Jamie C. Yesnowitz
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On Dec. 27, 2018, the Louisiana Fifth Circuit Court of Appeal affirmed a trial court judgment finding a taxpayer liable for sales tax on transactions involving third-party retailers which were hosted by its online marketplace.1
The court held that the taxpayer is statutorily classified as a “dealer” for purposes of the third-party sales, and is therefore responsible for collecting sales tax.
The taxpayer, Wal-Mart.com USA, LLC (“Wal-Mart”) operates Walmart.com, an online marketplace that lists for sale both Wal-Mart inventory and goods sold by third-party retailers. Under the standard Marketplace Retailer Agreement between Wal-Mart and each third-party retailer, the third-party retailer is the seller of record and is responsible for providing certain information for each product sold, including the product name, description, price, and image.
Customers using the marketplace are able to place orders to purchase goods from the third-party retailers using the Walmart.com checkout system, with Walmart.com collecting all of the proceeds. Subsequently, Walmart.com transmits the order information electronically to the third-party retailer who is solely responsible for fulfillment of the order, including packaging and shipping the goods to the customer. The third-party retailer is also responsible for customer service, including all cancellations, returns, and refunds. Walmart.com receives fixed referral fees for its role in facilitating the sales from the third-party retailers, as defined in the agreement. Items purchased from a third-party retailer may not be picked up at or returned to a physical Wal-Mart store.
The terms of the agreement stipulate that the third-party retailer is solely liable for any tax liabilities, including sales and use taxes. An option is available for Walmart.com to collect the applicable taxes, with the third-party retailer retaining responsibility for remitting the collected taxes to the proper government agencies.
In filing Jefferson Parish Quarterly Sales and Use Tax Returns from 2009 to 2015, Wal-Mart reported and remitted tax on taxable sales made by Walmart.com to customers located in Jefferson Parish. However, Wal-Mart did not report or remit tax on sales made by third-party retailers on Walmart.com. In a sales tax audit for this period, the Jefferson Parish Tax Collector determined that additional sales tax was owed by Wal-Mart for its sales involving third-party retailers on Walmart.com.
The Tax Collector filed a Rule for Taxes, and the trial court rendered judgment in favor of the Tax Collector for the uncollected taxes involving sales of third-party retailers.2
Wal-Mart appealed to the Circuit Court.
Circuit Court holding
The sole issue considered by the Circuit Court was whether the trial court correctly determined that Wal-Mart constituted a dealer under Louisiana law. The Louisiana statutes require that sales tax “shall be collected by the dealer
from the purchaser or consumer.”3
La. Rev. Stat. Sec. 47:301(4) defines “dealer” in pertinent part to include:
Every person who engages in regular or systematic solicitation of a consumer market in the taxing jurisdiction by the distribution of catalogs, periodicals, advertising fliers, or other advertising, or by means of print, radio or television media, by mail, telegraphy, telephone, computer data base, cable, optic, microwave, or other communication system.4
The focus of Wal-Mart’s argument was that it could not be considered a “dealer” because it was not the seller in the transactions at issue. The court, however, determined that the legislature deliberately and unambiguously imposed collection obligations on “dealers,” which is broadly defined and encompasses more than just sellers.
In determining that Wal-Mart constituted a “dealer,” the trial court found that the Walmart.com marketplace enables the third-party retailers to reach new customers. The trial court further found that the marketplace brings retailers and customers together, facilitates retailers gaining new customers, facilitates transactions and payment processing, takes on risks of fraudulent activity, and advises/ensures that retailers’ products are found by potential new customers. As a result of these activities, the trial court found that Walmart.com “engaged in regular or systematic solicitation” of the Jefferson Parish consumer market, and therefore qualified as a dealer.
