallels between the two standards.  Therefore, according to the majority, the reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question of whether physical presence is required to force an out-of-state seller to remit collect and remit use taxes.[15]  As a result, physical presence is not necessary to create substantial nexus.

The majority also rejected the idea that without the physical presence rule the administrative costs of complying with thousands of sales tax jurisdictions’ tax laws created an undue burden on interstate commerce.  The majority rationalized this conclusion by noting that with the physical presence standard it was still possible that a small company with a diverse physical presence might face equal or higher burdens than a large remote seller.  Thus, according to the majority, the physical presence rule was a “poor proxy for the compliance costs faced by companies that do business in multiple states.”[16]

The majority then explained that the physical presence rule creates rather than resolves market distortions.  And that the distortions created by the rule were in direct conflict with the purpose of the Commerce Clause, to prevent states from engaging in economic discrimination.  According to the majority, local business and businesses with a physical presence are at an economic disadvantage because a remote seller can offer “de facto lower prices” since states have difficulty enforcing their use tax laws directly against purchasers.[17]  Thus, Quill served as a “judicially created tax shelter” and guarantees a competitive benefit to certain businesses based solely on the organizational form they choose.[18]  Moreover, according to the majority, the physical presence rule caused harm to local markets and may have resulted in those markets lacking storefronts, distribution points, or employment centers.  According to the majority, rejecting the rule was necessary to ensure that the Court’s precedents did not create “artificial competitive advantages.”[19]  And the Court “should not prevent States from collecting lawful taxes” through a physical presence rule.[20]

With respect to formalism, the majority noted that the Court’s Commerce Clause jurisprudence has “eschewed formalism” in favor of a fact sensitive case-by-case analysis but Quill treats “economically identical actors” differently for “arbitrary reasons.”[21]  The majority justified this conclusion by explaining that the physical presence rule would tax an online sale by an in-state retailer differently than the sale of the same item to the same customer by an out-of-state retailer, solely because of the location of each firm’s warehouse and even if neither sale was related to the business’s warehouse.  According to the majority, a state is free to consider functional marketplace realities in enacting and enforcing its laws and courts should not rely on rely on “anachronistic formalisms” to invalidate those laws under the Commerce Clause if the law avoids an effect forbidden by the Commerce Clause.[22]

The majority next addressed the role of the physical presence requirement in the modern e-commerce economy and concluded that the rule was arbitrary in its entirely.  According to the majority, it is not clear why a single employee or a single warehouse should create substantial nexus while “physical” aspects of pervasive modern technology, including a “cookie” saved on a customer’s hard drive, a mobile app downloaded on a customer’s phone, or data storage leased in a state, should not.[23]  In addition, according to the Court, “between targeted advertising and instant access to most consumers via any internet-enabled device” a business may have a meaningful in-state presence without having an in-state physical presence.[24]  “[T]he continuous and pervasive virtual presence of retailers today is, under Quill, simply irrelevant and the “Court should not maintain a rule that ignores these substantial virtual connections to the State.”[25]

The majority next explained that the physical presence rule was an “extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions.”[26]  According to the majority, the rule intruded on states’ reasonable choices in enacting their tax systems and allowed remote sellers to escape an obligation to remit a lawful tax.  And the rule was unjust because it “allows [a remote seller’s] customers to escape payment of sales taxes—taxes that are essential to create and secure the active market they supply with goods and services.”[27]  According to the majority, “there is nothing unfair about requiring companies that avail themselves of the States’ benefits to bear an equal share of the burden of tax collection.”[28]  And helping a remote seller’s customer “evade a lawful tax” unfairly shifts an increased share of taxes to customers that buy from a business with an in-state physical presence.[29]  According to the majority, the Court should avoid undermining public confidence in a state’s tax system by creating inequitable exceptions.  Further, the Court suggested that Quill harms both federalism and free markets by limiting a state’s ability to seek long-term prosperity and preventing market participants from competing on an even playing field.[30]

