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 today, it could not have applied. Arguably, though, the law can still not be applied.
Louisiana’s Remote Seller (Online Retailer) Tax Regime Cannot Be Applied, And Likely Cannot Ever Be, Under Current Law
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.
It is necessary to note that late this evening 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 – which SB 1 appears clearly designed to do – must originate in the Louisiana House of Representatives. 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 Wayfairthat the South Dakota law is constitutional remains in effect, and limits the state’s powers to impose the tax on so-called 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 beenacted 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 salessourced 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 likely meets the Complete Auto test, in full, including 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 scrutiny under the Complete Autotest, because such a scenario would 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.
This article was authored by Kean Miller attorneys Jason Brown, Jaye Calhoun, and Willie Kolarik.