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.

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).

In recent years, the National Labor Relations Board’s joint employer standard has been in a state of flux, making it hard (if not impossible) for employers to feel like they can get a handle on this important standard and plan/organize/prepare accordingly. This week, we have again seen movement from the NLRB on the issue.

On June 5th, Chairman John Ring issued a letter to several U.S. Senators concerning the NLRB’s announcement that it plans to go through the notice and comment rulemaking process to address the joint employer conundrum. That letter may be found here.  In his letter, Chairman Ring confirmed that the “NLRB is no longer merely considering joint-employer rulemaking” but that a “majority of the Board is committed to in rulemaking.” The NLRB is working to issue a Notice of Proposed Rulemaking as soon as possible, and indicated that it will certainly be issued by this summer. Chairman Ring opined that notice-and-comment rulemaking offers the best vehicle to fully consider all views on what the joint employer standard ought to be, as compared to the NLRB’s traditional case-by-case adjudication. The letter stated that rulemaking is appropriate for the joint employer subject because it will allow the NLRB to consider the issue in a comprehensive manner and “will enable the Board to provide unions and employers greater ‘certainty beforehand as to when [they] may proceed to reach decisions without fear of later evaluations labeling [their] conduct an unfair labor practice.’”

Consistent with the June 5th letter, the NLRB announced that it will not reconsider its order (Hy-Brand II) vacating the controversial ruling (Hy-Brand I) that most recently addressed the standard for joint employer status under the NLRA. Instead, the NLRB simultaneously released a separate decision and order, replacing Hy-Brand I, holding that Hy-Brand and Brandt were commonly owned and managed companies constituting a “single employer;” thereby avoiding the need to address Hy-Brand’s status as a joint employer. Therefore, the Hy-Brand I definition of joint employer (holding that businesses can be joint employers of a group of employees only if each has exercised direct and immediate control over those employee) will not be the NLRB’s controlling standard, at least for the time being. The NLRB’s full docket activity for the Hy-Brand proceedings may be found here.

So where do we stand until the NLRB completes the rulemaking process you ask? The Hy-Brand II decision to vacate Hy-Brand I effectively restored the NLRB’s 2015 decision in Browning Ferris Industries of California, Inc. which expanded the definition of joint employment beyond those employers that exercise direct control and authority over employees’ terms and conditions of employment to include employers that share indirect or potential control over a group of employees.

And now we wait for the completion of the rulemaking process to see where the pendulum will land—whether a Hy-Brand I or Browning Ferris type definition will carry the day.

A recent story from New Orleans demonstrates that overtime violations can be costly.  In the case of a New Orleans bakery that paid employees for overtime at their straight time rate and paid some workers in cash, the issue cost the employer over $125,000 in back wages alone.  Pursuant to the federal Fair Labor Standards Act, non-exempt employees are entitled to a half-time premium for all hours worked over 40 in a workweek (i.e., employees must receive “time and a half” for overtime hours).  In the case of the New Orleans bakery, the employees were paid their regular rate of pay for the hours worked, but were not paid the half-time premium for their overtime hours, a major issue under the FLSA.  For more on the story, click here and here.

Over the last two or more years, the Louisiana Department of Revenue (the “Department”) has audited oil and gas producers operating in the state for severance-oil tax compliance.  Of the completed audits, a significant number have resulted in a formal assessment, and many of those assessments are the subject of current, ongoing litigation. The Department has advanced a number of theories of liability over the course of the audits and in support of the assessments, but the basic theory underpinning each assessment has been its determination that pricing formulas contained in industry-standard oil purchase agreements improperly include deductions or adjustments for transportation.

Recently, in separate cases, the Louisiana Board of Tax Appeals and Louisiana’s First Circuit Court of Appeal (on appeal from a Nineteenth Judicial District ruling in favor of the taxpayer), threw cold water on the Department’s theories, finding that the pricing formulas at issue were appropriate and that the taxpayers paid the appropriate amount of taxes on oil sales.  We have been made aware, however, that the Department will appeal the Louisiana Board of Tax Appeals’ decision and may seek the Louisiana Supreme Court’s review of the appellate court’s decision. Importantly, the Department has given every indication that it will continue ongoing audits and even initiate new audits under the theories of liability at issue in the cases.

