Contractual indemnities are important and valuable in the oil patch. When they are enforceable, they have the potential to end litigation completely or at least the financial burden for a particularly well-positioned indemnitee. But, with “anti-indemnity” statutes in play in several jurisdictions (including Louisiana), the enforceability of these indemnity provisions rely (barring exceptions) on the application of general maritime law.

It is a common practice to select general maritime law as the governing law in any oilfield MSA – at least within the Fifth Circuit – but simply saying it applies doesn’t actually make it so. As a result, jurisprudential tests have emerged to determine what law actually applies to torts depending on where the incident occurred, as well as to the contracts themselves. When the services provided under the contract are obviously maritime in nature, such as a contract for vessel support services, there is little to dispute. But, especially when there is a high-dollar potential exposure riding on the enforceability of an indemnity obligation, there have been persuasive arguments made on both sides of the maritime vs. state law debate governing contracts for other, less obvious, oilfield services.

Most recently, the US Fifth Circuit addressed this dispute over plugging and abandoning services (“P&A work”) on three wells in coastal Louisiana waters in In re: Crescent Energy Services, No. 16-31214 (5th Cir. July 13, 2018). Crescent agreed, amongst other things, to provide three vessels to perform the work and to indemnify Carrizo against any claims for bodily injury, death, or damage to property. One of Crescent’s employees was injured on one of Carrizo’s fixed platforms during the P&A work, and unsurprisingly, Carrizo’s indemnity demand from the resulting claim was denied by Crescent under the Louisiana Oilfield Indemnity Act. The district court, applying the former Davis & Sons test, found the contract between Carrizo and Crescent to be a maritime contract and granted summary judgment in favor of Carrizo on its indemnity claim.

In January, the US Fifth Circuit pared down its maritime contract test (from Davis & Sons) to focus on only two factors: (1) “is the contract one to provide services to facilitate the drilling or production of oil and gas on navigable waters?” and (2) “does the contract provide or do the parties expect that a vessel will play a substantial role in the completion of the contract?” In re Larry Doiron, Inc., 879 F.3d 568, 576 (5th Cir. 2018). Both factors must be affirmed before maritime law may be applied to the contract.

On the first factor, Carrizo asserted a creative and ultimately successful argument that P&A work is “part of the total life cycle of oil and gas drilling.” Because plugging and abandoning a drilled well is part of the agreement with the State of Louisiana to get an initial permit to drill, the US Fifth Circuit was persuaded that the contract for P&A work involved “the drilling and production of oil and gas.” The Court then re-iterated its departure from Davis & Sons and its concern about where the incident occurred. In Doiron, the US Fifth Circuit stated: “The facts surrounding the accident are relevant to whether the worker was injured in a maritime tort, but they are immaterial in determining whether the workers’ employer entered into a maritime contract.” Doiron, 879 F.3d at 573-74. The US Fifth Circuit is “no longer concerned about whether the worker was on a platform or vessel.” Rather, the question is whether the contract concerned the drilling and production of oil and gas on navigable waters.

On this point, Crescent’s insurers argued that Doiron’s analysis on the P&A work resulted in inconsistencies with other Fifth Circuit precedents finding that torts occurring on and during the construction of fixed, offshore production platforms on the OCS are generally not governed by maritime law. Also, wireline work – which comprises much of the P&A work – had also traditionally been found to not be a maritime activity. The Court declined the invitation to review those OCSLA cases: “We are not concerned here with those OCSLA issues of whether to borrow state law as surrogate federal law, which leads to analyzing whether maritime law applies of its own force, which requires determining the historical treatment of certain contracts. We do need to analyze, though, whether this is a maritime contract. Doiron now controls that endeavor.” But these statements do not make clear whether the rejection of the OCSLA cases was because Crescent Energy Services is not an OCSLA case itself, or whether that distinction no longer has a difference in oil and gas contract review.

The Fifth Circuit then quoted commentary from Professor David W. Robertson discussing contract disputes on the OCS: “If the contract is a maritime contract, federal maritime law applies of its own force, and state law does not apply. If the contract calling for indemnity is not a maritime contract, the governing law will be adjacent-state law made surrogate federal law by OCSLA § 1333(a)(2)(A).” Why bring this up if the Court is ignoring OCSLA cases on the grounds of distinction? The Court doesn’t directly clarify. Instead, it said the reference was “to show that Davis previously and Doiron now are performing the task of determining how to classify contracts.” It further stated that Davis (a Louisiana waters case) did not offend OCSLA cases, so neither does Doiron.

