An online seller’s constitutional challenge against Louisiana’s sales tax system cannot be heard in federal court, the U.S. District Court for the Eastern District of Louisiana has ruled.

Arizona-based Halstead Bead Inc. alleged that Louisiana’s “arbitrary and fragmented” sales tax system imposes unconstitutional burdens on interstate commerce. Three parish-level tax administrators, backed by the state Department of Revenue, had accused Halstead of wasting the court’s time with a list of lies and “hypothetical charges.”

Judge Jane Cheats Milazzo sided with the state on Monday, concluding that the tax injunction law strips the court of jurisdiction over the case because it seeks to restrict the collection of state taxes when Louisiana law offers an adequate remedy . She dismissed the lawsuit “without prejudice,” meaning Halstead can refile the case with revamped arguments.

Halstead plans to appeal or file a new claim in state court, according to his attorney, Joe Bishop-Henchman of the National Taxpayers Union Foundation.

“The tax injunction law judge’s reading is much broader than the Supreme Court’s, and at one point she suggested that our victory would stop tax collection because Louisiana doesn’t have a use tax, which it does,” Bishop-Henchman said. “We knew whoever didn’t win in the trial court would appeal, because this is an important case. We are here for the long term.

The Department of Revenue declined to comment.

“Trembling Ground”

While the ruling marks a significant victory for Louisiana tax collectors, the state’s highly decentralized sales tax system remains uncertain, said Jason DeCuir, a state and local tax partner at Advantous Consulting LLC. .

Louisiana is one of the few states to grant localities broad autonomy in the administration of sales tax. In recent years, most of the 45 states with sales tax have tightened their centralized collection protocols, particularly following the groundbreaking 2018 U.S. Supreme Court ruling in South Dakota vs. Wayfairwhich allowed states to impose tax collection fees on remote retailers based on economic activity in a state rather than physical presence.

Judge Milazzo never addressed the core constitutional and tax administration issues raised by the plaintiffs, DeCuir said, leaving open the possibility that Louisiana’s tax code continues to impose unconstitutional burdens on interstate commerce.

“Even with this decision, we have nothing definitive about whether our system is constitutional or not. None of this has been tried in federal court,” he said. “Unless we change our constitution and start building a system that conforms to Wayfairour current administrative system is legally fragile.

A campaign to streamline Louisiana’s sales tax system is gaining momentum in the Legislature under HB 681said DeCuir, who last year chaired a legislative sales tax task force.

The proposal would ask voters in November to amend the constitution and allow the state to modernize its fragmented sales tax system. A key provision would create a streamlined commission on centrally administered sales and use tax. HB 681 won unanimous support in the House on April 27 and is awaiting action in the Senate. The legislation is virtually identical to a bill passed last year that ended with 52% of voters opposing centralized sales tax collection through a constitutional amendment.

Parish by Parish

Retailers without a physical presence in Louisiana who deliver goods or services there are required to collect and remit sales tax once they have passed a certain number of sales.

Halstead deliberately halted sales in the state before reaching the threshold to avoid complying with different sales and usage rates in each parish. Instead, he sued three parishes and the Secretary of Revenue, seeking a declaratory judgment that the “labyrinthine” parish-by-parish rules violate the Commerce and Due Process Clauses of the U.S. Constitution. He also sought a permanent injunction restraining the execution.

The defendants sought to dismiss the lawsuit, arguing that the Tax Injunctions Act and principles of comity preclude federal jurisdiction. Halstead argued that the lawsuit did not involve the TIA because it challenged the regulatory requirements of the taxes, not the taxes themselves.

“Although the plaintiff may claim to be challenging only the regulatory charges and not the payment of taxes, the question under the TIA is whether the relief sought would ‘enjoin, suspend, or restrict the assessment, levy, or collection’ of a national or local tax,” the court said. “The court believes that here he would undoubtedly do so.”

The injunction sought by Halstead would have prevented state officials from requiring distance sellers to register with the Distance Sellers Commission, remit sales to it, and use taxes, thereby preventing the state to collect taxes, the court said.

Louisiana law provides a “simple, speedy and effective remedy” – a declaratory judgment action in state court to invalidate the tax laws at issue, the court said.

In addition to the TIA, jurisdiction is also precluded by the comity doctrine, which encourages federal courts to respect state jurisdiction, the court said.

The factors the Supreme Court set out to support comity “overwhelmingly advise the court to refrain from hearing this case,” he said. Halstead seeks to overhaul a tax regime over which the state “enjoys wide regulatory latitude,” state courts know best the legislature’s intent, and the TIA limits federal court relief options, said the tribunal.

The deal is Halstead Bead, Inc. vs. LewisED La., no. 21-2106, 23/05/22.