Business and Corporate

By James R. “Sonny” Chastain, Jr.

In a recent Supreme Court decision involving the Fourth Amendment, Justice Roberts noted that there are 396 million cell phones accounts in the United States for a nation of only 326 million people.  The cell phone provides numerous functions including access to contacts, data, information and the internet.  Some studies suggest people check cell phones every ten minutes and are less than five feet away from the phone most of the time.  It seems the cell phone has become an integral part of daily living. While the development may be productive in terms of the overall access to information, it also creates certain risks that employers should consider.

In many instances companies operate on a platform of bring your own device to work (“BYOD”).  Employers should consider what business information may be available to that employee on his or her personal cell phone.  An employer is vulnerable if an employee is connected to the employer’s computer system and can access valuable confidential information through the cell phone.   The risk is that the employer’s business information may “walk” out the door with the employee.  Moreover, if the information gets comingled with the employee’s personal information, there could be a problem in terms of “unscrambling” or wiping the phone on departure.   Certainly one approach is to not permit the employee to have access to the information on the phone.   However, an employee may need access in order to perform his or her job responsibilities.  Employers should consider whether to have a cellular phone policy that addresses how employees should use the phone, any issues regarding expectation of privacy, ownership of information, and wiping upon termination.

Additionally, a cell phone may cause distracted driving. Whether ringing, beeping, vibrating – the cell phone may cause drivers to lose focus.  A driver’s perceived belief that the ever important text/email may have just come in can create an overwhelming desire to check/respond.  To the extent an employee is on the road, the temptation to text, call or open an app may create serious risks.   Distracted driving is alleged to be a contributing factor in 80% of the automobile accidents on the road today.  Employers need to recognize this risk and be proactive in addressing it.  Employers should consider having a policy regarding the use of cell phones while driving.

Cell phones are integrated into our daily activities – just look around at any restaurant, getting on an elevator, or at a stop light.  No matter the time, place or circumstances, staying connected seems to be of utmost importance.  A cell phone is certainly very beneficial in terms of facilitating access to people and information.  However, cell phones may also bring about certain risks.  Employers may want to consider the risks which that may be applicable to it and any policies to put in place to address them.

By Stephen C. Hanemann

“A big day for trade!” was President Donald Trump’s enthusiastic announcement concerning the bilateral negotiations recently reached between the United States and Mexico on August 27, 2018, merely three months away from the North American Free Trade Agreement’s 25th birthday.

While ratified by the Legislatures of Canada, Mexico, and the United States in 1993, and signed into law by President Bill Clinton on December 8, 1993, NAFTA, which became effective on January 1, 1994, traces its direct origins to 1980 when the three North American nations first sought an accord to establish mutual trading, cost reduction, increased business investment, and heightened competition in the global market place. Shortly thereafter, President Ronald Reagan – whose campaign platform included provisions advancing a North American common market – supported the 1984 Congressional passage of the Trade and Tariff Act, which gave the U.S. President unilateral authority to negotiate free trade agreements. The Act facilitated the U.S. Chief Executive’s ability to expedite trade negotiations. Since its passage, Congress retains only the ability to approve or reject the complete agreement as negotiated, but not to alter it or suggest revisions. President Reagan and Canadian Prime Minister Brian Mulroney negotiated a Canada-U.S. Free Trade Agreement in 1998, which was signed in that year, and went into effect in 1999. Reagan’s successor, President George H. W. Bush, negotiated with Mexican President Carlos Salinas de Gortari to reduce Mexican tariffs on U.S. imports, which before NAFTA were 250% higher than U.S. tariffs on Mexican imports. In conjunction with the Bush-Salinas negotiations, in 1991, Canadian Prime Minister Mulroney requested a trilateral agreement, from which NAFTA was born.

