State and Local Taxation

By Jaye A. Calhoun, Jason R. Brown, and William J. Kolarik, II

In Smith v. Robinson, La. S. Ct., Dkt. No. 2018-CA-0728 (Dec. 5, 2018), the Louisiana Supreme Court held that the Texas franchise tax (also known as the “Texas margins tax”) was an income tax for purposes of Louisiana’s credit for tax paid to another state and held that a 2015 law that limited the credit was unconstitutional because it impermissibly discriminated against interstate commerce.  In Smith, the Louisiana Supreme Court struck down Act 109 of the 2015 Regular Legislative Session, which amended La. Rev. Stat. Ann. 47:33 (the “Credit Statute”).  Louisiana law taxes residents on income earned both within and without Louisiana but, prior to revision, the Credit Statute allowed a credit against Louisiana tax for “net income tax” paid to another state.  The credit prevented Louisiana taxpayers from being subject to income tax more than once on the same income.  The relevant portions of Act 109 limited the credit in two ways.  First, Act 109 provided that the credit was only available against taxes paid to another state if the other state offered a reciprocal credit to the state’s own residents transacting business in Louisiana.  Second, Act 109 capped the credit so that it could not exceed Louisiana income taxes paid.  The invalidation of Act 109 may present a refund opportunity for certain Louisiana resident individuals that either (1) had their credit limited by the cap in Act 109; or (2) paid Louisiana income tax on revenue from a flow-through entity that was subject to the Texas margins tax.

In Smith, the taxpayers were Louisiana residents who owned interests in several flow-through entities, specifically, limited liability companies and subchapter S corporations, with operations in Texas, Arkansas, and Louisiana.  The entities were subject to the Texas margins tax.  The taxpayers paid Louisiana individual income tax on the portion of each entity’s income that was subject to tax in Texas under protest and filed a lawsuit against the Louisiana Department of Revenue (the “Department”) seeking recovery of the tax.

In district court, the taxpayer filed a motion for summary judgment and asserted that Act 109 was unconstitutional because the Texas margins tax was a tax on income and, absent Act 109, the taxpayer would be entitled to a credit for the amount of Texas margins tax paid.  The taxpayer also asserted that Act 109 violated the dormant Commerce Clause because it resulted in a double tax on interstate income but not intrastate income.  The Department opposed the taxpayer’s motion for summary judgment, arguing that the Texas margins tax was not a tax on income because it contained both a net income component and a net capital component, which are not divisible.  The Department denied that Act 109 burdened interstate commerce because it was within the state’s power to regulate state income tax.  The district court granted the taxpayer’s motion of summary judgment and concluded that Louisiana First Circuit Court of Appeals decision in Perez[1], which held that the old Texas franchise tax was an income tax under Louisiana law, was dispositive of the income tax issue, and that the U.S. Supreme Court’s decision in Wynn[2] was dispositive of the constitutional issue.  The Department appealed to the Louisiana Supreme Court.

The Court first considered whether the Texas franchise tax was a net income tax within the meaning of the Credit Statute and held that it was, relying in part on the reasoning in Perez.  The Court also noted that the Department of Revenue had acquiesced in the Perez decision (LDR Statement of Acquiescence No. 03-001, Sep. 10, 2003) and had not revoked nor modified its acquiescence despite the 2006 revisions to the Texas franchise tax law.  In so holding, the Court also concluded that the calculation of taxable margin was essentially an income tax.

With respect to the dormant Commence Clause, the Court also agreed with the trial court that Act 109 violates the Dormant Commerce Clause, specifically, the fair apportionment and discrimination prongs of Complete Auto.[3]  The Court held that Act 109 violated the external consistency test developed to analyze fair apportionment because Act 109 operates to ignore where a taxpayer’s income is generated and does not take into account whether the income has a relationship to the state.  The Court agreed with the taxpayers that Act 109 failed to apportion out-of-state income.  The Court also held that Act 109 discriminated against interstate commerce because it exposes one hundred percent of the interstate income of Louisiana residents to double taxation and because the cap on the credit caused a portion of the taxpayer’s out-of-state income to be subject to double taxation.

Implications

Any Louisiana resident individual that was previously subject to the limitations on the credit for taxes paid to other states should consider filing a refund claim.  In addition, any Louisiana resident individual doing business in Texas through a flow-through entity that paid Texas margins tax should review their returns and consider whether a refund claim is warranted.