Before issuing its holding in Wayfair, the majority also rejected upholding Quill based on stare decisis because, according to the majority, a Commerce Clause decision may not “prohibit the States from exercising their lawful sovereign powers in our federal system.”[31]  The majority also noted that it was inappropriate to ask Congress to resolve the matter because, while Congress could change the physical presence rule, it was not proper for the Court to ask Congress to address a false constitutional premise of the Court’s own creation.[32]  The majority also dismissed the theory that the physical presence rule was easy to apply by noting Massachusetts and Ohio’s recent attempt to expand the physical presence rule to placing cookies on an in-state residents computer and similar technical and arbitrary rules that would likely result in a substantial amount of litigation.[33]  And, because Quill was not easily applied, the majority noted that augments for reliance based on the physical presence rule’s clarity were misplaced.[34]  Finally, the majority noted that Congress could resolve any problems associated with the administrative burden rejecting Quill imposed on small businesses and that other aspects of the Commerce Clause can protect against any undue burden on interstate commerce that may be placed on small business or others that engage in interstate commerce.[35]

For the reasons articulated above, the majority then concluded that the physical presence rule of Quill was “unsound and incorrect” and that Quill and Bellas Hess are now overruled.[36]

The New Substantial Nexus Standard

The majority in Wayfair was not content to merely overrule Quill and Bellas Hess.  After doing so, the majority articulated a new test to determine whether substantial nexus exists and, in so doing, changed the entire landscape of state of local taxation in the US.

According to the majority, for purposes of the substantial nexus prong of Complete Auto, “[S]uch a nexus is established when the taxpayer [or collector] ‘avails itself of the substantial privilege of carrying on business’ in that jurisdiction.”[37]  And according to the majority, this new sufficiency standard was satisfied in Wayfair “based on both the economic and virtual contacts” the remote sellers had with South Dakota.  The majority continued stating “respondents are large, national companies that undoubtedly maintain an extensive virtual presence. Thus, the substantial nexus requirement of Complete Auto is satisfied in this case.”[38]

Remand to South Dakota Supreme Court

Because the Quill physical presence rule was the only issue before the Court in Wayfair, the majority was unable to conclude that South Dakota’s law was constitutional for purposes of the Commerce Clause.  As a result, the majority remanded the case to the South Dakota Supreme Court to determine whether South Dakota’s law violated some other principle of the Court’s Commerce Clause jurisprudence, e.g., whether the law discriminated against or placed an undue burden on interstate commerce.

Even though the Court remanded the case, is made a point to note that South Dakota’s law contained the following attributes:

  1. The law contained a safe harbor for those who transact only limited business in South Dakota;
  2. The law ensured that no obligation to remit the sales tax may be applied retroactively;
  3. South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement, which standardizes taxes to reduce administrative and compliance costs by:
    1. Requiring single, state level tax administration;
    2. Requiring uniform definitions of products and services;
    3. Requiring simplified tax rate structures, and other uniform rules;
    4. Providing sellers access to sales tax administration software paid for by the State; and
    5. Providing sellers who choose to use that software immunity from audit liability.[39]

Implications

The Wayfair decision represents a fundamental change in the relationship of the states to each other and the relationship of the states to the federal government.  And the decision may signal a new era of state tax jurisprudence in which the courts provide a tremendous amount of deference to state tax regimes.

The “Obvious” Implication

States and localities will likely assert that the obvious implication of Wayfair is that a remote seller with economic or virtual contacts with the state is now required to collect and remit sales and use taxes (and arguably may be assessed retroactively).  But this is not correct at this time because the constitutionality of South Dakota’s law has not yet been determined and the Court has indicated that a sales tax regime that does not meet all (or some) of the requirements listed above may not satisfy constitutional muster.  The requirements a state tax regime must satisfy to survive Commerce Clause scrutiny will likely be litigated in the future.