Citing a compelling need to revitalize and modernize the aging NAFTA content, the United States and Mexico recently commenced and completed preliminary negotiations in support of a mutually-beneficial trade agreement to promote vibrant economic growth, balanced trade, and less-restricted markets to help North America keep pace with the 21st century-global economy. The recent discussions, which excluded Canada, have seemingly created more of a path to replace NAFTA than to revise it. In fact, President Trump has been quite vocal about the name of the new agreement, which he says will not be NAFTA.

The negotiations seek to modernize NAFTA to conform with recent technological, digital, and environmental innovations, as well as address the arenas of intellectual property, copyright, digital trade, and financial services. Other developments focus on eliminating customs duties on low-valued goods, levying prohibitions on local data storage requirements for information accessible to financial regulators, and establishing new trade rules of origin, vastly improving the North American labor force benefits and upping local content requirements in the automotive industry. Bolstering their commitment to technological and ever-changing labor market advancements, the United States-Mexico negotiations also brought to bear a heavy import on environmental concerns and obligations pertaining to wildlife, timber, fish, and air quality.

Despite the newly-developed and comprehensive enforcement provisions pertaining to intellectual property and trade secret protections, the key points of negotiations also involved added benefits for innovators and stronger disciplines on digital trade; all of which tend to provide a firm foundation for the expansion of trade and investment in products and services where the United States has a competitive advantage.

An additional noteworthy development involves the increased de minimis shipment value of cross-border goods, which will facilitate greater trade between the United States and Mexico by reducing or eliminating customs duties and taxes on shipments valued up to $100. Increasing the de minimis value will significantly lower costs to small and medium-size enterprises, which do not have the resources to pay shipping costs on small shipments. The cost savings will also trickle down to the new traders entering Mexico’s market, and of course, the consumers.

On the labor front, the new trade rules of origin in the automotive manufacturing industry will require at least 75% of a car’s value to be manufactured in North America (compared to 62.5% previously). And at least 40% of each vehicle manufactured in North America must be made by workers earning at least $16 per hour. These and other labor revisions seek to create more U.S. jobs carrying competitive wages, as well as stimulate the domestic automotive industry’s overall production and global competitiveness.

The proposed content of the environmental chapter marks the first ever articles of a Free Trade Agreement to directly improve air quality, prevent and reduce marine litter, support sustainable forest management, and to create and implement procedures for environmental impact studies and assessments, and modernize mechanisms for public participation and environmental cooperation.  Other enforceable-environmental obligations seek to combat unlawful trafficking in wildlife, timber, and fish, and address pertinent environmental issues related to air quality and marine dumping.

Indeed, Canada’s absence during the NAFTA re-negotiations likely bodes well in favor of a NAFTA replacement rather than revision. While Mexico’s administration has contacted Canada requesting a return to the negotiating table, in hopes of a trilateral NAFTA deal, the Trump administration has unequivocally expressed its concerns about multi-lateral agreements and voiced a strong preference for bilateral ones.

By Jill A. Gautreaux

Some exciting news for liquor license holders in the City of New Orleans! Effective August 27, 2018, the City of New Orleans (“City”) has transferred the administration of liquor licenses from the Department of Revenue to the Department of Safety and Permits in an effort to streamline the permitting process.  Years ago, the City created the “One Stop Shop”, which consolidated the permit application process to a single outlet.  Prior to the creation of the “One Stop Shop”, applicants for building or business permits would be required to coordinate between several departments within the City, and often within the Department of Safety and Permits itself, in order to obtain necessary approvals for certain building, zoning, or business applications.  The One Stop Shop created a more user-friendly department wherein applications were submitted for intake, and the City undertook the task of routing the application to the various departments required approval the application.  The creation of the One Stop Shop alleviated some of the frustrations expressed by prospective licensees.  Nevertheless, the Department of Revenue maintained control of the liquor licensing process, requiring applicants to obtain building permits, zoning actions, occupational and other licenses from the Department of Safety and Permits, but work with the Department of Revenue for its liquor licenses.

