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Jamie C. Yesnowitz
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On Jan. 29, 2020, the Louisiana Supreme Court held in a 4-3 decision that an online marketplace was not a “dealer” required to collect and remit sales tax on third-party sales.1
In reversing the Louisiana Court of Appeal, the Supreme Court also determined that the online marketplace did not contractually assume the statutory obligation of the third-party retailers to collect sales tax from purchasers in connection with sales made through the online marketplace.
The taxpayer, Wal-Mart.com USA, LLC (“Wal-Mart.com”), operates an online marketplace where customers can buy products from Wal-Mart.com or third-party retailers. From 2009 through 2015, Wal-Mart.com reported its online sales in Jefferson Parish and remitted sales tax to the Louisiana Department of Revenue and the Jefferson Parish Tax Collector (Tax Collector). Wal-Mart.com did not include the sales made by third-party retailers through its online marketplace.
Following an attempted audit, the Tax Collector filed a Rule for Taxes, which is a summary proceeding, alleging that Wal-Mart.com had not collected sales tax on its sales in Jefferson Parish and did not provide the complete information on the sales transactions in the parish that were conducted for third-party retailers. The Tax Collector then sought estimated unpaid sales tax, interest, penalties, audit fees and attorney fees related to the online marketplace sales by third-party retailers. Wal-Mart.com responded that it was not the “dealer” in the third-party retail sales transactions and thus was not required to collect tax on these sales. Also, Wal-Mart.com filed a motion for a trial to consider the matter.
The trial court held that Wal-Mart.com qualified as a “dealer” for sales on its online marketplace by third-party retailers. As a result, Wal-Mart.com was responsible for collecting and remitting sales tax from sales by third-party retailers through its online marketplace. The trial court emphasized the contractual requirements that purchasers of third-party sales use Wal-Mart.com’s checkout system and that Wal-Mart.com was required to “collect all proceeds from such transaction.” Accordingly, the trial court found that third-party retailers were precluded from collecting sales tax directly from purchasers. Wal-Mart.com subsequently appealed this decision. On Dec. 27, 2018, the Louisiana Court of Appeal affirmed the trial court’s judgment.2
The Court of Appeal denied Wal-Mart.com’s application for rehearing on Jan. 16, 2019. The Louisiana Supreme Court granted Wal-Mart.com’s writ application filed on February 14, 2019, to consider whether Wal-Mart.com was obligated to collect and remit sales tax on sales by third-party retailers facilitated through the online marketplace. The Tax Collector filed a motion to dismiss and argued that the Louisiana Supreme Court did not have jurisdiction to consider the matter.
Tax Collector waived compliance with summary proceeding requirements
The Louisiana Supreme Court began its opinion by parsing through the procedural issues raised by the Tax Collector. The Court denied the Tax Collector’s motion to dismiss that alleged the Court lacked jurisdiction because Wal-Mart.com did not comply with the statute authorizing the collection of unpaid taxes by using an expedited summary proceeding.3
The Tax Collector initiated this collection action under the statutory summary proceeding provisions, which explicitly prohibit rehearings.4
If Wal-Mart.com’s application for rehearing with the Court of Appeal was impermissible, its writ application with the Supreme Court would have been untimely.5
Accordingly, the Tax Collector argued that the Supreme Court should have dismissed the writ application for lack of jurisdiction. Wal-Mart.com contended that an application for rehearing was permissible because the actions of the parties, trial court and appellate court destroyed the summary nature of the proceedings and converted it to an ordinary proceeding.
In rejecting the Tax Collector’s argument that the Court lacked jurisdiction, the Court noted that “there were numerous acts of noncompliance with various provisions” of the summary proceeding statute, but the Tax Collector did little to hasten the collection of unpaid taxes or ensure that this case received preferential treatment by the courts. Although most of the acts of noncompliance did not originate with the Tax Collector, he never objected to the manner in which the case proceeded through the courts and many times consented to Wal-Mart.com’s requests to proceed in a manner inconsistent with the statute. According to the Court, the Tax Collector implicitly converted the summary proceeding to an ordinary proceeding by waiving his right to demand strict compliance with the summary proceeding statute. Furthermore, the Tax Collector did not show that any harm resulted from the limited delay caused by Wal-Mart.com’s request for a rehearing. Therefore, the Court rejected the Tax Collector’s motion to dismiss.