If you are an oil producer currently under audit or likely to be audited, you will have the right to challenge any assessment through the Louisiana Board of Tax Appeals or state district court, but any challenge must be filed within sixty (60) days of the date of the assessment.  For information on your options contact Jason R. Brown at Kean Miller at (225) 389.3733 or jason.brown@keanmiller.com.

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

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

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

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

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

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

On May 30, 2018, the Environmental Protection Agency (EPA) published proposed revisions to the Risk Management Program (RMP) rules that would largely undo changes to the (stayed) final rule published on January 13, 2017.  See 83 Fed. Reg. 24850 (May 30, 2018).  Although not a complete one hundred eighty degree U-turn, the revised proposed rule pretty much guts most of the 2017 changes.  Rather than spending time parsing out what stayed from what was removed, I thought it would be more useful to consider the underlying message.

  • EPA has no ongoing obligation to modify RMP. EPA notes that section 112(r) of the Clean Air Act (CAA) contains four provisions that require EPA to promulgate regulations.  EPA believes that they have “met all of its regulatory obligations under section 112(r) prior to promulgating the RMP Amendments rule.”  83 Fed. Reg. at 24856 – 57.  EPA further explains that changes to the rule are allowed, but such changes are discretionary.
  • Discretionary changes to RMP should be coordinated with OSHA and reflect costs. The RMP prevention program requirements, from its initial promulgation in 1966 until the 2017 (stayed) rulemaking, were effectively identical to the Occupational Health and Safety Administration’s (OHSA) Process Safety Management (PSM) program rules.  This is not surprising as EPA is obligated to coordinate with OSHA pursuant to CAA section 112(r)(7)(D).  “While EPA has amended the Risk Management Program several times after 1996 without corresponding OSHA amendments to its PSM standard, these changes did not involve the prevention program provisions, thus precluding any need for coordination with OSHA.”  83 Fed. Reg. at 24864.  Although the EPA recognizes that “at times divergence between the RMP rule and the PSM standard may make sense given the agencies’ different missions,” the 2017 amendment “constitute a divergence from that longstanding practice.”   Further, most of the anticipated costs associated with the new rule are aligned with OSHA preventive program requirements.  Given the cost, coupled with the understanding that changes to the RMP program are discretionary, EPA action is a policy choice.  Id.
  • An enforcement-led approach is preferred to over-regulation. EPA notes that only 8% of RMP covered facilities had reportable accidents and that 2% of the facilities reported 48% of such incidents.  See 83 Fed. Reg at 24872.  Accordingly, instead of burdening all facilities with new rules, EPA believes that it would be more efficient to fulfill the goal of RMP through an enforcement-led approach.  Accordingly, “the RMP Amendments missed the opportunity to better target the burdens of STAA [Safer Technology and Alternatives Analysis] to the specific facilities that are responsible for nearly half of the accidents associated with regulated substances at stationary sources subject to the RMP rule.” 83 Fed. Reg. at 24872.
  • Reporters of RMP incidents beware. See above.
  • Process safety information (PSI) may have no regulatory purpose other than information required to conduct a Process Hazard Analysis (PHA). The 2017 Amendment added a requirement that process safety information be kept up to date.  This requirement was removed without any explanatory discussion.  Arguably, by adding and removing this requirement, the only obligation is to have up-to-date PSI at the beginning of a PHA.  If so, any violation should be a one-time, single-day, violation.
  • Information release should be limited to that which is necessary for developing and implementing emergency response plans. Perhaps just semantics, but EPA modified the requirement to share information with local emergency planning and response organizations from relevant information to information necessary to develop and implement (fearing that the original language was too open-ended).    See 83 Fed. Reg. at 24853.  Arguably, the only true “relevant” reason to request such information would be as needed to develop and implement response plans.  The revised proposed language will accomplish the goal and is less ambiguous.
  • EPA should not require information “synthesis” that connect-the-dots for intended bad actors. Whereas information may be accessible to the public through multiple sources, added hazard may occur through compiling the information in a single source.  See 83 Fed. Reg. at 24867.