Importantly, the Circuit Court classified the trial court’s conclusion as a finding of fact, and not a finding of law. While the Appellate Court would afford little deference to trial court’s findings of law, findings of fact, as the Circuit Court explained, may only be overturned if the appellate court finds them to be manifestly erroneous. As a result, the Circuit Court further explained that the question before it was:
[N]ot whether the trier of fact was right or wrong, but whether the factfinder’s conclusion was reasonable. If the factual findings are reasonable in light of the record reviewed in its entirety, a reviewing court may not reverse even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently.5
The Circuit Court concluded that the trial court’s classification of Wal-Mart as a dealer was reasonable and therefore not manifestly erroneous.
Notably, Wal-Mart also argued to the Circuit Court that imposing a sales tax obligation on Walmart.com for sales made by third-party retailers “violates federal law and is discriminatory.” The Circuit Court, however, did not weigh this argument because this challenge had not been raised at the trial court level.
This Circuit Court decision could have substantial and immediate implications for marketplace providers facilitating sales to Louisiana customers, and also raises several additional considerations.
Immediate impact to Walmart.com and other marketplace providers
Specifically, this decision establishes precedent for the other parishes located within the Fifth Circuit to assess Wal-Mart for uncollected tax on sales made by third-party retailers on Walmart.com.6
It also opens the door for these parishes, and possibly the state of Louisiana, to assess similar taxes on marketplace providers that have not been collecting tax on third-party sales.
Additionally, based on the Court’s reasoning, other transaction facilitators could also qualify as dealers. For example, payment platforms such as Square and Stripe arguably help facilitate sales and serve to increase sellers’ customer bases. Accordingly, an aggressive taxing authority could assert that these types of facilitators also help in regularly and systematically soliciting a consumer market.
Potential action by other jurisdictions
Other jurisdictions could be emboldened by the ruling to seek tax on third-party marketplace sales on a similar basis. Many states have enacted marketplace facilitator legislation that requires marketplace providers to collect sales tax on sales by third-party sellers. On one hand, states may view the rollout of these laws as a substitute for having to pursue sales tax through the use of an expansive construction of the term “dealer,” making this ruling less consequential. On the other hand, this case may be seen as a novel method for states to assess tax on sales that predate the marketplace facilitator laws, or as a method for taxing authorities in states without marketplace facilitator laws to pursue these taxes. Notwithstanding whether this case will spur states to seek tax on third-party marketplace sales, the ruling may be viewed as a prime opportunity for local tax compliance auditors to consider.
Obligations of third-party sellers using marketplace platforms
Further, the decision raises questions regarding the role of third-party sellers. Since the Fifth Circuit considers marketplace providers to be dealers for third-party sales, does that mean the third-party sellers are not dealers and are therefore not responsible for collecting tax on their sales? While it would not be unreasonable for third-party sellers to reach this conclusion, the Court, by distinguishing between “sellers” and “dealers” seems to suggest that multiple parties could be dealers with respect to a single transaction. Because third-party sellers often provide product information to the marketplaces (e.g., names, descriptions, images, prices, etc.), fulfill orders, ship inventory to customers, and perform customer service functions, one could conclude that the third-party retailers, like the marketplace providers, also regularly and systemically solicit consumer markets, and therefore qualify as dealers.
Further review of the issues
Wal-Mart has appealed this decision, petitioning for an en banc
rehearing. It will be interesting to see if the en banc
request is granted, and if so, whether this issue is viewed as a question of law or fact, and what standard of review it deems appropriate. Because the Circuit Court’s review was based on a standard of manifest error, the facts as initially determined by the trial court were not re-examined. In fact, the Circuit Court specifically pointed out that under the standard of manifest error, it could affirm a decision with which it substantively disagrees.
Finally, commentators have suggested that the federal arguments raised by Wal-Mart related to the Internet Tax Freedom Act (“ITFA”).7
Specifically, a question remains as to whether it is discriminatory to apply tax to online marketplaces when the tax would not be applied to owners of physical marketplaces such as malls. Because the ITFA issue was not addressed by the Court, practitioners may look to two pending Illinois cases to see if this question will be addressed by the courts.8
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