While the case is not yet final, the recent decision in Bannister Properties[4], may limit the taxpayer’s ability to file a refund claim if a court concludes that the Department’s interpretation of the Texas margins tax was a mistake of law arising from the misinterpretation by the Department.  In that instance, it is possible that the Louisiana First Circuit Court of Appeals decision in Bannister Properties could limit the taxpayer’s ability to pursue the refund claim.

The issue in Bannister Properties was whether a taxpayer could file in the Board of Tax Appeals (“BTA”) for review of the Department’s denial of a refund claim arising from a mistake of law by the Department.   In Bannister Properties, the taxpayer filed a refund claim and a claim against the state for franchise taxes that were not paid under protest.  The taxpayer and the Department reached a settlement on the claim against the state but the legislature refused to appropriate the funds to pay the refund, so the taxpayer attempted to force the Department to pay the refund through the refund claim.  The refunds at issue were attributable to the invalidation of the Department’s regulation in UTELCOM.[5]  La. R.S. 47:1621(f) (the “Refund Statute”) appears to create a bar to a refund related to a mistake of law by the Department unless the taxpayer paid the tax under protest and filed suit to recover, or by appeal to the BTA in instances where such appeals lie.  According to Bannister Properties the phrase “appeal to the BTA in instances where such appeals lie” is limited to claims against the state and does not apply to appeals related to the denial of refund claims.  Bannister Properties will likely be appealed to the Louisiana Supreme Court because it has the potential to severely limit a taxpayer’s ability to obtain a refund for the overpayment of taxes caused by a mistake of law on the part of the Department.

While the scope of Bannister Properties is not yet clear and it is likely the decision will be appealed, the Department has indicated that it will not issue a refund claim related to the Smith case if the amount was not paid under protest.  Therefore, a taxpayer filing a new refund claim for a tax that was not paid under protest, should consider filing a protective claim against the state in the Louisiana Board of Tax Appeals in addition to a refund claim.  If successful, a claim against the state may only be paid by legislative appropriation.

For additional information, please contact: Jaye A. Calhoun at (504) 293-5936, Jason R. Brown at (225) 389-3733, or Willie Kolarik at (225) 382-3441.

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[1] Perez v. Secretary of Louisiana Department of Revenue, 731 So.2d 406 (La. App. 1st Cir. March 8, 1999).

[2] Comptroller of Treasury of Maryland v. Wynn, 135 S.Ct. 1787 (2015).

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

[4] Bannister Properties, Inc. v. State of Louisiana, Dkt. No. 2018 CA 0030 (La. Ct. App., 1st Cir., Nov. 2, 2018).

[5] UTELCOM, Inc. v. Bridges, La. Ct. App., 1st Cir., 77 So 3d 39 (2011) (Which held that La. Admin. Code 61:I.301(D) was invalid because it was promulgated based on a mistake of law due to the Department’s misinterpretation of the corporation franchise tax law.)

By Angela W. Adolph

Opportunity Zones (“OZs”) were added to the US Tax Code by the 2017 Tax Cuts and Jobs Act (“TCJA”).  OZs are economically-distressed communities where new investments, under certain conditions, may be eligible for preferential tax treatment. Communities are nominated by the states and approved by the Treasury Department as designated OZs.

OZs are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (“QOF”) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026.   If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain.  If held for more than 7 years, there is a 15% exclusion of the deferred gain.  Second, if investments in the QOF are held for at least ten years, investors are eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.  Importantly, investors do not have to live in the OZs in order to take advantage of the benefits; they need only invest a recognized gain in a QOF and elect to defer the tax on that gain.

Last week, the Treasury Department released the first set of proposed regulations and a related revenue ruling for OZs.   The proposed regulations provide for the types of gains that may be deferred, the timing to invest such gains in QOFs, and the mechanism for selecting deferral of such gains. The proposed regulations also address self-certification of the QOF, valuation of QOF’s assets, and identification of OZ businesses.

Revenue Ruling 2018-29 addresses issues related to the qualification of an existing building and land in an OZ as OZ Business Property (“OZBP”).  OZBP is tangible property used in a trade or business of the QOF (1) that is purchased by the QOF after December 31, 2017; (2) the original use of which commences with the QOF or the QOF substantially improves the property; and (3) during the QOF’s holding period, substantially all of the use of such property is in the OZ.  OZBP is treated as substantially improved by the QOF if, during any 30-month period beginning after the date of acquisition, additions to basis exceed the adjusted basis of such property at the beginning of such 30-month period.