The Wayfair test also creates and additional problem.  Many remote sellers do business through a marketplace facilitator and some states have enacted laws that purport to require a marketplace facilitator to collect and remit use tax on behalf of remote sellers that use the marketplace facilitator’s services.  But the Wayfair test does not address whether a remote seller’s indirect virtual contacts with a state, through a marketplace facilitator, are sufficient to satisfy the substantial nexus prong of the Complete Auto test.  So at this time, it is not clear weather a state may compel a remote seller with only indirect virtual contacts with a state to collect and remit the states use tax.  Nor is it clear whether a state may compel the marketplace facilitator to collect and remit use tax on behalf of its client, the remote seller. As a result, a remote seller that does business through a marketplace facilitator or a marketplace facilitator that actually has virtual contacts with the state should carefully evaluate their state tax exposure in light of the Court’s decision in Wayfair.

It is also important to note that in at least one state, Louisiana, sales tax economic nexus law is premised on a final decision by the United States Supreme Court on the constitutionality of South Dakota’s law in Wayfair.  Because Wayfair was not a final decision by the United States Supreme Court on the constitutionality of South Dakota’s law, Louisiana’s economic nexus threshold law is inoperative unless amended.[40]  Similar laws in other states should be scrutinized to determine whether they are operative.  In Louisiana and any other state with an inoperative economic nexus threshold for sales and use tax purposes, a taxpayer below the threshold in the inoperative law could be subject to sales and use tax if it satisfies the Wayfair test and the states sales and use tax regime does not otherwise violate the Commerce Clause.

A remote seller should evaluate its sales and use exposure in light of Wayfair, but it is premature to conclude that states and localities have free reign to impose sales and use tax collection obligations on a remote seller.  It is also important to note that Wayfair may not alter state notice and reporting requirements.  But states that are aggressively enforcing notice and reporting requirements, e.g., Connecticut and Washington, and the penalties associated with those requirements, are no longer likely to be willing to negotiate the waiver of penalties associated with those notice and reporting requirements in exchange for a remote seller’s commitment to prospectively collect and remit use tax on sales to in-state customers, unless the state’s existing sales and use tax regime is unlikely to survive Commerce Clause scrutiny as applied to a remote seller post-Wayfair.

It should also be noted that even though the Court laments the litigation that will arise from the expansion of the definition of physical presence to include cookies on in-state computers and similar items by states like Massachusetts and Ohio, the Wayfair decision could be read as tacitly endorsing those laws as correct.  Depending how lower courts defined the Wayfair test, it is possible that a state and locality could rely on Wayfair to support a physical presence nexus theory below the economic and virtual contact threshold in Wayfair.  More importantly, Massachusetts and Ohio may interpret the Wayfair decision as endorsing their approach and issue retroactive assessments based on their expanded physical presence standards.

Finally, a business considering restructuring its operations to fall below a state’s economic nexus threshold should note that the Wayfair test may set a low bar.  And a state could thwart any restructuring by repealing its nexus threshold (assuming its sales and use was otherwise constitutional, which is not clear).

The Big Picture

Because the Wayfair test is linked to the substantial nexus prong of Complete Auto, the Wayfair decision marks the first time that the Court’s has established a test that appears to be intended to determine whether substantial nexus exists for  all state tax regimes, e.g., income, franchise, sales and use, and property taxes.  Unfortunately, the Court has left the new sufficiency standard in Wayfair undefined.[41]  As a result, lower courts will be required to determine which economic and virtual contacts with a state are sufficient to create substantial nexus.  Note that it is not clear whether (or how) the “substantial virtual connections” standard articulated in Wayfair applies to the test.[42]  Nor is it clear whether targeted advertising or “instant access to most consumers via any internet-enabled device” creates an economic or virtual contact.[43]  After determining whether the taxpayer’s contacts create substantial nexus, the lower courts are also left to decide whether the state’s tax regime violates another aspect of the Commerce Clause, such as the undue burden test created in Pike v. Bruce Church (see Footnote 11) or another prong of the Complete Auto test.

A state may impose a higher nexus standard than the Constitution requires but it may not impose a lower standard.  Many states have imposed higher standards, e.g., factor presence standards for income tax or click-through nexus standards for sales and use tax.  But most state tax regimes extend to the extent permitted by the Constitution and any state legislature could repeal a higher standard in favor of a relying on the standard in Wayfair.