Last spring, the New Orleans City Council ordered that the liquor licenses be administered by the Department of Safety and Permits instead of the Department of Revenue.  Several City Council members cited complaints from constituents regarding the inefficiencies in the licensing process as the reason for the change.

The Department of Safety and Permits has already revised the liquor license application to provide for an alternative “short form” application that eliminates most information duplicative of the State Alcohol and Tobacco Control application.  The Department of Safety and Permits also plans to promulgate regulations to clarify and document some of the policies previously unwritten yet practiced by the Department of Revenue.  We will provide an update when new regulations are promulgated.

In the meantime, if you have any questions regarding the new licensing process, please do not hesitate to contact me.

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.


[1] Newell Normand, Sheriff and Ex-Offico Tax Collector For The Parish of Jefferson v. 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.,, 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]


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.


[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. 430 279.

[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) .

By James R. “Sonny” Chastain, Jr.

La. R.S. 23:921(A) states that every contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind, except as provided in this Section shall be null and void.  However, there are certain exceptions to this general rule including La. R.S. 921(L) which permits member to agree that members will refrain from carrying on or engaging in a business similar to that of the limited liability company and from soliciting customers of the company within specified parishes or municipalities, as long as the company carries on a similar business therein, for a period not to exceed two years from the date membership ceases.  This exception was at issue in Yorsch v. Morel, 223 So.3d 1274 (La. App. 5th Cir. 2017), writ denied, 230 So.3d 307 (La. 2017), where the Court refused to enforce a non-competition and non-solicitation clause. In the first appellate interpretation of this exception regarding members, the Court affirmed the district court denial of a preliminary injunction and declined to reform the clauses at issue.

Yorsch and Morel formed two member-managed LLCs and entered into a Non-Circumvention and Non-Competition Agreement.  The non-competition clause stated neither member shall directly or indirectly perform any of the following activities:  “work for, manage, operate, control, … or engage or invest in, own, manage, … be employed by or associated with, or render services or advice or other aid to, or guarantee any obligation of, any person or entity engaged in any business whose activities compete in any way with the Business or the Opportunity.”  Specific parishes were identified where this covenant applied.  Additionally, the members agreed not to circumvent the Companies in any dealings regarding the Business or the Opportunity with any title insurance companies and would not, except on behalf of the Companies, access, contact, solicit and/or communicate with such parties or accept any business, support, investment or involvement from such parties without the other Member’s express consent.  The term Business and Opportunity were defined terms in the agreement.  When Morel became employed by a competitor, Yorsch filed suit seeking an injunction which was denied.  The court of appeals further addressed the claims.

Yorsch argued that the public policy concerns of La. R.S. 23:921 did not apply since he and Morel were sophisticated parties, the agreement was bilateral and the parties were on equal footing as members of the companies.  However, the Court noted that the statute was amended in 2008 to bring limited liability companies within the umbrella of the statute.  Since La. R.S. 23:921 applied to the dispute, the Court concluded bargaining power and sophistication were not relevant factors.

Yorsch argued that the agreement only restricted members from competing in the field of tax adjudicated closing and title insurance; however, the district court and court of appeals disagreed finding the clause impermissibly broad.  According to the language, a member could not render services or advice or other aid to any person or entity engaged in any business whose activities competed in any way of the Business or Opportunity.  The broad scope of the clause prohibited a member from working in a completely unrelated capacity for a company whose activities competed with the Business or Opportunity.  According to the Court, Morel could not get a job babysitting for an employee of the company that competes with the Business or Opportunity or cater a crawfish boil of a firm that competes in any way with the Business or the Opportunity — because he would be rendering services to a competing entity.  The Court concluded the clause “drives a freight train through this limitation”, barring a member from engaging in other occupations that are not similar to that of the company, and is in derogation of La. R.S. 23:921(L).