The Revenue Ruling notes that, given the permanence of land, land can never have its original use in an OZ commencing with a QOF.  The Ruling then holds that, regarding an existing building located on land that is wholly within an OZ, the original use of the building in the OZ is not considered to have commenced with the QOF, and the original use requirement is not applicable to the land on which the building is located.  Second, substantial improvement to the building is measured by the QOF’s additions to the adjusted basis of the building. Finally, measuring substantial improvement to the building does not require the QOF to separately substantially improve the land upon which the building is located.

The Treasury Department and IRS anticipate providing additional information, including additional legal guidance, on this new tax benefit over the next few months.

By Angela W. Adolph

The Industrial Tax Exemption Program (ITEP) is a key tax incentive for manufacturers looking to expand or build facilities in Louisiana.  The property tax exemption is authorized in the Constitution and is administered by the Louisiana Department of Economic Development (LED).  Historically, exemption contracts were approved at the state level and manufacturers enjoyed ten years of 100% property tax exemption on eligible capital expenditures.  In 2016, Gov. John Bel Edwards issued two Executive Orders that upended the program by making local approval of the exemption a prerequisite to LED application and consideration, and reducing the number of years and percentage of exemption on eligible capital expenditures.

In early 2018, LED proposed revisions to reinstate much of the old ITE program.  Manufacturers once again enjoy ten years of exemption, but only as to 80% of property tax liability.  Additionally, LED regained initial approval authority, with local governmental entities having a short window for an “up or down” vote on any LED-approved project.  This allows for a more efficient process as applications will receive automatic approval if the local governmental entities take no action within the specified time.

The last few weeks have been significant for ITEP:  the Board of Commerce and Industry approved the first batch of exemption contracts under the new rules at its August 29th meeting.  And, on September 19th, the Louisiana Tax Commission approved new rules regarding reporting exempt property, including manufacturing establishments with ITEP contracts. Parish assessors are now required to classify ITEP property on their tax rolls and report the start/end date of any exemption contract, the fair market value and assessed value of exempt property, the exemption percentage and value of the exemption contract, and the amount of property tax subject to exemption.  Finally, LED has gone completely digital, and ITEP applications must now be submitted online through the Fastlane system.

By Jaye A. Calhoun, Jason R. Brown and William J. Kolarik, II

On Friday, August 10, 2018, the Louisiana Department of Revenue (the “Department”) released Remote Sellers Information Bulletin No. 18-001 (the “RSIB”).  The RSIB states that the Louisiana Sales and Use Tax Commission for Remote Sellers (the “Commission”) “will not seek to enforce any sales or use tax collection obligation on remote sellers based on United States Supreme Court’s decision in South Dakota v. Wayfair or the provisions of Act 5 [2018 La. Sess. Law Serv. 2nd Ex. Sess. Act 5 (H.B. 17)] as it relates to the expanded definition of “dealer” for any taxable period beginning prior to January 1, 2019.  In addition, the RSIB notes that Uniform Local Sales Tax Board will issue guidance to local sales and use tax collectors advising them not to seek retroactive application of the Wayfair decision.

In Wayfair, the United States Supreme Court held that physical presence in a state is no longer required before a state (or local, by implication) taxing jurisdiction may impose a use tax collection obligation on an out-of-state vendor.  But the Court also noted that a use tax collection obligation could constitute an undue burden on interstate commerce.  In so holding, the Court listed the characteristics of the South Dakota law at issue in Wayfair that may indicate that South Dakota’s law does not impose an undue burden on interstate commerce.  Those factors included: (1) a safe harbor to protect small sellers; (2) the lack of retroactive enforcement; and (3) South Dakota’s adoption of the Streamlined Sales and Use Tax Agreement (which, among other things, requires centralized collection, uniform definitions, simplified rate structures, access to sales tax software paid for by the state, and audit immunity for a seller using the state’s tax software).  The Court remanded the case to the South Dakota Supreme Court for a determination of whether South Dakota’s law created an undue burden on interstate commerce.

Act 274 (H.B. 601) of the 2017 Regular Session of the Louisiana Legislature created a 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.  The Commission was created to: (1) promote uniformity and simplicity in sales and use tax compliance in Louisiana, (2) serve as the single entity in Louisiana to require remote sellers to collect from customers and remit to the Commission sales and use tax on remote sales sourced to Louisiana, and (3) provide the minimum tax administration, collection, and payment requirements required by federal law with respect to the collection and remittance of sales and use tax imposed on remote sales.[1]  But the Commission was prohibited from acting unless the U.S. Congress enacted a federal law authorizing states to require a remote seller to collect and remit state and local sales and use tax on sales made into the state, which has not occurred.