Online marketplace was not a dealer
Reaching the substantive aspects of its decision, the Supreme Court thoroughly examined whether a marketplace facilitator came under the Louisiana statutory definition of a “dealer”6
that would be responsible for collecting and remitting sales tax on the sales made by third-party retailers through its online marketplace. The Court acknowledged that while a “dealer” includes a wider group of people than sellers, a “dealer” generally is a responsible party in the underlying transaction. In the instant case, the actual participants in the sale are the purchaser and the third-party retailer that actually sells the goods. An online marketplace is a facilitator of the sale rather than a party to the underlying transaction. Furthermore, the Court determined that the statutory language indicated that only one dealer can be required to collect sales tax from the purchaser. The Court explained that “[i]n a retail sale, ‘the dealer’ is the seller–here, the third party retailer that is transferring title and physical possession of its own property to its purchasers.”
According to the Court, the expansion of the statutory definition of “dealer” in 1990 to include regular solicitors of business by distributing catalogs or advertising in the jurisdiction “did nothing to change the meaning of the expression ‘the dealer’ in the context of a ‘sale at retail’ in terms of its application to parties of the underlying transaction–the seller and the purchaser.”7
The statute established nexus for certain out-of-state sellers and was not intended to expand the definition of “dealer” to include more than sellers that own the property being sold and are parties to the underlying sales transaction. The Court concluded that “there is no indication the legislature intended to tax intermediaries that are only tangentially involved in [the] sales transaction, such as a marketplace facilitator relative to sales by third party retailers.” The Court noted that the Department’s regulations supported this interpretation.
The Court also noted that special legislation was enacted to impose a sales tax collection responsibility on third-party auctioneers.8
If this type of third-party facilitator is a “dealer,” there would have been no need to enact legislation imposing a legal obligation on third-party auctioneers. Because Wal-Mart.com simply facilitated sales, like an auctioneer, the Court concluded special legislation would be required to address the obligation of an online marketplace to collect sales tax on the sales of third-party retailers. Absent similar legislation for online marketplaces, double taxation could result if both online marketplaces and third-party retailers are required to collect sales tax on the same transaction. The Supreme Court held that the lower courts legally erred in finding that Wal-Mart.com is a “dealer” relative to the sales by third-party retailers conducted through its online marketplace.
Online marketplace was not contractually required to collect tax
In reversing the lower courts, the Supreme Court held that Wal-Mart.com did not contractually assume through the Marketplace Retailer Agreement the obligation of the third-party retailers to collect and remit sales tax. Under the contractual agreement between Wal-Mart.com and third-party retailers, the third-party retailer consistently was designated “the seller of record,” with purchases from third-party retailers being made through the online marketplace’s checkout system that collects “all proceeds from such transactions.” The online marketplace collected sales tax for third-party retailers that request the service, but third-party retailers were solely responsible for any sales tax liabilities. The Court noted that some third-party retailers did not engage the marketplace facilitator to collect sales tax on their behalf. After Wal-Mart.com collected the proceeds and related sales tax, such amounts were held in escrow until remitted to third-party retailers, less the referral fee owed for using the online marketplace. Under the agreement, third-party retailers are “solely responsible for remittance of all taxes required to be paid under all applicable Law” to the proper taxing authorities. The Court emphasized that Wal-Mart.com never remitted sales tax on third-party sales directly to tax collectors.
Two dissenting opinions separately expressed disagreement with the Court’s substantive and procedural approach. In the first dissent, the chief justice explained that she would have found Wal-Mart.com responsible for collecting and remitting the taxes from the third-party retailers on its online marketplace. According to the chief justice, an expansive definition of “dealer” would clearly apply to Wal-Mart.com’s online marketplace. The chief justice noted that “Wal-Mart.com has exclusive control and enforceable rights relative to each sales transaction.” Also, the chief justice was concerned that the Marketplace Retailer Agreement provided that Wal-Mart.com only will collect sales tax if requested by the third-party retailer. Under the agreement, Wal-Mart.com was the sole party with the ability and opportunity to collect sales tax from the purchasers for all marketplace sales transactions, and transmitted the sales tax to the third-party retailer rather than the tax collector. The chief justice was troubled that the agreement operated as a means to promote and facilitate sales tax avoidance.