The Court construed the non-circumvention clause to be a non-solicitation agreement and found it to be unenforceable because it did not contain geographic limitations as required by La. R.S. 23:921(L).  While the non-competition clause contained the geographic limitation, the non-circumvention clause did not.  The Court stated that the statute requires specificity regarding these geographical limitations and the non-circumvention clause could not stand on its own.  The Court declined to reform the non-solicitation clause.

This is another example of a court closely scrutinizing language in a restrictive covenant and declining to enforce.  The Court found the exception in La. R.S. 23:921(L) not to be satisfied concluding the language in the obligation not to compete to be overbroad and the non-solicitation not to state geographic boundaries.  Most importantly, the Court refused to reform or sever showing one cannot count on a court to remedy language which may be interpreted as overbroad in these covenants.  However, in the dissenting opinion, the judge concluded the proper determination to be to remove the potentially overbroad language, “associated with or render[ing] services or advice or other aid to,” from the clause which would make it in compliance with the exception.


On December 22, 2017, President Trump signed into law H.R.1, also known as the Tax Cuts and Jobs Act (the “TCJA”). The TCJA makes the most significant and sweeping changes to the federal taxation of business and individuals in more than a generation.  Due to the unusual speed with which the TCJA went through the legislative process, the new law raises several technical issues and contains numerous drafting errors that are expected to be addressed in a 2018 technical corrections bill.

This blog post summarizes several of the TCJA’s most significant tax changes for businesses and individuals.  The Kean Miller Tax and Transactions Groups will post additional summaries of specific, identified provisions in the coming days.

Corporate Tax Changes

Reduced Corporate Tax Rate – The TCJA permanently reduces the corporate income tax rate from 35% to 21% for tax years starting in 2018.

Capital Expenditures – For the next five years (or, for certain property, six years) the TCJA allows corporations to fully expense the cost of “qualified property,” including tangible personal property and computer software.  This provision is phased out after five years and does not apply to property currently in use.  In addition, the TCJA alters the cost recovery period for certain real property and leasehold improvements.  The Section 179 expensing cap is increased from $500,000 to $1 million.

Dividends Received Deduction – The TCJA reduces the 80% dividends received deduction to 65% and the 70% dividends received deduction to 50% for tax years beginning after December 31, 2017.

Repeal of the Corporate AMT – The Corporate AMT is repealed for tax years beginning after 2017 and taxpayers can claim a refund for previously paid AMT amounts.

Net Operating Losses (“NOLs”) – The deduction for NOLs is limited to 80% of taxable income for losses arising in tax years after 2017.  NOLs generated in tax years ending after 2017 may be carried forward indefinitely, but the two-year carryback provisions are repealed (with certain exceptions).

Interest Expense Limitation –  For tax years beginning after December 31, 2017, the deduction for interest expense is limited to 30% of earnings before interest, taxes, depreciation and amortization through 2021 and of earnings before interest and taxes beginning in 2022.

Section 451 Revenue Recognition – Under the TCJA, and for tax years beginning after 2017, an accrual-method taxpayer is required to recognize income that is subject to the all-events test no later than the tax year in which the income is taken into account on the taxpayer’s financial statements (except for certain income).  The deferral method of accounting for advance payments for goods and services in Revenue Procedure 2004-34 is codified.

Research and Experimental Expenditures – Amounts paid or accrued for Research &Experimental expenditures after 2012 are capitalized and amortized over five years (15 years for certain foreign research expenditures).

Section 199 Domestic Production Deduction – The Section 199 deduction is repealed for tax years beginning after 2017.

Entertainment Expenses and Fringe Benefits – The 50% deduction for entertainment expenses is repealed, as are deductions for qualified transportation fringe benefits.  Deductions for other fringe benefits are also reduced or eliminated.

Like-Kind Exchanges – Under the TCJA, like-kind exchanges will be tax free, but only for real property exchanges.

Cash Accounting Limit Raised – More businesses will be able to use cash accounting as the upper limit in average annual gross receipts (measured as of the prior three years) has been raised from $5 million to $25 million.