Act 5 was passed, in part, to fix the Congressional action requirement in Act 274 by amending the definition of “federal law” to include a “final ruling by the United States Supreme Court” (which did not occur in Wayfair).  Act 5 also amended the definition of “dealer” to create a South Dakota-style economic nexus law.  But Act 5’s effective date was contingent on a final ruling by the United States Supreme Court in Wayfair that South Dakota’s law was constitutional, which, as mentioned, did not occur.

Despite the uncertainty of its authority to act, the Commission held its first meeting on June 29, 2018 and has continued to meet monthly.  The RSIB represents the first substantive official guidance issued by the Commission since Wayfair.

As noted above, the RSIB adopts a January 1, 2019, prospective enforcement date and encourages Louisiana localities to refrain from applying Wayfair retroactively.  The Department also notes that any remote seller who is not currently registered with the Department or a local sales and use tax collector can voluntarily register with the Department to begin collecting and remitting sales and use tax in accordance with the direct marketer return provisions in La. R.S. Sec. 47:302(K).  Finally, the RSIB notes that Louisiana’s notice and reporting requirements remain in effect for any remote seller to which those rules apply.

Implications

Louisiana’s decentralized sales and use tax regime does not conform in any measurable way with the factors outlined in the Wayfair opinion as significant in evaluating whether South Dakota’s law imposes an undue burden on interstate commerce.  And numerous Louisiana officials have indicated that Louisiana will not adopt the Streamlined Sales and Use Tax Agreement.  As a result, if Louisiana’s sales and use tax regime were applied to remote sellers as it currently stands it going to be very hard for tax collectors to argue that it does not create an undue burden on interstate commerce.

During its meetings, the Commission has indicated that it views the factors listed in the Wayfair decision as a roadmap and the Commission appears to be attempting to adhere to that roadmap.  For example, the Commission is currently researching software vendors certified by the Streamlined Sales Tax Project (the SSTP”) and the SSPT registration process.  But, as mentioned above, because the Wayfair decision was not a final decision by the Supreme Court, the Commission’s authority to act is simply not clear.  However, it is clear that that the Commission has no direct authority to binds Louisiana local tax collectors.

Nevertheless, it appears the Commission will continue to work towards finding a path that conforms Louisiana’s sales and use tax regime as closely as possible to the factors listed by the Court in Wayfair.  But as the January 1, 2019 date approaches, it is possible that rifts between the localities and the state may be revealed and those rifts may jeopardize the Commission’s mission.

A remote seller that sells goods into Louisiana should be mindful that Louisiana’s notice and reporting requirements remain in effect.  As a result, a remote seller that sells into Louisiana should carefully balance the business concerns related to complying with those requirements with the costs and business concerns of complying with the direct marketer return provisions.

Kean Miller is also aware that some parishes may be sending out post-Wayfair voluntary compliance notices.  Those notices request that the vendor register with the Parish under the Parish’s registration system and begin collecting and remitting tax.  While some vendors may be voluntarily registering with Louisiana localities, it should be noted that there may be a downside to voluntarily registering at this point, before the Commission’s work is complete.  For example, the Commission contemplates a single point of registration and return but if a remote vendor registers voluntarily, it may be stuck with filing individual returns for the foreseeable future in every parish where it has sales (as opposed to filing through the contemplated forthcoming uniform system) and the vendor may not be able to take advantage of any uniform guidance issued by the Commission.  Any taxpayer that receives a voluntary registration notice, or that is considering voluntary registration, should speak with their tax advisor before doing so.

For additional information, please contact: Jaye Calhoun at (504) 293-5936, Jason Brown at (225) 389-3733, or Willie Kolarik at (225) 382-3441.

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[1] La. R.S. Sec. 47:339.

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, and Willie Kolarik

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) or Willie Kolarik (225.382.3441).

 

 

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) .

Today, the Supreme Court of the United States issued perhaps the most significant and far-reaching decision affecting state sales and use tax collection since its Quill v. North Dakota decision in 1992.  The high court expressly overruled the Quill decision, stating that the decision’s “physical present rule…is unsound and incorrect.”  As a result of today’s ruling, each state is now generally free to require that online retailers having no physical presence in the state (i) register with the state for sales/use tax purposes; and (ii) collect sales/use tax on a retailer’s sales of products or services into the state.

Kean Miller’s SALT Team is undertaking an in-depth review of today’s Wayfair decision and will publish its analysis, including, specifically, the decision’s specific effect on Louisiana state and local sales and use taxes later today.

