Ever since the U.S. Supreme Court overturned the physical presence nexus requirement for state sales and use taxes in South Dakota v. Wayfair, 138 S. Ct. 2080 (2018), taxpayers and practitioners have questioned the extent to which the Court’s holding applies to locally administered sales and use taxes. This question is often rooted in the Court’s statement in Wayfair that “States may not impose undue burdens on interstate commerce” and its reference to Pike v. Bruce Church, 397 U.S. 137 (1970), an earlier Supreme Court case which held that state laws that “regulat[e] even-handedly to effectuate a legitimate local public interest . . . will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” The Wayfair Court’s discussion of this test—known as the Pike balancing test—coupled with its conclusion that the South Dakota tax did not impose an “undue burden” on interstate commerce based, in part, on South Dakota’s adoption of the Streamlined Sales and Use Tax Agreement has led some to question whether requiring taxpayers without a physical presence in the state—including remote sellers and marketplace facilitators—to register, file and pay hundreds, or even thousands, of locally-administered sales taxes might violate the Pike balancing test. On November 15, 2021, one taxpayer brought that question to the forefront in a complaint filed in U.S. District Court for the Eastern District of Louisiana, alleging that Louisiana’s system of locally administered sales taxes violates the Commerce Clause and the Due Process Clause of the U.S. Constitution by creating a discriminatory undue burden on interstate commerce. See Halstead Bead Inc. v. Louisiana, E.D.La. Case 2:21-cv-02106 (Complaint Filed Nov. 15, 2021).
The plaintiff, Halstead Bead, is a retailer with no physical presence in Louisiana. According to the facts of the complaint, which named the Secretary of Revenue and three Louisiana parishes as defendants, the plaintiff’s sales into Louisiana are primarily composed of “wholesale” sales rather than direct retail sales. The plaintiff also alleges that it takes active measures to ensure that its sales do not exceed Louisiana’s economic nexus threshold, because if it exceeded that threshold, it would be required to register and file returns in over 750 different parishes throughout the state, resulting in overly burdensome compliance costs. The plaintiff argues that the parish-by-parish remittance system in Louisiana is unconstitutional for several reasons. First, the plaintiff argues that although the Supreme Court held that the South Dakota statute at issue in Wayfair was constitutional, the Court’s decision was based, in part, on the many safeguards that the South Dakota statute contained. For example, South Dakota was and is a signatory to the Streamlined Sales and Use Tax Agreement (“SSUTA”), and the South Dakota statute provided for a single point of contact for registration and filing, uniform tax definitions, state-supplied software for registering and reporting, and a safe harbor for miscalculations if a taxpayer used that software. Louisiana’s local tax system, on the other hand, does not include any of the safeguards referenced by the Wayfair Court. Second, the plaintiff argues that the costs of complying with Louisiana’s local sales tax system were so great that they constituted a discriminatory burden on interstate commerce, in violation of Wayfair and Pike v. Bruce Church. Third, the plaintiff argues that because there is no reasonable relationship between Louisiana’s local sales tax system and the value derived by the plaintiff in Louisiana, the parish-by-parish remittance system violates the Due Process Clause.
Interestingly, this case comes immediately on the heels of the citizens of Louisiana voting down a proposed state constitutional amendment that would have required Louisiana to switch to a centrally-administered local sales tax registration and collection system.
Although it is in the very beginning stages of litigation, the outcome of the Halstead Bead case potentially has nationwide ramifications. Louisiana is not the only state that is attempting to require remote sellers and remote marketplaces to comply with a complex, decentralized registration and transaction tax reporting and remittance regime. For example, earlier this year the West Virginia Legislature passed Senate Bill 270 which requires marketplace facilitators (as defined for state sales and use tax purposes)to collect and remit the local hotel occupancy tax (“HOT”) authorized under Chapter 7, Article 18 of the West Virginia Code beginning January 1, 2022. See W.V. Code § 7-18-3(b), 4(b). S.B. 270 also incorporates the SUT economic nexus threshold into the HOT—that is, marketplace facilitators are required to collect and remit HOT if the marketplace facilitator makes or facilitates West Virginia sales on its own behalf or on behalf of one or more hotel or hotel operators equal to or exceeding either $100,000 in gross revenue or 200 separate transaction in a calendar year. See W.V. Code § 7-18-4(b). Notably, while S.B. 270 amended a state-level enabling statute, the HOT is administered at the local level in West Virginia, and there are over 100 different HOT taxing jurisdictions within the state. Thus, effective January 1, 2022, marketplace facilitators with economic nexus in West Virginia potentially face the obligation to register and begin collecting and remitting HOT in hundreds of different jurisdictions.
Some in state and local government also appear to recognize the risk that these taxing regimes may be deemed unconstitutional—a risk that appears even more tangible now that the Halstead Bead complaint has been filed. For example, the Colorado Municipal League, which operates in a state with notoriously burdensome compliance obligations with respect to its home rule charters, has recognized the litigation hazards associated with a decentralized system for locally administered taxes. Post-Wayfair, the Colorado Municipal League (“CML”) developed a Model Ordinance on Economic Nexus and Marketplace Facilitators “as part of a sales tax simplification effort.” The CML cautioned that home rule municipalities enforcing an economic nexus threshold, but not also participating in the CML’s single point of remittance portal and adopting the CML’s uniform language, faced an increased risk of challenge under Wayfair. Ultimately, if the Louisiana courts decide that subjecting taxpayers without a physical presence to a system of decentralized, locally administered taxes is unconstitutional, many other local tax systems would likely be implicated. In fact, in light of a growing number of states and localities that are attempting to subject remote sellers and marketplace facilitators to their locally-administered tax systems, taxpayers may want to consider whether there are other overly burdensome regimes that should be challenged through proactive litigation.
We will continue to monitor the Halstead Bead case as it progresses and keep you updated on SALT Savvy.
Contact the Authors: Lindsay LaCava, Nicole Ford, and Kelsey Muraoka