Self-Created Property – The TCJA amends Section 1221(a)(3) and excludes patents, inventions, models or designs (whether or not patented), and secret formulas or processes that are held by the taxpayer who created the property or by a taxpayer with a substituted or transferred basis from the taxpayer who created the property, from the definition of a capital asset.  This provision is effective for dispositions after December 31, 2017.

Affordable Care Act – While the TCJA reduced the Affordable Care Act (the “ACA”) individual penalty to zero for months beginning after December 31, 2018, the ACA’s employer mandate rules have not been repealed and remain in full effect.

International Tax Changes

The TCJA’s most significant changes are to the US international tax regime.  Those changes include implementing a quasi-territorial tax system, imposing a one-time transition tax on accumulated foreign earnings, and imposing anti-deferral and anti-base erosion rules.

Pass-Through Deduction

The TCJA creates new Section 199A, which permits an individual to deduct up to 20% of their “qualified business income” earned through a partnership, S corporation or sole proprietorship, and qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income.  This deduction expires on December 31, 2025.

Qualified businesses includes partnerships; S corporations; sole proprietorships; REITs; cooperative and master limited partnerships.  However, specified service trades or businesses with income over $315,000 of taxable income for joint filers or $157,500 for other filers (with the deduction phased out over the next $50,000/$100,000 of taxable income) are excluded, including:

  • Any trade or business in the fields of accounting, health, law, consulting, athletics, financial services, brokerage services; or
  • Any business where the principal asset of the business is the reputation or skill of one or more of its employees

Qualified business income includes the net amount of qualified items of income, gain, deduction, and loss of a qualified trade or business that is effectively connected with the conduct of a US trade or business.  Certain specified investment-related income, deductions, or losses, and an S corporation shareholder’s reasonable compensation, guaranteed payments, or—to the extent provided in regulations—payments to a partner who is acting in a capacity other than his or her capacity as a partner are excluded from the definition of qualified business income.

Qualified business income deduction is limited to the greatest of 50% of wages paid by the business to its employees or 25% of wages paid plus 2.5% of the cost (unadjusted basis) of certain qualified business property.  Taxpayers with less than $315,000 of taxable income (joint return) or $157,500 (other filers) are not subject to this limitation (the wage limitation is phased in over the next $50,000/$100,000 of taxable income).

Individual Income Tax Changes

The TCJA reduces individual tax rates for taxable years beginning January 1, 2018 and ending December 31, 2025.  The top marginal tax rate is reduced from 39.6% to 37% and bracket widths are modified.  The new tax brackets are summarized below:

Single Individuals:

  • 10% – $0-$9,525
  • 12% – $9,525-$38,700
  • 22% – $38,700-$82,500
  • 24% – $82,500-$157,500
  • 32% – $157,500-$200,000
  • 35% – $200,000-$500,000
  • 37% – $500,000+

Married Filing Jointly and Surviving Spouses:

  • 10% – $0-$19,050
  • 12% – $19,050-$77,400
  • 22% – $77,400-$165,000
  • 24% – $165,000-$315,000
  • 32% – $315,000-$400,000
  • 35% – $400,000-$600,000
  • 37% – $600,000+

In addition to temporarily reducing the individual income tax rates and modifying the bracket widths, the TCJA also increased the standard deduction for married individuals filing jointly from $12,000 to $24,000 and for single filers from $6,350 to $12,700.  The TCJA also imposes significant limits on certain itemized deductions and eliminates several other deductions.  Notably, the TCJA limits the state tax deduction to $10,000, limits the mortgage interest deduction to the first $750,000 in principal value, and eliminates the home equity debt deduction and the personal exemption.  The limitation on itemized deductions, which phased out 3% of a taxpayer’s itemized deductions once income exceeded a threshold, is also suspended through 2025.  The Alternative Minimum Tax (“AMT”) is retained but the exemption is increased.