By Jaye Calhoun, Jason Brown and Willie Kolarik

In Camp v. Robinson, No. 10609D, (La. Bd. Tax App. June 13, 2018), the Louisiana Board of Tax Appeals (the “Board”) held that Louisiana’s Individual Net Capital Gain Exclusion applies to a multi-step transaction.  In so holding, the Board read more broadly the scope of the transactions to which the capital gain exclusion may apply and rejected the Louisiana Department of Revenue’s (the “Department”) narrow construction of the exclusion.

In Camp, the taxpayers sold the assets of their nonpublicly-traded Louisiana-domiciled business to a multi-national conglomerate in 2013.  The sale was structured as a tax-free reorganization under Internal Revenue Code Section 368.  As part of the reorganization, the taxpayers’ business received stock of the acquiring corporation and took a basis in that stock equal to the business’s basis in the assets sold.  As a result, no gain was immediately recognized on the sale of the business’s assets, instead the gain was deferred until the stock received in exchange for the assets was sold.

The acquisition agreement imposed a one-year holding period on the stock received by the taxpayers’ business.  Two years after the reorganization, the taxpayers’ business distributed a portion of the stock to the taxpayers and the individuals subsequently sold that stock and realized a gain on the sale.  On their 2015 individual income tax return, the taxpayers took the position that the gain they realized on the sale of stock qualified for the Net Capital Gain Exclusion, which permits a taxpayer to exclude gains recognized and treated for federal income tax purposes as arising from the sale or exchange of an equity interest in or substantially all of the assets of a nonpublicly traded business organization commercially domiciled in Louisiana.[1]

The premise of the taxpayers’ assertion was that the 2015 sale of the acquirer’s stock was one part of series of steps in a single transaction designed to facilitate the sale of the business.  In contrast, the Department viewed the sale as an isolated transaction and asserted that gain recognized on the subsequent sale of the acquirer’s stock did not “arise” from the sale of a nonpublicly traded Louisiana domiciled business because the acquirer was a publicly traded foreign company.

In ruling for the taxpayers, the Board first reviewed the language of the statute and concluded that if the transaction was viewed in isolation it must find in favor of the Department but if the transaction was viewed as one part of a sequence of steps in a single transaction the taxpayers should prevail.  Because the statute was ambiguous as to whether it applied to a multi-step transaction, the Board then reviewed the statute’s legislative history.  According to the Boardthe Louisiana legislature intended to remove the incentive for a Louisiana business owner to relocate to a state without a capital gains tax before selling a private business.  Accordingly, the Board could not discern a reason why the structure of a transaction as a tax-free reorganization should result in the revival of the incentive (to relocate) that the Legislature sought to eliminate.  For those reasons, the Board concluded that the taxpayers were entitled to claim the exclusion on the subsequent sale of the acquirer’s stock.

Although the Board held in favor of the Taxpayers on the substantive issue, the Board ultimately declined to grant the taxpayers’ motion for summary judgment.  The Board reasoned that f the additional gain attributable to the post-exchange appreciation of the acquirer’s stock was ineligible for the exclusion and the taxpayers did not establish the value of the consideration prior to that appreciation.  As a result, the Board determined there was an unresolved issue of material fact precluding summary judgment in the taxpayers’ favor.

Implications

While the decision may be appealed and while it is not binding on Louisiana courts, the Board’s holding in Camp does indicate how the Board may rule on similar issues and provides early guidance on how to view the capital gain exclusion in multi-step transactions.  The Board’s decision stands for the proposition that a taxpayer should have freedom to structure their affairs in a manner that best accomplishes their goals, while preserving the ability to claim the capital gain exclusion.  The Board’s decision is also significant because it looks to the intent of the legislation to preserve the objectives of the exclusion in the face of the most recent attempt by the Department to narrow the scope of the capital gain exclusion.

A taxpayer considering the sale of a Louisiana domiciled business should nonetheless tread cautiously.  While the Board’s decision in Camp suggests the availability of more freedom in determining the most appropriate structure of a sales transaction, the Department can be expected to continue to aggressively challenge these transactions as it continues to attempt to limit the scope of the capital gain exclusion.  That is, taxpayers considering the sale of a Louisiana business should be aware that the Department may challenge the applicability of the capital gain exclusion in reorganization transactions even if the exclusion clearly should apply.

For additional information, please contact: Jaye Calhoun at (504) 293-5936, Jason Brown at (225) 389-3733, or Willie Kolarik at (225) 382-3441.

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[1] La. R.S. Sec. 47:293(9)(a)(xvii) (Note that the legislature placed additional restrictions on the capital gain exclusion during 2016).