A U.S. District Court in Louisiana recently dismissed a remote online seller’s constitutional challenge of Louisiana’s sales and use tax assessment and collection system.1 Due to the burden of complying with numerous Louisiana local sales and use tax rates, the remote seller challenged the tax scheme as unconstitutional in violation of the Commerce and Due Process Clauses of the U.S. Constitution. Under the federal Tax Injunction Act (TIA), the court determined that it lacked subject matter jurisdiction to hear the case because the remote seller could pursue a plain, speedy and efficient remedy in Louisiana state court.
The remote seller, an Arizona corporation, sells jewelry-making supplies to wholesale and retail customers located in many states, including Louisiana. Because all the remote seller’s employees and inventory are located in Arizona, it does not have a physical presence in Louisiana. The remote seller challenged Louisiana’s sales and use tax laws because they require remote sellers to collect sales tax from many local jurisdictions that may have different tax rates.
Louisiana law requires a remote seller to collect and remit sales and use tax if its annual gross revenue from Louisiana sales exceeds $100,000 or it annually completes 200 or more separate transactions in the state.2 After a remote seller exceeds one of these thresholds, it is required to register with the Louisiana Sales and Use Tax Commission for Remote Sellers.3 This Commission is established within the Louisiana Department of Revenue and performs the sales and use tax administration and collection functions for remote sellers.4 The local sales and use tax rates differ by parish and political subdivision, but the Commission is the sole collector of sales and use taxes for remote sellers.5 Based on the address where the goods or services are shipped, the remote seller collects tax from the retail customers at the appropriate rate, and remits the amount to the Commission every month.
The remote seller in this case has never met the Louisiana sales or transactional thresholds and is not currently subject to the laws that it challenged. According to the remote seller, it deliberately stopped its sales in Louisiana before reaching the thresholds each year because of the anticipated burden of complying with the numerous local tax rates. In November 2021, the remote seller filed suit in federal court against the Louisiana Secretary of Revenue and sales tax administrators in various parishes. The remote seller argued that the parish-by-parish requirements of the sales and use tax laws violate the Commerce Clause by discriminating against and unduly burdening interstate commerce, and the Due Process Clause by lacking any reasonable relationship with their value.
The remote seller sought a declaratory judgment that certain parish-by-parish requirements, constitutional provisions, and state laws are unconstitutional, both on their face and as applied to the remote seller. Also, the remote seller sought a permanent injunction to prevent the state and parishes from enforcing local sales and use tax registration and reporting requirements against remote sellers. The sales tax administrators responded that the federal court lacked subject matter jurisdiction because the remote seller did not have standing and because the TIA and the doctrine of comity precluded jurisdiction.6
Tax Injunction Act
The TIA provides that federal “district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”7 The court explained that the “TIA acts as a broad restriction on federal suits that impede the assessment, levy, or collection of any tax under state or local law.”8 The tax administrators argued that the court did not have jurisdiction under the TIA to hear the remote seller’s challenge of the Louisiana sales tax assessment and collection system because there is a plain, speedy and efficient remedy in state court. The remote seller replied that the TIA did not apply to this case because it challenged the regulatory requirements of the sales and use taxes rather than the taxes themselves.
Federal Court lacked subject matter jurisdiction
The court held that it did not have subject matter jurisdiction under the TIA to consider the remote seller’s challenge of Louisiana’s sales and use tax assessment and collection system. Under Federal Rule of Civil Procedure 12(b)(1), “[a] case is properly dismissed for lack of subject matter jurisdiction when the court lacks the statutory or constitutional power to adjudicate the case.”9 If a court determines that it does not have subject matter jurisdiction, it must dismiss the case.10
Requested relief would enjoin, suspend or restrain the assessment, levy or collection of tax
In considering the application of the TIA, the court first determined that granting the relief that the remote seller requested would enjoin, suspend or restrain the assessment, levy or collection of Louisiana sales tax from remote sellers. The remote seller argued that it was challenging the regulatory burdens rather than the payment of taxes, but the court explained that the “question under the TIA is whether the relief requested would ‘enjoin, suspend or restrain the assessment, levy or collection’ of a state or local tax.”11 The court concluded that granting the injunctive relief the remote seller requested “would permanently halt the registration of remote sellers with the Commission and the State’s ability to receive sales and use tax remittances.”