The Affordable Care Act required individuals not covered by a health plan that provided minimum essential coverage to pay a penalty with their federal tax return, unless an exception applied.  The TCJA permanently reduces that penalty to zero for months beginning after Dec. 31, 2018.

The legislation also permits distributions from retirement plans for persons who suffered losses as a result of the 2016 severe storms and flooding in Louisiana without penalty (but subject to tax, which may be spread over 3 years).  The distributions must be made before January 1, 2018.  Retirement plans may be amended to permit such distributions, and the amendment must be made by the last day of the first plan year beginning on or after January 1, 2018.  Also, distributees are permitted to repay such distributions within 3 years and treat them as rollovers.  This is an extension of the IRS guidance issued in 2016.


The TCJA is a significant and substantive, yet flawed revision to the US federal income tax regime.  The business tax consequences of the TCJA are only beginning to come into focus, but it is clear that most businesses should consider whether restructuring would make sense to maximize the tax benefits available under the TCJA.  In addition, certain provisions of the TCJA, such as the limitation on the interest expense deduction, could negatively impact certain businesses.  Those businesses should consider whether it is possible to restructure operations or financing to avoid or minimize the tax impact of the TCJA’s limitations on interest expense deductions.  For example, a highly-leveraged business could consider exploring alternative financing arrangements that do not generate interest expense.  Owners of flow-through entities that are not eligible for the 20% qualified business income deduction should also consider restructuring their operations in a manner that allows them to claim all or a portion of the deduction.

The TCJA will also have substantial state and local tax implications.  It is not clear at this time whether or to what extent states will conform to the provisions created by the TCJA.  But states like Louisiana that use federal taxable income as a starting point for computing state taxable income will certainly be impacted by the TCJA.

Kean Miller’s Tax and Transactions Group will continue to post updates as the implications of the TCJA for business and individual taxpayers become clearer.  For additional information, please contact:  Jaye Calhoun, Willie Kolarik, Jason Brown, Kevin Curry, Linda Clark, Bob Schmidt, and David Hamm.

By Lauren J. Rucinski and R. Devin Ricci

As of December 14, 2017, the Federal Communications Commission (“FCC”) repealed the so-called net neutrality regulations in a 3 to 2 vote along party lines. But what does this mean and how may this decision affect you or your business?

To be honest, it is too early to tell if derailing the short-lived regulation of internet providers will significantly impact the casual user’s internet experience, but there are some issues which should cause companies and individuals alike to be wary.

What is Net Neutrality?

Net Neutrality defines the concept that all content transmitted over a phone company or cable company’s network are to be treated equally and without preference. During the Obama administration, the FCC adopted rules to protect net neutrality.[1] These 2015 rules reclassified broadband Internet service as a form of telecommunications, allowing the FCC to regulate providers of Internet services, e.g., Comcast, Cox, AT&T, as common carriers under the Communications Act. The rules also aimed at specifically prohibiting certain “non-neutral” leaning actions by the internet service providers such as:

  1. blocking (providers cannot discriminate against any lawful content),
  2. throttling (providers cannot slow data transmission based on content), and
  3. paid prioritization (providers cannot create internet “fast lanes” for those willing to pay premiums).”[2]

These rules were, at least somewhat, in contrast to case law at the time. For example, in Verizon v. F.C.C., the D.C. Circuit held that anti-blocking and nondiscriminatory rules were unlawful because they treated internet service providers as common carriers in violation of the Communications Act.[3] At the time, telecommunications companies were treated differently than common carriers like the telephone companies. The 2015 FCC rules circumvented this issue by expressly making internet service providers common carriers. Without the 2015 FCC rules, cases like Verizon are going to become relevant again.

Should the average business owner be concerned?

