In a case examining the extent to which the 14th Amendment Due Process Clause limits a state assertion’s of jurisdiction over an out-of-state taxpayer, the Louisiana Court of Appeal for the First Circuit held that the Court lacked personal jurisdiction over an out-of-state corporation for income and franchise tax purposes because the corporation’s contacts with the state were not sufficient to satisfy the minimum contacts requirement of the Due Process Clause.[1] For a number of years, Louisiana and other states have aggressively pursued economic nexus[2] arguments against nonresident entities, and these efforts increased after the U.S. Supreme Court overturned the physical presence requirement for satisfying the substantial nexus standard of the dormant Commerce Clause in Wayfair.[3]

When the U.S. Supreme Court overturned its decision in Quill, which bifurcated the Due Process Clause and Commerce Clause nexus requirements, the extent to which the Due Process Clause would continue to limit aggressive attempts to tax an out-of-state business because less clear. The Court’s decision in Jeopardy Productions demonstrates that the Due Process Clause can effectively be used by nonresident entities to fight excessively aggressive assertions of taxing jurisdiction.

In Jeopardy Productions, the Court dismissed the Louisiana Department of Revenue’s (the “Department”) petition to collect corporation income and franchise taxes from a California company, Jeopardy Productions, whose only contact with the state was that it indirectly derived revenue from intangible property used in Louisiana. Jeopardy Productions owned the intangible property related to the Jeopardy! television game show — for example, the Jeopardy! logo. Jeopardy Productions licensed the distribution rights to the television show to CBS Television Distribution Group (“CBS”), licensed trademarks to International Gaming Tech (“IGT”) for use on gaming machines around the country, and licensed similar marks to other manufacturers and distributors for use on merchandise marketed in a number of states. In turn, CBS sold the distribution rights to television stations, including seven in Louisiana, and IGT manufactured gaming machines that used the logo — placing several of them in truck stops and other locations in Louisiana.

In determining whether Jeopardy Productions satisfied the minimum contacts requirement of the Due Process Clause, the court noted that Jeopardy had no intentional or direct contact with Louisiana. Its only contact with Louisiana was indirectly through the activities of unrelated third parties that contracted with CBS and IGT. Jeopardy’s licensing agreements gave CBS and IGT the sole authority to determine where and with whom they contracted to license or distribute the game show and related merchandise. Also, the licensing agreements specifically stated that Jeopardy Productions was not in a partnership, joint venture, or agency with CBS or IGT. The Court held that this indirect contact with Louisiana was too attenuated to provide the Court jurisdiction over Jeopardy Productions and dismissed the Department’s petition.

The issue of when a Louisiana court has personal jurisdiction over an out-of-state taxpayer has been percolating for many years.[4] While the Department has long attempted to assert taxing jurisdiction over out-of-state businesses with tenuous connections to Louisiana, in recent years it has become more aggressive in issuing assessments and filing lawsuits seeking to collect tax from out-of-state businesses with no direct contacts with the state. Since Wayfair, out-of-state businesses have increasingly refused to appear voluntarily in these cases and a number of nonresident entities have filed exceptions objecting to the lack of personal jurisdiction. These cases are pending.

In Jeopardy Productions, the nonresident entity’s contacts with Louisiana were indirect because the relevant activity was conducted by unrelated third parties. It is important to note, however, that the Court’s holding in Jeopardy Productions should not be interpreted to imply that the Court would have personal jurisdiction over the company in the event the parties were related. Louisiana law recognizes the separate nature of related business entities and there is no indication that a direct or indirect ownership interest in a lower-tier affiliate is sufficient to satisfy the Due Process Clause minimum contacts standard.

Louisiana’s status as a separate-entity jurisdiction continues to frustrate the Department, which seems to be trying to change the law or narrow the limitations the Due Process Clause places on state taxation by taking aggressive audit positions— such as ignoring the existence of separate legal entities — in an attempt to shift the state’s tax burden to out-of-state businesses. At present, the Department is regularly issuing assessments premised on the assertion of jurisdiction over a number of out-of-state businesses that simply own an interest in an affiliate doing business in Louisiana. If the Jeopardy Productions decision stands, it should give the Department pause regarding whether to continue issuing such assessments. The Department is likely to file a writ with the Louisiana Supreme Court. How the Louisiana Supreme Court reacts may give nonresident businesses some indication of the extent to which the judiciary is willing to place limitations on the department’s increasingly aggressive attempts to assert taxing jurisdiction over nonresidents.

In memoriam:  Alex Trebek – 1940-2020

For additional information, please contact: Jaye Calhoun at (504) 293-5936, Willie Kolarik at (225) 382-3441 or Michael McLoughlin at (504) 620-3351.

******************************************************************************************************************************************************************************************************************

[1] Robinson v. Jeopardy Productions Inc., 2019-1095 (La. App. 1st Cir. Oct. 21, 2020) ___ So. 3d ___ (slip op.).

[2] Economic nexus is the position taken by some states that a nonresident entity can be subjected to tax because it earns revenue in the state, regardless of whether the nonresident has any physical presence in the taxing state]

[3] South Dakota v. Wayfair Inc., 585 U.S. ___, 138 S. Ct. 2080 (2018), overruling the physical presence for commerce clause nexus upheld in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). For a detailed discussion of Wayfair and its implications, see Jaye Calhoun and William J. Kolarik II, “Implications of the Supreme Court’s Historic Decision in Wayfair,” State Tax Notes, July 9, 2018, p. 125.

[4] See, e.g., Bridges v. AutoZone Properties, 900 So. 2d 781 (2005) (nonresident real estate investment trust required to pay corporate income tax on rental payments made by retail stores in Louisiana); Secretary v. GAP (Apparel) Inc., 886 So. 2d 459 (La. App. 1st Cir 2004) (nonresident corporation required to pay Louisiana corporate income tax on royalties received from affiliate for the use of intangibles in Louisiana).