According to the court, the U.S. Supreme Court’s decision in Direct Marketing Association v. Brohl failed to support the remote seller’s argument that the TIA did not apply to the Louisiana challenge.12 In Direct Marketing, the U.S. Supreme Court considered a constitutional challenge of a Colorado law that required retailers that did not collect Colorado sales or use tax to notify the customers that they had use tax liability and to report tax information to the customers and the Colorado Department of Revenue. The Court determined in Direct Marketing that the TIA did not prevent the suit from proceeding because the challenged notice and reporting requirements occurred before the assessment, levy and collection of the tax. Thus, striking down the notice and reporting requirements would not stop the assessment or collection of state sales tax. This case differed from Direct Marketing, since the remote seller’s requested injunctive relief would act to stop Louisiana sales and use tax collections from all remote sellers. Therefore, the court held that the TIA applied with respect to both the remote seller’s permanent injunction and declaratory judgment requests.
Plain, speedy and efficient remedy available in state court
The court next determined that the TIA applied because the remote seller had an efficient remedy available in the Louisiana courts. The tax administrators argued that Louisiana provides a plain, speedy and efficient remedy through the Louisiana Board of Tax Appeals. The remote seller replied that Louisiana does not provide an adequate remedy because out-of-state businesses cannot obtain preemptive relief but must first pay or remit the taxes.13 The court acknowledged that Louisiana’s payment-under-protest statutes would not provide the remote seller with an avenue to challenge the enforcement of a state or local tax because they apply to taxpayers, not a collector of the tax like the remote seller. However, the court concluded that Louisiana provides a plain, speedy and efficient remedy to the remote seller by allowing a declaratory judgment action seeking to invalidate the sales and use tax laws at issue.14 The court held that it lacked jurisdiction under the TIA to hear the case because Louisiana law provides an adequate remedy by allowing an action for declaratory judgment. Because the court did not have jurisdiction to hear the matter, it was required to dismiss the case.
The court agreed with the tax administrators that the remote seller’s suit also was barred by principles of federal comity. As explained by the U.S. Supreme Court, “[t]he comity doctrine counsels lower federal courts to resist engagement in certain cases falling within their jurisdiction.”15 This limitation has particular strength when lower federal courts are asked to determine the constitutionality of the state taxation of commercial activity.16 Furthermore, the U.S. Supreme Court has stated that “the comity doctrine is more embracive than the TIA.”17 In the instant case, the court determined that Louisiana courts are in a better position to consider the constitutionality of Louisiana’s tax laws. After reiterating that the TIA precludes jurisdiction over this case, the court explained that even if it had jurisdiction, it would not consider the case due to comity principles.
After South Dakota v. Wayfair, Inc. was decided by the U.S. Supreme Court in 2018, states followed the lead of South Dakota and required remote sellers with sufficient economic contacts with in-state customers to register, collect and remit sales and use tax.18 The Wayfair decision rested in part on the belief that compliance with a remote seller rule would not be unduly burdensome, particularly in states that had adopted the Streamlined Sales and Use Tax Agreement (SSUTA). This case is noteworthy because the remote online seller filed a lawsuit in federal court to challenge a non-SSUTA state that unlike most other states has retained a decentralized system requiring remote sellers to account for locality-specific distinctions. Specifically, Louisiana’s complex sales tax system requires the state’s 64 parishes to set their own sales tax rates, and local school districts also set their own rates. Although the Louisiana Sales and Use Tax Commission for Remote Sellers provides a central entity to which remote sellers may remit the sales tax, remote sellers must continue to track, collect and remit the numerous local taxes. This burden is particularly heavy for small remote retailers that may lack the resources to handle locality-based requirements. The burden was enough in this case for the remote seller to declare that it avoided doing business in Louisiana once it approached the economic thresholds under which it would be required to begin collecting and remitting sales and use tax. Despite these concerns, the federal district court never reached the substantive question of whether Louisiana’s sales and use tax system was unconstitutionally burdensome, as it relied upon the TIA to disclaim jurisdiction of the case.
The Louisiana legislature has made attempts to simplify the sales tax collection system, but progress in this area has been limited. In 2021, nearly 52% of Louisiana voters rejected a constitutional amendment that would have created the State and Local Streamlined Sales and Use Tax Commission that would have been tasked with providing streamlined electronic filing and remittance of all sales and use taxes.19 Two days after Louisiana voters rejected this proposal, this litigation ensued. The legislature considered a similar bill this year that would have placed a constitutional amendment on the November 2022 ballot that would streamline the sales tax system, but following the dismissal of the case, the legislature adjourned before concurring on the bill.20 It should be noted that the legislature recently passed two bills, S.B. 9521 and S.B. 235,22 that are designed to simplify the sales tax system by creating a multi-parish audit program for local sales tax, and authorizing parishes to contract with the Louisiana Sales and Use Tax Commission for Remote Sellers for the collection of local sales and use tax.