Maybe. By dismantling the net-neutrality rules, internet service providers are no longer regulated as common carriers. In theory, the service providers can demand premiums for fast or substantial access to web-based services. This, of course, may have immediate implications for popular streaming services such as HBO, Netflix, and news outlets. These companies are likely to pass along any increase cost to the ultimate users, so it may not affect their bottom line. Some argue that the common mid-sized business is unlikely to feel much effect as typical webpages do not require substantial bandwidth. However, modern business is intrinsically tied to Internet based services. Although a company may not be part of e-commerce, it may rely upon every day services for billing, time keeping, or communications that could be affected.

One thing is for certain: we should not expect Net Neutrality to be reinstated any time soon. The Trump administration successfully pushed for its repeal and has shown no sign of recanting. Past Congressional attempts to regulate the area have not been fruitful, and it is unlikely that any new legislation will fare better in the current political climate.

Many groups have already voiced their intent to sue the FCC over the new regulations: the Internet Association (representing tech firms like Google and Facebook), public interest groups, and the New York Attorney General, to name a few. But, whether or not they will be successful is far off and yet to be seen. The concept of net neutrality issue is no stranger to litigation. In fact, the net neutrality regulations were borne out of case law deeming the regulations of non-common carriers unconstitutional. Because the common carrier classification of Internet service providers was repealed, precedential case law implies that any attempts to regulate these companies in the future would be unconstitutional. Only time and, unfortunately, more lawsuits will tell if Internet service providers will be able to cherry pick users and broadband speeds for a fee. We will continue to monitor this progression and provide updates as it unfolds.


[1] Protecting and Promoting the Open Internet, 80 FR 19738-01; 47 C.F.R. §8.1, et. seq.

[2] 47 C.F.R. §§ 8.5, 8.7, and 8.9.

[3] Verizon v. F.C.C., 740 F.3d 623 (D.C. Cir. 2014).

By Brian R. Carnie, David M. Whitaker, Robert C. Schmidt, and Angela W. Adolph

The IRS is starting to notify employers of their potential liability under Obamacare’s employer mandate for the 2015 calendar year.  According to the IRS, the determinations are based on the employer’s 1094-C/1095-C informational returns filed for the 2015 tax year as well as individual tax information filed by the employer’s employees.

The IRS will notify an employer of potential liability for the employer shared responsibility payments (“ESRP”) via Letter 226J, which will set forth the preliminary calculation of the penalties owed and will provide detailed instructions for either paying or contesting all or part of the same.  Employers will have just 30 days from the date the notice was mailed to respond before the IRS will issue a notice and demand (i.e, a bill) for payment.  Failure to timely respond will result in waiver of your defenses to payment.

Given the timing of these initial notices, many employers will receive these during the holidays when offices are short-staffed or perhaps even closed.  The notices may or may not be directed to the appropriate contact person previously identified on the 1094/1095-C forms.

Employers would be wise to take the following immediate steps:

  1. Notify your administrative staff that any letters from the IRS should be forwarded immediately to a designated person for review. Have someone monitor the incoming mail if you will be closed for any significant period of time.
  2. Gather copies of your company’s 2015 ACA reports so that you can quickly compare your entries to that in any penalty notice you may receive.
  3. Make sure you have access to the data necessary to review any purported assessments that are indicated for one or more employees for 2015. If you relied on a third party vendor for reporting purposes, contact the vendor to see if and how they may be able to help and/or for access to their backup data.

The 2015 reports were confusing and there likely will be discrepancies and/or inaccuracies that need to be corrected, especially with the mandated use of indicator codes and the numerous transition relief rules/exceptions that applied in 2015.  You should also expect that one or more employees may have submitted false or inaccurate information when they filed their individual returns or applied for a subsidy on the exchange.  Don’t wait for receipt of the IRS penalty notice before taking the above steps.  You will have very limited time to review and gather lots of information.  We recommend that you get your lawyer or accountant involved at the outset to fully protect your rights and IRS appeal options.

Kean Miller stands ready to help.