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Louisiana Gov. John Bel Edwards called three special legislative sessions to address a $650 million budget gap due to temporary tax measures expiring on June 30, 2018. In the second special session, Edwards signed H.B. 17, legislation that adopted an economic nexus standard contingent on the decision in South Dakota v. Wayfair, Inc.1
The new provision requires remote retailers to collect and remit sales and use tax when they have a specified amount of sales or number of transactions within the state.2
The sales thresholds for economic nexus mimic the thresholds of the South Dakota legislation that recently was considered by the U.S. Supreme Court in Wayfair
. At the close of the state’s third special session, on June 24, Edwards signed H.B. 10, which, among its provisions, extends the state’s “clean penny” sales tax rate that had been scheduled to expire on July 1, 2018, until June 30, 2025, and decreases the “clean penny” rate to 0.45%.3
H.B. 17: economic nexus contingent on Wayfair decision
H.B. 17, effective on June 12, 2018, and applicable to all taxable periods beginning on or after the date of the final ruling by the U.S. Supreme Court in Wayfair
, provides that the term “dealer” includes any person who sells for delivery into Louisiana tangible personal property, products transferred electronically, or services, and who does not have a physical presence in Louisiana, if during the previous or current calendar year either of the following criteria was met: (1) the person’s gross revenue for sales delivered into Louisiana exceeded $100,000 from sales of tangible personal property, products transferred electronically, or services; or (2) the person sold for delivery into Louisiana tangible personal property, products transferred electronically, or services in 200 or more separate transactions.4
In 2017, the legislature created the Louisiana Sales and Use Tax Commission for Remote Sellers within the Louisiana Department of Revenue for the administration and collection of sales and use tax imposed by the state and political subdivisions with respect to remote sales.5
Upon the contingency of a final U.S. Supreme Court ruling in Wayfair
, the Commission will “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 sales sourced to Louisiana on the uniform Louisiana state and local sales and use tax base established by Louisiana law. . . .”6
Until the establishment of the Commission, remote dealers must specifically collect the additional tax imposed by Louisiana on remote sales and file all applicable sales and use tax returns.7
Since enactment of the remote seller legislation, the Commission has released an information bulletin to remote sellers explaining Wayfair
, the Louisiana remote seller legislation, and the formation of the Commission.8
In the bulletin, the Commission noted that it was formed to serve as a single, state-level administrator for remote sales, and was tasked with promoting uniformity and simplicity for purposes of the sales tax. This was done as a means for Louisiana’s system to meet Commerce Clause standards other than substantial nexus, and was particularly important as Louisiana is not currently a member of the Streamlined Sales and Use Tax Agreement (SSUTA). In addition, the Commission confirmed that it will not enforce any sales and use tax collection obligation on remote sellers based on Wayfair
and the new economic nexus thresholds for tax periods prior to Jan. 1, 2019.9
H.B. 10: The ‘clean penny’ tax rate and other provisions
The so-called “clean penny” was originally enacted in Louisiana’s first extraordinary session of 2016, and imposed an additional 1% sales and use tax that applied regardless of any exclusions or exemptions except for those on a very limited list.10
H.B. 10 extends the state’s “clean penny” sales tax rate that was set to expire on July 1, 2018, until June 30, 2025. Effective July 1, 2018, the new legislation reduced the rate from 1% to 0.45%, which reduced the Louisiana state sales tax rate from 5% to 4.45%.
Other provisions of H.B. 10 include a sales and use tax exemption for manufacturing machinery and equipment,11
and the imposition of a sales tax at a 2% rate for business utilities.12
The legislation provides that certain exemptions, including the exemption for purchases of certain pollution control equipment, will sunset on June 30, 2018.13
In a year where more than $1 billion in temporary tax measures were set to expire, creating a $650 million budget gap, the most notable budgetary item came down to a “clean penny.” The 1% “clean penny” tax rate was set to expire on June 30, 2018. Despite multiple bills addressing the “clean penny” tax rate in the first two special legislative sessions, it took until the third special legislative session for a 0.45% tax rate compromise to be signed into law by Edwards. The renewal of the “clean penny” tax helps to reconcile a budget that was passed by lawmakers which contained about $500 million in spending that was unfunded.
While the clean penny legislation resolved an issue of state-specific import, Louisiana’s adoption of economic nexus is part of a national trend, as numerous states adopted similar legislation in the last couple of months. This legislation expands the state’s tax base by taxing remote retailers without placing an additional burden directly on Louisiana residents and businesses. In a year of a $650 million “fiscal cliff,” Louisiana’s effort to take advantage of a potential sales and use tax windfall is not surprising.
The Louisiana economic nexus legislation was enacted while Wayfair
was pending before the U.S. Supreme Court. It is no coincidence that the Louisiana economic nexus thresholds are virtually the same as the thresholds contained in the South Dakota statute at issue, and ultimately endorsed in Wayfair
. The Court overturned the physical presence requirement for substantial nexus. According to the Court, the conclusion that the South Dakota statute satisfied the Commerce Clause was supported by factors such as: (1) no retroactive application of the statute; (2) a safe harbor for limited sales; and (3) South Dakota’s adherence to the SSUTA. However, it is not clear whether states are required to satisfy all three of these factors under the Commerce Clause standards. It should be noted that the Court remanded the Wayfair
case to consider whether the South Dakota statute could be challenged on an alternative basis under the Commerce Clause. Thus, the constitutionality of the South Dakota legislation has not been finally determined.
Because Louisiana is not a member of the SSUTA, its sales tax system only satisfies two of the three factors mentioned by the Wayfair
Court. One of the major requirements of becoming a member of the SSUTA is having state-level administration of the sales tax. Under the SSUTA, sales tax must be remitted to a single state agency. The locally administered taxes at the parish and city levels create an obstacle for Louisiana to participate in the SSUTA, and therefore, a potential obstacle for the economic nexus standard to withstand legal challenge.
Retailers and service providers will need to remain cognizant of their activities in states that may create a collection and remittance responsibility via the application of the economic nexus thresholds, and carefully monitor and consider their out-of-state sales.
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