Lawsuit Filed Against Louisiana for Violation of the Due Process & Commerce Clause
On November 13, 2021, Louisiana voters rejected H.B. 199, which would have centralized Louisiana’s sales tax collection and remittance of sales and use taxes levied by all 64 parishes.
Two days later, on Monday, November 15, 2021, the National Taxpayers Union Foundation and Halstead Bead, Inc. sued Louisiana Secretary of Revenue Kimberly Lewis and several parishes on the basis that Louisiana’s sales tax registration and remitting requirements are an unconstitutional burden on interstate commerce and a violation of the Due Process Clause for businesses with activity in Louisiana.
The suit alleges Louisiana’s decentralized system as a “compliance nightmare” that violates the Commerce Clause of the U.S. Constitution. The suit describes the main challenge as regulatory compliance. Halstead Bead, Inc. is a family-owned business based in Arizona specializing in jewelry-making supplies selling to both wholesalers and retail customers across the United States. In Halstead Bead’s case, most of its Louisiana sales are wholesale rather than retail, which means these transactions are not even subject to sales and use tax. Yet, parish-by-parish registration and reporting requirements are still required. This is arguably a burden in interstate commerce. One of the most famous frameworks applicable to this case is the balancing test pronounced by Pike v. Bruce Church, Inc., 397 U.S. 137 (1970), which requires a court to weigh the burdens that a state law places on interstate commerce. In this instance, Halstead Bead made sure to engage in fewer than 200 transactions or less than the $100,000 in taxable sales in Louisiana in any single year and lost revenue as a result. Halstead Bead estimated the cost to comply with the current system would be greater than the combined tax revenue Louisiana local governments would receive from Halstead Bead’s sales.
The suit also goes into describing the violation of the Due Process Clause of the U.S. Constitution by stating that for a state to reach beyond its borders, there must be a “reasonable” relationship between the tax system and the value gained in process (see, e.g., Norfolk & W. Ry. Co. v. Missouri State Tax Comm’n, 390 U.S. 317 (1968)). Therefore, Louisiana’s system requiring remote sellers to have detailed local knowledge of the parish and various tax districts within the parish is “not reasonable.” Plus, the enormous amount of time spent on registering and remitting in each parish is too much to ask of someone provided only with a shipping address and nine-digit ZIP code. This, compounded by the complex regulations, product definitions, and rates applied to each parish, outweighs the revenue the state receives or the benefits Halstead Bead receives for the opportunity to reach Louisiana retail buyers.
The lawsuit was filed in the Eastern District Court of Louisiana. Taxpayers can expect some traction in the next few months. Taxpayers that have operations in Louisiana or plan to expand their business/sales into Louisiana parishes should carefully consider how Halstead Bead could affect their Louisiana filings in the future.
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