In a win for entrepreneurs nationwide, Louisiana lawmakers took an important step this month toward reforming the state’s obsolete and confusing sales tax system by establishing a “safe harbor” provision shielding small businesses. The new law is a victory for the Goldwater Institute’s client in an ongoing federal lawsuit that challenges the constitutionality of the state’s burdensome tax system, which requires businesses to calculate sales taxes for each given jurisdiction, or parish.
Louisiana imposes a bizarre parish-by-parish taxation scheme that requires companies to figure out how much they have to collect, through a process so complicated that even the state can’t tell companies for sure what they owe. When the Arizona-based jewelry and craft supply company Halstead Bead company wanted to sell its products over the internet to people in Louisiana, therefore, it was forced to limit how much it sold, in order to avoid triggering the state’s complicated and expensive regulations.
Joining forces with the Pelican Institute and the National Taxpayers Union, we filed a lawsuit on behalf of Halstead Bead, arguing that the state’s tax law is so complicated and hard to comply with that it essentially walled off Louisiana for businesses in other states—obstructing the free flow of commerce in just the way the Constitution forbids. The case was recently argued in the Fifth Circuit Court of Appeals.
But in the meantime, Louisiana lawmakers adopted HB 171, a new law that changes the threshold so that only businesses that sell more than $100,000 into the state of Louisiana have to comply.
That’s an important win for small businesses like family-owned Halstead Bead, and an important step toward making Louisiana’s sales taxes fairer and more equal.
Goldwater’s case has its roots in a 2018 case called Wayfair, in which the U.S. Supreme Court—in a dramatic reversal of its precedents—allowed states to impose sales taxes on businesses located in other states. That case involved a South Dakota law that taxed internet-based sales, which was challenged on the grounds that it violated the Constitution’s Commerce Clause—a provision that gives Congress alone the power to regulate trade from state to state. Because only Congress can regulate such transactions, states aren’t allowed to impose discriminatory taxes or otherwise hinder the flow of goods or services across state lines. And until the Wayfair case, that meant states couldn’t tax out-of-state businesses based solely on sales made over the internet.
That all changed when the justices allowed states to impose taxes on internet-based sales. Yet although the Wayfair case opened the door to state taxation of internet sales, it also recognized that there might be state tax laws that were so difficult and expensive to comply with, they would effectively discriminate against out-of-state businesses, in violation of the Constitution. That’s why the justices emphasized in the Wayfair case that the South Dakota tax law “includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.” The most notable of those features was a “safe harbor” provision that provided that “those who transact only limited business in South Dakota” would not have to do all the paperwork and calculations that in-state businesses were required to complete.
Louisiana’s sales tax law was a different beast entirely. But the new “safe harbor” provision is a much-needed first step toward shielding small businesses from the state’s burdensome tax system.
Of course, much remains to be done, and it’s unjust and absurd to require businesses to follow 63 separate sets of rules (for each parish in Louisiana) when they want to buy or sell products to people in that state. But the new reform a welcome improvement, and a victory for businesses located throughout the United States.
Timothy Sandefur is the Vice President for Legal Affairs at the Goldwater Institute.
