Wal-Mart.com USA LLC is liable for local sales taxes on third-party sales through its online marketplace, a Louisiana appellate court recently held.
In Normand v. Wal-Mart.com USA LLC, the Louisiana Fifth Circuit Court of Appeal ruled December 27 that Walmart.com is the dealer for sales by third-party retailers in its marketplace program and is responsible for collecting the sales tax, finding that the company owes Jefferson Parish for uncollected sales taxes.
The court did not address whether requiring Walmart.com to collect the sales tax on third-party sales violated federal law, finding that the argument would constitute a constitutional challenge to the tax statutes and that “Walmart.com did not challenge the constitutionality of the law at the trial court level.”
June Summers Haas of Honigman Miller Schwartz and Cohn LLP told Tax Notes December 28 that it was disappointing and surprising that the court did not address whether the sales tax obligation violated the Internet Tax Freedom Act (ITFA), adding that practitioners had been watching the case to see the court’s analysis of the ITFA.
Haas continued that the court seemed to have determined that the ITFA argument was a constitutional challenge and that she would have thought the court would have conducted a separate analysis of the federal law. She said that the issues raised regarding the ITFA concern whether it's discriminatory to apply the tax to Walmart.com as an online marketplace when the tax is not applied to mall owners or other similar entities operating in physical locations.
Haas said practitioners must now wait for the next case, noting that two cases are pending in Illinois, one before a circuit court (Apple Inc. v. City of Chicago) and one before an Illinois appellate court (Labell v. City of Chicago). Haas said she believes there will continue to be challenges that raise the ITFA until the issue is addressed by the courts.
Walmart.com collected and remitted local sales and use taxes on its own product sales, but it did not do so on third-party sales unless the retailer requested it. In cases where the third-party retailer requests that Walmart.com collect the sales tax on its behalf, the retailer is still responsible for remitting the taxes under Walmart.com’s marketplace retailer agreement.
After Jefferson Parish audited Walmart.com for 2009 through 2015, the tax collector sought close to $2 million in unpaid sales taxes on third-party marketplace sales from Walmart.com. But Walmart.com claimed it was not obligated to collect the tax because it was not the retail seller of the items.
Louisiana District Court Judge Stephen Enright Jr. ruled March 2 in favor of Jefferson Parish, finding that Walmart.com owed the parish approximately $140,000 in uncollected taxes. Enright concluded that the obligation to collect and remit local sales and use taxes is imposed on a “dealer” and that the statutory definition of the term is not limited to the retail seller, citing La.R.S. 47:301(4)(l). Under that code section, a dealer is any person engaged in regular or systematic solicitation of a consumer market in the taxing jurisdiction.
The appellate court agreed with the district court, finding that the “legislature’s choice of the term ‘dealer’ and its definition clearly encompasses a wider group of people than ‘seller.’” The court called the statutory provisions “clear and unambiguous.”
Noting that the district court’s finding that Walmart.com met the definition of dealer under La.R.S. 47:301(4)(l) was a factual determination, the court ruled that it must be upheld because it was not manifestly erroneous.
Kenneth Fonte of Golden & Fonte APLC, who represents Jefferson Parish, told Tax Notes that the appellate court's decision was well-reasoned and followed the same thought pattern of the district court — that a dealer does not have to be the seller.
Fonte said that the case, in which the parish asked for uncollected taxes between 2009 through 2015, represented the early years of online marketplaces, adding that marketplace sales have likely jumped tremendously since then. He said Walmart.com is also liable for the sales tax it didn't collect for the periods after the audit, an amount he said could be substantial.
Fonte continued that Walmart.com also faces exposure in the other localities within the Fifth Circuit Court of Appeal's jurisdiction and could see similar challenges throughout the state. He added that challenges could also be brought in states with similar statutes that do not limit the definition of a dealer to a seller.
Jason Brown of Kean Miller LLP told Tax Notes that the court seemed to be reading La.R.S. 47:301(4)(l) in a vacuum to rule that a dealer was not limited to the seller, stating that all the other subsections defining dealer under La.R.S. 47:301(4) contemplate a sale.
Brown continued that the court didn’t address whether the third-party retailers, in addition to Walmart.com, would also be considered dealers for their own sales, adding that the decision appears to relieve third-party retailers of the responsibility to collect the sales and use tax, though they arguably meet the definition of dealer under La.R.S. 47:301(4).
Arguing that the court also used the wrong standard of review regarding whether Walmart.com was a dealer, Brown said the district court’s finding should have been considered a legal question and subject to a de novo review.
Brown said he hoped the case would be appealed and taken up by the state supreme court, adding that taxpayers would benefit from a final decision. He continued that this would allow businesses to be fully aware of their obligations, including whether they need to register to collect and remit the sales tax.
The Louisiana Sales and Use Tax Commission for Remote Sellers, acknowledging that this case was on appeal, stated in a December 18 remote sellers information bulletin that it would submit specific definitions and information on other matters related to marketplace facilitators to the Louisiana Legislature for consideration in the 2019 legislative session. The commission was created to serve as a single, state-level tax administrator for remote sales and has been meeting regularly in an effort to navigate issues with remote sales taxation in the state.