A public hearing on the proposed revisions to the RMP rules is planned for June 14, 2018 and comments must be submitted on or before July 30, 2018.

On May 30, 2018, EPA finally promulgated modifications to its 2015 definition of solid waste rule (2018 DSW Rule).[1] EPA promulgated the 2018 DSW Rule in response to the D.C. Circuit’s decision on EPA’s 2015 definition of solid waste rule.[2]

EPA’s revisions to the definition of solid waste rule essentially implement the vacaturs ordered by the D.C. Circuit, as discussed in my prior blog on this issue.[3] That is, EPA deleted the verified recycler exclusion (VRE) and reinstated the transfer based exclusion (TBE); retained the emergency preparedness and response requirements and expanded containment requirements and applied these to the TBE; and removed the mandatory 2015 version of Legitimacy Factor 4[4] and replaced it with the 2008 version of Legitimacy Factor 4, which must be considered but is not mandatory. EPA also removed the prohibition that had made certain spent petroleum catalysts (K171 and K172) ineligible for the TBE.

In addition, EPA provided some clarity on the applicability of rules in states such as Louisiana that have been authorized to administer and enforce the state hazardous waste program in lieu of the federal program and that adopted rules similar to the VRE and the 2015 definition of legitimate recycling but have not yet been authorized for them. According to EPA, the authorization status established prior to the adoption of the state counterpart rules remains in effect and the vacaturs and subsequent reinstatement of various provisions of the prior rules “will result in state provisions that are broader in scope than the federal program as it pertains to the specific vacated provisions.”[5]

Bottom line:  Louisiana’s VRE and mandatory 2015 version of Legitimacy Factor 4 may apply and be enforced by the Louisiana Department of Environmental Quality – but not EPA – within Louisiana.

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[1] 83 Fed. Reg. 24664 (May 30, 2018).

[2] American Petroleum Institute v. EPA, 862 F.3d 50 (D.C. Circuit 2017), as clarified on rehearing, 883 F.3d 918.

[3] See,  https://www.louisianalawblog.com/environmental-litigation-and-regulation/impact-louisiana-d-c-circuits-decision-definition-solid-waste-rule/

[4] The product of the recycling process must be comparable to a legitimate product or intermediate.

[5] 83 Fed. Reg. 24664, 24666. Because the state program provisions are broader in scope than the federal program, they are not part of the federally authorized program and are not federally enforceable. 40 CFR 271.1(i)(2) and RCRA Online Document 14848.

To say that privacy regulations have been in the news lately is a bit of an understatement. The European Union’s new General Data Protection Regulation has had privacy professionals and businesses scrambling to meet the May 25, 2018 deadline for compliance. While the GDPR may be dominating the national news circuits, the EU is not the only one making changes to their privacy laws. The Louisiana Legislature has passed, and Governor Edwards signed on May 20, 2018, amendments to Louisiana’s Database Security Breach Notification Law (Louisiana Revised Statutes 51:3071, et seq.), at Act 382.[i] Act 382 becomes effective on August 1, 2018.

A.  Expansion of “Personal Information”

The first major change is the expansion of the definition of “personal information” under the statute. Louisiana previously defined personal information for the purposes of the breach notification law as an individual’s first name or initial and last name in combination with any of the following additional data elements when the name or data element is not encrypted or redacted: (1) social security number; (2) driver’s license number; or (3) account number, credit or debit card number, in combination with the applicable password, security code, or access code that would allow access to an individual’s financial account. Act 382 adds the following additional pieces of data to this list: state identification card number; passport number; and “biometric data.” “Biometric data” is defined as “data generated by automatic measurements of an individual’s biological characteristics” and includes markers such as fingerprints, voice prints, eye retina or iris, or other unique biological characteristics that are used to authenticate an individual’s identity when accessing a system or account. In this change, Louisiana joins a growing trend of expanding personal data beyond ID numbers and financial accounts into more unique and personal identifiers. At the time of this writing, at least twelve other states have enacted laws that include biometric markers as personal information.[ii]