Two justices joined in a second dissent, stating that they would grant the Tax Collector’s motion to dismiss because Wal-Mart.com did not timely file its writ application to the Supreme Court under the summary proceeding statute. The dissent noted that the actions Wal-Mart.com used to support its argument that the summary proceeding was converted to an ordinary proceeding were initiated by Wal-Mart.com or the lower courts, not the Tax Collector. Also, during the course of the proceedings, Wal-Mart.com expressly recognized the matter as being conducted in summary fashion. The dissent opined that the Court should find that Wal-Mart.com waived any objection to procedural deviations from the summary proceeding requirements and conclude that the summary proceeding was not converted to an ordinary proceeding in this case. Because the summary provisions do not permit a rehearing, the dissenting justices would have held Wal-Mart.com’s writ application not to be timely filed, with the Court lacking jurisdiction to consider the case.
The Louisiana Supreme Court’s highly anticipated decision reversing the lower courts and holding that Wal-Mart.com was not responsible for collecting and remitting sales tax for third-party retailers during the tax periods at issue has potentially significant effects for businesses that participate in marketplace facilitator activities. As the first decision by a state high court to consider marketplace provider or facilitator sales tax collection obligations, it might influence the thinking of the courts addressing similar issues in other states involving tax periods prior to the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc.9
For example, a case concerning the obligation of a marketplace facilitator to collect sales tax from third-party retailers in the absence of a marketplace facilitator law currently is pending in South Carolina. In Amazon Services
, the South Carolina Administrative Law Court held that an online marketplace facilitating sales for third-party merchants was required to collect sales tax on sales made to South Carolina customers in the first quarter of 2016.10
It stands to reason that the South Carolina Court of Appeals, which is currently evaluating Amazon Services
on appeal, will at least consider the Louisiana Supreme Court’s approach to determine whether it should uphold the Administrative Law Court’s decision. The Louisiana and South Carolina decisions may go a long way in informing other states as to whether they will pursue collection and remittance requirements on marketplace providers for pre-Wayfair
periods that remain open under the statute of limitations.
The Louisiana Supreme Court’s decision also could have consequences down the road for the substantial majority of states that have directly imposed sales tax collection and remittance duties on marketplace providers following Wayfair
. Due to the fact that these provisions only recently have been enacted and are not consistent from state to state, there still are many unanswered questions regarding the scope and application of the marketplace provider concept. For example, the term “marketplace provider” is not well-defined in some states, and there is some uncertainty as to whether the marketplace provider, third-party retailer, or other party is responsible for sales tax collection within the marketplace when the marketplace provider and third-party retailer both satisfy the sales tax nexus thresholds. The Louisiana Supreme Court’s insistence that there only can be one “dealer” required to collect sales tax for a single transaction highlights the need for clearer rules on how to resolve conflicts when more than one party may be responsible for sales tax collection. The marketplace provider rules as adopted in many jurisdictions may pose significant obstacles to proper compliance in the case where the party ultimately designated as liable for the sales tax may not have as much information concerning the sale than another party to the transaction.
For all of these reasons, this decision also might influence marketplace provider legislative efforts in the relatively few states that have not adopted such provisions to date, including Louisiana. While Louisiana has expanded the statutory definition of “dealer” to include remote sellers that satisfy certain sales thresholds in the state in response to Wayfair
marketplace provider legislation has not been adopted to date. One would expect the Louisiana legislature to strongly consider how to address this issue in the state’s 2020 legislative session, with a fresh court decision on the topic possibly informing the statutory language and collection requirements that will be used.
Finally, query whether the U.S. Supreme Court might have a further role to play here. Because the U.S. Supreme Court did not specifically consider marketplace provider sales tax collection requirements in Wayfair
, the overall validity and operation of these requirements remains somewhat uncertain. Currently, the Wal-Mart.com
decision is the highest level of state judicial authority concerning marketplace providers. The state is likely to seek review of this case by the U.S. Supreme Court. The probability of the Court considering this particular case might not be especially high, based partly on the fact that the issue concerns tax periods prior to the Court’s Wayfair
decision. However, a case targeting the validity of marketplace provider statutes enacted following Wayfair
may have a greater probability of being considered by the Court, particularly by a party that feels it is being unduly burdened by the proliferation of these provisions.
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