Any business with an economic or virtual presence (i.e., any business with a website that can be accessed remotely) should begin to evaluate the scope of its economic and virtual contacts with all other states to determine whether those contacts with other states are sufficient for purposes of the Wayfair test.  This analysis should be conducted for any jurisdiction that levies any tax that the taxpayer may be subject to.  It is important to note that because the Wayfair decision is premised on the Quill rule having always been incorrect, and despite the fact that the Court approved the lack of retroactivity in the South Dakota statute, the new rules may be interpreted by taxing jurisdictions as applicable retroactively.  Accordingly, a business with an economic or virtual presence in any state may be subject to tax by that state and its political subdivisions for any period in which it has not filed returns, unless the taxing jurisdiction imposed a higher nexus threshold in all periods in which the taxpayer’s contacts with the state occurred.  The financial statement implications of this analysis should not be overlooked.

Because the Court has left the new sufficiency standard undefined, a substantial amount of litigation is likely to result.  Among other things, that litigation may test whether the floor of the new substantial nexus test is above or below the minimum contacts required by the Fourteenth Amendment Due Process Clause and whether a taxpayer must affirmatively target a state’s market.  In addition, there will likely be a substantial amount of litigation regarding the scope of the Fourteenth Amendment Due Process Clause.  Nonresident businesses will also likely challenge state taxes on the grounds that the discriminate or place an undue burden on interstate commerce.

Throughout its decision in Wayfair, the Court repeatedly notes that the Quill physical presence rule was an inappropriate intrusion on a state’s authority to make reasonable choices when enacting its tax regime, to collect taxes and to perform critical functions.  This language may indicate that the Court is reevaluating the role of the judiciary reviewing state tax laws and that the court intends to give substantial deference to state tax regimes in the future.  States and localities may assert this position in future tax litigation and it is not clear at this time whether state courts and lower federal courts will interpret the Court’s language in Wayfair in this manner.

Wayfair also appears to muddy the distinction between the due process and Commerce Clause analysis articulated in Quill by stating: “[t]he reasons given in Quill for rejecting the physical presence rule for due process purposes apply as well to the question whether physical presence is a requisite for an out-of-state seller’s liability to remit sales taxes.”[44]  The “reasons given in Quill” appears to be a reference to the “purposeful direction” language used by the court in Burger King.[45]  The “purposeful direction” language from Burger King has since evolved in other due process cases so it is not clear whether the Court also believes a similar standard should apply to the Wayfair test and, if so, what rule should apply.

The Wayfair test may also have implications for Public Law 86-272.[46]  P.L. 86-272 prohibits a state from levying a state income tax upon a taxpayer whose in-state business activity is limited to the solicitation of sales orders of tangible personal property that are sent outside the state for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the state.  It is possible that the types of virtual and economic contacts contemplated in the Wayfair decision could inadvertently undermine P.L. 86-272.  For example, that a state could construe a tracking cookie on an in-state customer’s computer as a business activity that exceeds solicitation.

The Wayfair decision also raises the issue of whether the Court is attempting to limit a taxpayer’s ability to structure its business in a manner that minimizes taxes or administrative burdens.[47]  Specifically, the majority cites the Judge Gorsuch’s concurring opinion in Direct Marketing: “[t]his guarantees a competitive benefit to certain firms simply because of the organizational form they choose while the rest of the Court’s jurisprudence is all about preventing discrimination between firms.[48]  It is likely that this language is dicta but a state or locality may attempt to rely on this language to contest a taxpayer’s choice of entity or business structure.

Finally, we note that Court’s reasoning in Wayfair for rejecting Quill is deeply flawed and appears at times to misunderstand which party sales and use tax are imposed on.  For example, the court frequently references sales tax and on occasion incorrectly states that remote sellers are somehow shifting the tax burden to the customers of in-state business.  While this is true in the minority of states in which the tax obligation is imposed on the vendor (for example, California), it is not the case throughout most of the country.  Further, in overruling Quill, the Court also improperly appears to hold remote sellers responsible for the states’ inability to collect their own tax from their residents.  This type of rhetoric abounds throughout the Wayfair decision.