B.  New Data Protection Requirements

Act 382 imposes new requirements on Louisiana businesses to protect personal information. These changes affect companies that conduct business in the state of Louisiana or own or license computerized data that include personal information of Louisiana residents and for agencies that own or license computerized data that includes Louisiana residents’ personal information (collectively “Subject Entities”). Under Act 382, Subject Entities will be required to implement and maintain “reasonable security procedures and practices appropriate to the nature of the information” to protect the personal information from breaches, destruction, use, modification, or disclosure.

Subject Entities will also be under new requirements for data destruction. Subject Entities will be required to take reasonable steps to destroy or arrange for the destruction of records within its custody or control containing personal information that is no longer to be retained by the Subject Entity by shredding, erasing, or otherwise modifying the personal information to make the information unreadable or undecipherable.

C.  Data Breach Notifications

In the event of a breach, the revisions to Section 51:3073 have now implemented a time limit within which Subject Entities must notify the Louisiana residents’ whose data was affected. Originally, the statute provided that notice must be done “in the most expedient time possible and without unreasonable delay.” The revised statute retains that language, but now includes that notification must be made no later than 60 days from the discovery of the breach. The revisions maintain the original exception to this rule in the case of delay necessitated by the needs of law enforcement or measures necessary to determine the scope of the breach, prevent further disclosures, and restore the reasonable integrity of the data system. However, if a Subject Entity does delay notification for one of these reasons, it must provide written notice to the Louisiana Attorney General of this delay and the reasons for same within the 60 day period. Upon receipt, the Attorney General will grant a reasonable extension of time for notification.

The revisions preserve the ability for a Subject Entity to investigate whether the breach is reasonably likely to cause harm to Louisiana residents, and, if the breach is unlikely to cause harm, the Subject Entity is not required to notify affected Louisiana residents of the breach. This situation commonly arises when the breached data was encrypted, provided the encryption key was not also breached. If the Subject Entity decides not to report under this section, then the entity must document that decision in writing and retain the written decision and supporting documentation for five years from the date of discovery of the breach. The Attorney General can request a copy of this documentation and the written determination, and the Subject Entity must provide the documentation within thirty days of the Attorney General’s request.

Last, violations of these provisions are now deemed an unfair trade practice under R.S. 51:1405(A). During testimony on this bill, the Attorney General’s Office commented that their Office has already been treating violations as an unfair trade practice, so this language only codifies their current practice.

D.  General Comments

Many of the changes made to Louisiana’s data security laws echo similar revisions in other states. Several states have opened their data security laws to expand beyond notification procedures to now requiring “reasonable” security practices and destruction of outdated data. Unlike Alabama’s new data security law, Louisiana’s revised law does not define what security practices qualify as “reasonable”, which may cause some concern amongst Subject Entities looking for guidance when updating their security practices.

It is possible that the new revisions may lead to increased litigation for data breaches. The Attorney General currently is and remains the primary enforcer of the data breach laws; however, private rights of action are permitted. Codifying violations of these statutes as an unfair trade practice may lead to an increase in suits filed under these statutes. However, a potential plaintiff will likely still be required to provide that he or she was injured by the breach, which has been a difficult task for plaintiffs that have not suffered an identity theft.

The new law becomes effective on August 1, 2018. Until that time, Subject Entities that have not recently reviewed their data security policies and practices may want to consider an update.

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[i] Act 382 of the 2018 Regular Session can be found at the following address: https://www.legis.la.gov/legis/ViewDocument.aspx?d=1101149.

[ii] These states include, but are not limited to Arizona, Delaware, Illinois, Iowa, Maryland, Nebraska, New Mexico, North Carolina, Oregon, South Dakota, Wisconsin, and Wyoming.