In a 4-3 decision, the Louisiana Supreme Court (Court) concluded that an online marketplace is not a "dealer," as defined under Louisiana law, responsible for collecting and remitting local sales tax on property sold by third-party retailers through the marketplace's website.¹ The decision reverses a ruling by the Louisiana Court of Appeal, which upheld a Louisiana District Court judgment that a "dealer" is not limited to a person that transfers title or possession of a product to the end consumer for a stated price.

Although the case deals with local sales tax, the Court's decision effectively prohibits both the state and its local taxing jurisdictions from imposing a collection obligation on marketplace facilitators on third-party sales made through its marketplace.

Background

Wal-Mart.com USA LLC (Company) operates an online marketplace through which customers can purchase goods directly from the Company or from third-party retailers that use the marketplace. The Company collected, remitted, and reported sales tax to the state and to various localities (parishes) on its own direct sales, but did not do so for sales made by third-parties through its marketplace. The Tax Collector for Jefferson Parish, Louisiana commenced an action to recover unpaid taxes on these sales, which the Company opposed by explaining that it merely provided a service to third-party retailers. The Company noted that the service was limited to connecting customers to marketplace sellers, providing a single checkout system, and processing payments, and that the Company never took physical possession of the goods sold through its marketplace. As such, the Company argued, it did not meet the definition of a "dealer" under Louisiana law, and could not be held responsible for collecting and remitting the sales or use tax on third-party sales.

Under Louisiana law, "dealers" must collect and remit state and local sales tax on taxable sales made to in-state customers.² A "sale" is defined as "any transfer of title or possession … of tangible personal property, for a consideration."³ A "dealer" is defined to include any person who "engages in regular or systematic solicitation of a consumer market in the taxing jurisdiction … by means of … [a] communication system."⁴ Any dealers that fail to collect the tax as required are liable for and must pay the tax themselves.⁵

Marketplace facilitator is not a "dealer" under state law

The Court rejected the lower courts' rulings that the Company was a "dealer" under the Louisiana sales and use tax law. While the definition of that term was "seemingly very broad," the Court reasoned, nothing indicated that the legislature had intended to expand it to include "more than sellers that own property being sold and are the parties to the underlying sales transactions." Further, nothing indicated legislative intent to " … tax intermediaries that are only tangentially involved in sales transaction [sic], such as a marketplace facilitator relative to sales by third party retailers." In support of its position, the Court cited to numerous regulations that were promulgated by the Louisiana Department of Revenue and describe a "dealer" as a party to a transaction, a seller of merchandise, a performer of taxable services, or a renter or lessor of property.

The Court compared marketplace facilitators to third-party auctioneers. Louisiana enacted specific laws to reclassify certain non-traditional sales transactions conducted by auctioneers on behalf of third-party sellers so these auctioneers would fall within the group of taxpayers responsible for collecting sales and use tax. Before the law change, these auctioneers would not otherwise fall within the state's statutory definition of "dealer." Under these provisions, the third-party auctioneer must collect and remit tax because it conducts the sales and consummates the final transfer of title and possession, as a third party, from the owner to the purchaser. Rationalizing that the Company's position is similar to that of a third-party auctioneer, the Court concluded that only with specific legislation could an online marketplace facilitator be required to collect the requisite sales or use tax on a transaction.

The Court further explained that retail sales transactions often involve third-party service providers and intermediaries that, while providing aid and enabling sellers to reach new customers, are not themselves selling anything. Such intermediaries, which the Court noted may include payment processors, credit card companies, financial institutions, common carriers, advertisers, and broadcasters, simply serve to facilitate sales; they do not consummate the sales themselves, so they may not be required to collect and remit the tax absent specific legislation both for practical as well as legal reasons.

Lastly, the Court said, it was not "in the province of the judiciary to create an exception (in the context of a retail sale) to the seller's obligation to collect sales tax for a marketplace facilitator, similar to that legislatively enacted for auctioneers." That, it concluded, was a legislative responsibility.

Implications

The Court's decision effectively prohibits both the state and its local taxing jurisdictions (Louisiana's parishes, which all separately administer their own sales and use tax laws) from asserting that marketplace facilitators and other intermediaries involved in retail sales have a collection obligation involving third-party sellers. At present, Louisiana has not adopted or introduced legislation that would extend a collection obligation to marketplace facilitators. Such laws have been enacted in 40 states and the District of Columbia. Nevertheless, in light of this important ruling, should Louisiana follow this trend, sales taxes associated with any prior marketplace sales will not be the responsibility of the marketplace facilitator.

In contrast, an administrative law judge in at least one other state has reached a completely opposite conclusion under another state's law on almost identical facts. In South Carolina,⁶ an administrative law judge (ALJ) concluded that an online retailer was responsible for collecting and remitting sales and use tax on third-party merchant sales made through the online retailer's marketplace because the online retailer functioned like a consignee. The ALJ found that the relationship between the online retailer and marketplace facilitator functioned as a consignment-type relationship. Under South Carolina law, consignees have a sales tax collection obligation for retail sales of consigned goods. For periods after those considered by the ALJ in his ruling, the South Carolina legislature adopted marketplace facilitator legislation, so the decision has only retroactive effect. See EY Tax Alert 2020-0078.

It is widely expected in the sales tax industry that most or all the remaining states, including Louisiana, that have not already done so will enact legislation in the current calendar year that imposes a collection obligation on marketplace facilitators. For those states that have already imposed a collection obligation, however, several issues still need to be resolved, including: harmonizing definitions for marketplace facilitators; registration of foreign sellers; determination of liability between marketplace sellers and facilitators; and enforcement. Although groups such as the National Conference of State Legislatures, the Streamlined Sales Tax Project, and the Multistate Tax Commission are all working to achieve some level of uniformity among these new laws, marketplace facilitators, including businesses that might not think that they are operating a marketplace, should pay close attention to their internal compliance systems and processes or risk potential audit issues.

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ENDNOTES

¹ Normand v. Wal-Mart.com USA LLC, No. 2019-C-00263 (La. S. Ct. Jan. 29, 2020).

² La. Rev. Stat. Section 47:304, 47:337.17(A); La. Admin. Code Section 61:I.4311.

³ La. Rev. Stat. Section 47:301(10)(a)(i).

⁴ La. Rev. Stat. Section 47:301(4)(l). This provision, Louisiana's "anti Bellas Hess" law, was enacted in 1990.

⁵ La. Rev. Stat. Section 47:304(C), 47:337.17(C).

⁶ Amazon Services, LLC v. South Carolina Dept. of Revenue, No. 17-ALJ-17-0238-CC (S.C. Admin. Law Ct. Sept. 10, 2019).