The Wayfair decision removes prior limits that prevented states and localities from exercising nationwide jurisdiction over nonresidents operating in interstate commerce. It cannot be said to level the playing field for local businesses so much as it imposes significant compliance burdens on nonresident businesses which now must be understand and become compliant with the multiplicity of laws in all remote jurisdictions where their customers reside.

For additional information, please contact the Kean Miller SALT Team.

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[1] Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

[2] National Bellas Hess, INc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967).

[3] Many localities within states also impose sales and use taxes. The discussion herein applies equally to the large number of political subdivisions within states that also impose these types of taxes.

[4] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)

[5] Complete Auto v. Brady. 430 U.S.at 279.

[6] Quill v. North Dakota, 504 U.S. at 313 and 318.

[7] S.D. Codified Laws  §10-64-2.

[8] Justices Thomas and Gorsuch also filed concurring opinions.

[9] South Dakota v. Wayfair, slip op. at 7.

[10] Id.

[11] Id.  citing Granholm v. Heald, 544 U. S. 460, 476 (2005) and Pike v. Bruce Church, Inc., 397 U. S. 137, 142 (1970)

[12] Id.

[13] South Dakota v. Wayfair, slip op. at 10.

[14] Id.

[15] South Dakota v. Wayfair, slip op. at 11.

[16] South Dakota v. Wayfair, slip op. at 12.

[17] South Dakota v. Wayfair, slip op. at 13.

[18] Id.

[19] Id.

[20] Id.

[21] South Dakota v. Wayfair, slip op. at 13 and 14.

[22] South Dakota v. Wayfair, slip op. at 14.

[23] South Dakota v. Wayfair, slip op. at 15.

[24] Id.

[25] Id.

[26] South Dakota v. Wayfair, slip op. at 16.

[27] Id.

[28] South Dakota v. Wayfair, slip op. at 17.

[29] Id.

[30] Id.

[31] South Dakota v. Wayfair, slip op. at 17.

[32] Id.

[33] South Dakota v. Wayfair, slip op. at 19-20.

[34] South Dakota v. Wayfair, slip op. at 20.

[35] South Dakota v. Wayfair, slip op. at 21.

[36] South Dakota v. Wayfair, slip op. at 22.

[37] South Dakota v. Wayfair, slip op. at 22 citing Polar Tankers, Inc. v. City of Valdez, 557 U. S. 1, 11 (2009).

[38] South Dakota v. Wayfair, slip op. at 23.

[39] South Dakota v. Wayfair, slip op. at 23.

[40] As of this writing, a bill, SB1, has been introduced in the Louisiana Legislature to change the effective date of the Louisiana law to a specific date, August 1, 2018, to remove references to the result in the Wayfair case.

[41] Note that actual language of the Wayfair test appears to be first articulated in Wisconsin v. J.C. Penny Co., 311 U.S. 435 (1940) and was originally stood for the proposition that a tax on a foreign corporation that registered to do business in a state satisfied the Fourteenth Amendment Due Process Clause.  But because the Wayfair test was satisfied by economic and virtual contacts with a state, the Wayfair test should be considered as being undefined and should not be read as applying only to foreign corporations registered to do business in a state.

[42]South Dakota v. Wayfair, slip op. at 15.

[43] Id.

[44] South Dakota v. Wayfair, slip op. at 11.

[45] Quill v. North Dakota, 504 U.S. at 307-308 citing Burger King Corp. v. Rudzewicz, 471 U.S. 462, 476 (1985).

[46] 15 U.S. Code § 381.

[47] See Helvering v. Gregory, 69 F.2d 809, 810 (2nd Cir. 1934) (“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”)

[48] South Dakota v. Wayfair, slip op. at 13 citing Direct Marketing Ass’n v. Brohl, 814 F. 3d, 1129, 1150– 1151 (10th Cir. 2016)  (internal quotations omitted) .