The Fifth Circuit seemed concerned about this argument though and the perception of the Court’s abandonment of long-standing precedent. Surely, this will be the continued topic of attack from potential indemnitors. In addressing those criticisms, the Court stuck with its more back-to-basics theme: “We are here classifying a contract for a certain purpose, a juridical activity that has been done consistently with the 1969 Rodrigue decision at least since our 1990 Davis decision. We en banc eliminated most of the factors, narrowing our focus, but we did not fundamentally change the task. Doiron is the law we must apply.” On the one hand, the Court’s statements seem to firmly reiterate that Doiron is the law going forward when analyzing the maritime nature of a contract regardless of the location of the work. But, the Court’s avoidance of the OCSLA issues and the narrowed “certain purpose” of their decision begs for more direct guidance from the Fifth Circuit on Doiron’s geographic reach.

The Fifth Circuit could have unequivocally proclaimed that the breadth of Doiron extended to OCSLA cases, in whatever capacity, if that were its intent; but it did not. So then, what is the expected effect of Doiron on those contract cases involving a controversy on the OCS, where OCSLA statutorily provides its own choice-of-law provision? Does Doiron actually supplant Grand Isle Shipyard, Inc. v. Seacor Marine, LLC, 589 F.3d 778 (5th Cir. 2009), since it called the case “un-useful” to its task? If the situs of the controversy is no longer appropriate, then it seems that Doiron may be the answer.

Grand Isle was a contractual application of test articulated in Union Texas Petroleum Corp. v. PLT Engineering, Inc., 895 F.2d 1043 (5th Cir. 1990) which starts by finding that the dispute arises on the OCS; otherwise, now, Doiron surely is the test. The second PLT factor determines whether the OCSLA choice-of-law provision applies by looking to see if federal maritime law applies of its own force. This is where Crescent’s insurers’ historical argument would come into play. To determine whether federal maritime law applies of its own force, the US Fifth Circuit: (1) identified the historical treatment of contracts such as the one at issue, and (2) applied Davis & Sons. It seems obvious that this factor will likely at least be revised to substitute Doiron for Davis & Sons. The less obvious question is whether the historical treatment factor is relevant at all going forward.

In Doiron, the Fifth Circuit criticized those “historical” opinions that “improperly focus[ed] on whether the services were inherently maritime as opposed to whether a substantial amount of the work was to be performed from a vessel.” Thus, it is possible that the second PLT factor simply becomes the Doiron test. But, if so, then that would effectively eliminate the necessity of the PLT test for OCS contract law disputes, because the Courts have long since acknowledged that the relevant application of Louisiana law to the contract does not conflict with federal law. If this analysis is correct then Doiron should be the standing legal test for the determination of applicable law in an oilfield contract regardless of the location of the work (OCS vs. State waters).

A comment the Fifth Circuit made in its analysis of another earlier issue seems to bolster that conclusion: “If the contract here is maritime, the fact that it was to be performed in the territorial waters of Louisiana does not justify causing the outcome of this lawsuit to be different than if the contract was for work on the high seas. Consistency and predictability are hard enough to come by in maritime jurisprudence, but we at least should not intentionally create distortions.” After lauding the directness of its new test in Doiron (notwithstanding their use of the unpredictably applied term “substantial role”), the Fifth Circuit could have assisted practitioners with a bit more directness in Crescent Energy Services.

Despite the historically non-maritime nature of P&A work in the Fifth Circuit, the outcome of Crescent Energy Services is not surprising given the necessity of the vessels used for the work. In that respect, this decision is consistent with the Fifth Circuit’s continued primacy – now, by way of the Doiron test highlighting its importance – of the “substantial role” that a vessel will play in the work being done under the contract. While the Fifth Circuit may have left a gap in its recent holdings for the next OCSLA-based contract dispute, we see no reason why Doiron would not be at least a part of that new analysis.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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).

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 the Admiralty and Maritime Team

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

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

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

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

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

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.

On January 18, 2019, the Louisiana Supreme Court denied the application for writ of certiorari.

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).