This decision is consistent with several cases from 2021 in which claims raised by remote sellers were dismissed by federal courts.23 Remote sellers are likely to argue that the pattern of federal courts dismissing sales tax controversies is inequitable. Historically, many taxpayers desired to take state and local tax controversies, especially those with constitutional implications, into federal instead of state courts. Based on recent developments, however, the TIA has become a more prevalent obstacle for sales tax cases to proceed in federal court. Challengers to state and local tax policies in federal court may face even longer odds from getting a substantive hearing based on the court’s comments regarding the doctrine of comity, which allows a court an additional discretionary exit that potentially could be utilized in matters in which the TIA is not implicated. It remains to be seen whether the next step taken in this litigation occurs in an appeal to the federal circuit court, or to a Louisiana trial court.
1 Halstead Bead, Inc. v. Lewis, U.S. District Court for Eastern District of Louisiana, No. 2:21-cv-02106, May 23, 2022.
2 LA. REV. STAT. ANN. § 47:301(4)(m).
3 LA. REV. STAT. ANN. § 47:340.G.(6)(b).
4 LA. REV. STAT. ANN. § 47:339.A. The Commission is intended to “[s]erve 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 . . ..”
5 LA. REV. STAT. ANN. § 47:340.G.(2). The law provides that the Commission is designed “[t]o serve as the central, single agency to which remote sellers shall make state and local sales and use tax remittances.”
6 In addition, the sales tax administrators argued that the remote seller failed to state a claim on which relief could be granted. The court ultimately did not address this argument following consideration of the jurisdictional issue.
7 28 U.S.C. § 1341.
8 “State taxation, for § 1341 purposes, includes local taxation.” Hibbs v. Winn, 542 U.S. 88, 100 n. 1 (2004).
9 Home Builders Association v. City of Madison, 143 F.3d 1006, 1010 (5th Cir. 1998).
10 FED. R. CIV. P. 12(h)(3).
11 Emphasis in original. The court cited Direct Marketing Association v. Brohl, 575 U.S. 1, 7 (2015); CIC Services, LLC v. Internal Revenue Service, 141 S. Ct. 1582, 1590 (2021).
12 575 U.S. 1 (2015).
13 See LA. REV. STAT. ANN. §§ 47:1576 and 47:337.51 for Louisiana’s payment under protest statutes.
14 LA. CODE CIV. P. art. 1871 provides that “[c]ourts of record within their respective jurisdictions may declare rights, status, and other legal relations whether or not further relief is or could be claimed.” LA. CODE CIV. P. art. 1872 provides a “person interested under a deed, will, written contract or other writing constituting a contract, or whose rights, status, or other legal relations are affected by a statute, municipal ordinance, contract or franchise, may have determined any question of construction or validity arising under the instrument, statute, ordinance, contract, or franchise and obtain a declaration of rights, status, or other legal relations thereunder.”
15 Levin v. Commerce Energy, Inc., 560 U.S. 413, 421 (2010).
18 138 S. Ct. 2080 (2018).
19 Louisiana Amendment 1, rejected by Louisiana voters at the Nov. 13, 2021 election.
20 H.B. 681, amended version passed by Senate on June 2, 2022, but House failed to concur prior to adjournment on June 6, 2022.
21 S.B. 95, sent to governor for approval on June 3, 2022.
22 S.B. 235, sent to governor for approval on June 8, 2022.
23 A Pennsylvania federal court rejected a challenge from a group of remote online sellers to Pennsylvania’s assertion of sales tax nexus on out-of-state businesses having in-state inventory through the Fulfillment by Amazon (FBA) program. Online Merchants Guild v. Hassell, U.S. District Court for the Middle District of Pennsylvania, No. 1:21-cv-00369, May 28, 2021. In a similar case, an Illinois federal district court rejected an Illinois online seller’s motion for a preliminary injunction against the California Department of Tax & Fee Administration (CDTFA) for seizing the seller’s bank account in an effort to collect prior California sales taxes allegedly owed on the basis of inventory stored in Amazon warehouses located in California. Under the TIA, the federal court lacked subject matter jurisdiction to hear the case. Rubinas v. Maduros, U.S. District Court for the Northern District of Illinois, Eastern Division, No. 1:21-CV-00096, Sep. 16, 2021. See GT SALT Alert: Federal court passes on California sales tax suit. In another case, a California federal court rejected a motion for preliminary injunction against the CDTFA for pursuing back sales taxes from sellers with inventory located in Amazon fulfillment centers in the state. The court determined that it lacked subject matter jurisdiction to hear the case under the TIA. Online Merchants Guild v. Maduros, U.S. District Court for the Eastern District of California, No. 2:20-cv-01952, Oct. 13, 2021. For further information, see GT SALT Alert: Federal court dismisses California sales tax suit. To date, none of these cases have been considered by state courts.
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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