Halstead Bead Inc. v. Louisiana: A Serious Economic Nexus Threat or Minor Blip?

Even those with only a passing familiarity with sales tax understand that the tax rules and the associated compliance requirements are complex in the state of Louisiana (economic nexus only further added to that complexity). There is an argument to be made among practitioners, with strong challenges from states like Alabama and Colorado, that Louisiana is the toughest when it comes to sales tax. The underpinning for this dubious distinction lies in the unique combination of:

1. A complex tapestry of tax statutes, rules and regulations
2. A decentralized collection of county (parish), city and district tax rates
3. Home-rule localities that can (and do) have product taxability rules that vary from those applicable at the state level
4. Separate local filing, payment and remittance requirements
5. The inability to readily obtain local rate and reporting changes 

The current Louisiana economic nexus landscape

With these known and well understood challenges, it’s not surprising that Louisiana’s journey towards imposing a tax collection and remittance responsibility on remote sellers would be rockier than for states which only have a subset of the above-mentioned complexities. At first, the state DOR briefly offered its “Direct Marketer” simplification to remote sellers, allowing them to collect tax based on one consolidated state and local rate. Louisiana ultimately decided that effective July 1, 2020, companies would be obligated to collect standard state and local rates, without the benefit of any rate simplification, once they crossed $100,000 gross sales or 200 separate transaction thresholds.

However, it absolutely cannot be said that Louisiana failed to offer meaningful compliance simplifications to qualifying remote sellers. Although the Direct Marketer rate remains unavailable, Louisiana established the “Sales and Use Tax Commission for Remote Sellers.” Through the Commission, remote sellers are afforded:

1. A simplified process to register at the parish level
2. The ability to electronically file a single tax return covering both state and local taxes
3. A portal enabling a single payment for both state and local taxes   

While this new functionality does not address the complexity underlying Louisiana sales tax law, the proliferation of local rates, and the challenge of intersecting taxing jurisdictions, it’s entirely fair to suggest that existing of the Commission makes tax compliance considerably simpler than for their physical nexus brethren.

The new legal challenge

Events took a dramatic turn in early November 2021. First, in a popular election that took place on November 13, Louisiana Amendment 1 failed. If the measure had passed, it would have authorized the creation of a new “State and Local Streamlined Sales and Use Tax Commission,” which would have been tasked with enabling simplified electronic filing and remittance for all Louisiana sales and use taxes. It would have absorbed the responsibility of the existing Commission for Remote Sellers and would have been further empowered to enact additional compliance simplifications.

Immediately following the election result, an Arizona company, Halstead Bead Inc. (supported by the Pelican Institute for Public Policy, the National Taxpayers Union Foundation and the Goldwater Institute), filed suit against the Louisiana Department of Revenue and three Louisiana parishes in the U.S. District Court for the Eastern District of Louisiana. In short, the plaintiff contends that the Louisiana economic nexus compliance requirement represents an undue burden on interstate commerce, and a violation of constitutional due process.

What does this mean?

In the three years since the landmark South Dakota v. Wayfair decision, the sales tax community has been wondering whether a business would attempt to challenge a particular state’s economic nexus standard on Commerce Clause and/or due process grounds. Remember in the text of the Wayfair decision, the Court did not rule out the possibility that a particular state’s requirement could represent an undue burden or a due process violation. To the contrary, Justice Kennedy detailed how South Dakota made sales tax compliance simple through state administration of local taxes, uniform definitions, a simplified rate structure and other uniform rules – all of which are required components of their membership in the Streamlined Sales and Use Tax Agreement (SSTUA). With all that said, the fact that a challenge ultimately occurred in a complex state like Louisiana (which is not a member of the SSUTA) should not be surprising. 

However, companies still evaluating nationwide sales tax compliance options must keep this case in the proper context. First and foremost, this is not an overarching threat to the nationwide economic nexus standard. In fact, the plaintiffs go out of their way to differentiate the challenges attendant to compliance in Louisiana versus the rest of the country. Further, even as it relates to Louisiana itself, we are at the very earliest stages of the litigation. A final decision by the U.S. District Court is months away and depending on the outcome, Louisiana or the plaintiff can appeal the decision to a higher federal court. 

Reading the complaint closely reveals that Halstead Bead details several complexities (e.g., local registration and filing) but fails to acknowledge the simplifications offered by the existing Commission for Remote Sellers aimed directly at making these requirements more manageable. The complaint also fails to recognize the availability of affordable software solutions, which essentially eliminate the need for individual sellers to keep up with tax rates, rules and that can accurately identify the county, city and district tax rates associated with any given street address.  

While tax practitioners will undoubtedly watch developments in Louisiana closely, sellers cannot afford to put their compliance efforts on hold. With the Wayfair decision three years in the rear-view mirror, all signs point to more states becoming increasingly aggressive in enforcing economic nexus standards through audits leading to significant tax, penalty and interest assessments.