Ivan I. Smith, Jr. and Gloria G. Smith v. Kimberly L. Robinson, Secretary of the Department of Revenue, State of Louisiana , 265 So. 3d 740 ( 2018 )

Supreme Court of Louisiana
FOR IMMEDIATE NEWS RELEASE NEWS RELEASE #053
FROM: CLERK OF SUPREME COURT OF LOUISIANA
The Opinions handed down on the 5th day of December, 2018, are as follows:
BY GENOVESE,J.:
2018-CA-0728 IVAN I. SMITH, JR. AND GLORIA G. SMITH v. KIMBERLY L. ROBINSON,
SECRETARY OF THE DEPARTMENT OF REVENUE, STATE OF LOUISIANA
(Parish of E. Baton Rouge)
This case comes to this Court on direct appeal from the
Nineteenth Judicial District Court of East Baton Rouge Parish
pursuant to Louisiana Constitution Article V, § 5(D) upon a
declaration by that court that 2015 La. Acts No. 109 (“Act 109”),
which amended La.R.S. 47:33, is unconstitutional. Plaintiffs,
Ivan I. Smith, Jr. and Gloria G. Smith (collectively
“Taxpayers”), are Louisiana residents and part owners of several
limited liability companies (“LLC”) and Subchapter S corporations
(“S corporation”) that transact business in Texas, Arkansas, and
Louisiana. Defendant herein is Kimberly L. Robinson, in her
capacity as Secretary of the Department of Revenue of the State
of Louisiana (the “Department”). Taxpayers filed the instant
suit seeking recovery of income taxes paid under protest. At
issue is whether Act 109, which amended La.R.S. 47:33, a state
income tax statute that provides a credit to taxpayers for income
taxes paid in other states, violates the dormant Commerce Clause
of the United States Constitution. For the reasons herein set
forth, we conclude that Act 109, which amended La.R.S. 47:33,
violates the dormant Commerce Clause of the United States
Constitution. Consequently, the judgment of the district court is
hereby affirmed.
AFFIRMED.
Retired Judge Freddie Pitcher, Jr., assigned as Justice ad hoc,
sitting for Crichton, J., recused.
CRICHTON, J., recused.
12/05/18
SUPREME COURT OF LOUISIANA
No. 2018-CA-0728
IVAN I. SMITH, JR. AND GLORIA G. SMITH
VERSUS
KIMBERLY L. ROBINSON, SECRETARY OF THE
DEPARTMENT OF REVENUE, STATE OF LOUISIANA
ON APPEAL
FROM THE NINETEENTH JUDICIAL DISTRICT COURT
FOR THE PARISH OF EAST BATON ROUGE
Genovese, Justice∗
This case comes to this Court on direct appeal from the Nineteenth Judicial
District Court of East Baton Rouge Parish pursuant to Louisiana Constitution Article
V, § 5(D) 1 upon a declaration by that court that 2015 La. Acts No. 109 (“Act 109”),
which amended La.R.S. 47:33, is unconstitutional.
Plaintiffs, Ivan I. Smith, Jr. and Gloria G. Smith (collectively “Taxpayers”),
are Louisiana residents and part owners of several limited liability companies
(“LLC”) and Subchapter S corporations (“S corporation”) that transact business in
Texas, Arkansas, and Louisiana. Defendant herein is Kimberly L. Robinson, in her
capacity as Secretary of the Department of Revenue of the State of Louisiana (the
“Department”). 2 Taxpayers filed the instant suit seeking recovery of income taxes
paid under protest. At issue is whether Act 109, which amended La.R.S. 47:33, a
state income tax statute that provides a credit to taxpayers for income taxes paid in
∗ Retired Judge Freddie Pitcher, Jr., assigned as Justice ad hoc, sitting for Crichton, J., recused.
1
Louisiana Constitution Article V, § 5(D), provides that “a case shall be appealable to the supreme
court if . . . a law or ordinance has been declared unconstitutional[.]”
2
The Attorney General of the State of Louisiana was served with the captioned lawsuit in
accordance with Louisiana Code of Civil Procedure Article 1880 and made no appearance.
other states, violates the dormant Commerce Clause of the United States
Constitution.
For the reasons hereinafter set forth, we conclude that Act 109, which
amended La.R.S. 47:33, violates the dormant Commerce Clause of the United States
Constitution. Consequently, the judgment of the district court is hereby affirmed.
FACTS AND PROCEDURAL HISTORY
Taxpayers own an interest in several LLCs and S corporations (the “Pass-
Through Entities”) that transact business in Texas, Arkansas, and Louisiana.
Taxpayers, Louisiana residents, paid 2015 Texas franchise taxes in the amount of
$23,180.00, representing the amount of taxes based on the Pass-Through Entities’
Texas-sourced income. Taxpayers were also subject to the Louisiana income tax on
all of the income they derived both outside and inside Louisiana. The Department
denied Taxpayers the credit they claimed against their 2015 Louisiana income tax
for the franchise taxes they paid to the state of Texas; thus, Taxpayers paid
$23,180.00, the amount of credit against Louisiana income tax to which Taxpayers
would have been entitled absent Act 109, under protest, and then filed a Petition for
Refund of Tax Paid Under Protest.3 The subject of the protest is the disallowance
of the credit for taxes paid to Texas as a result of Act 109.
In the Petition for Refund of Tax Paid under Protest, Taxpayers alleged that
Act 109 limits the availability of credits for income taxes paid to other states.
Pursuant to Act 109, credits are only available for income taxes paid to a state that
3
Louisiana Revised Statutes 47:1576(A)(1)(a) provides:
Except as otherwise provided in Subsection B of this Section, any taxpayer
protesting the payment of any amount found due by the secretary of the Department
of Revenue, or the enforcement of any provision of the tax laws in relation thereto,
shall remit to the Department of Revenue the amount due and at that time shall give
notice of intention to either file suit or file a petition with the Board of Tax Appeals
for purposes of recovery of such tax.
2
offers a reciprocal credit to that state’s own residents who transact business in
Louisiana. Texas does not offer such a credit; thus, Act 109 denies a credit to
Louisiana residents who transact business in Texas. Taxpayers asserted in the
district court that the reciprocal credit requirement of Act 109 is unconstitutional as
it violates the dormant Commerce Clause by subjecting them to multiple taxation.
Taxpayers prayed that Act 109 be declared unconstitutional and that the taxes paid
in accordance with Act 109 be refunded with interest as provided by law.
In the district court, Taxpayers filed a Motion for Summary Judgment on the
issue of the unconstitutionality of Act 109 and their entitlement to a refund of the
taxes paid under protest. Taxpayers argued that Act 109 is unconstitutional because
the Texas franchise tax imposes a tax on income, and Taxpayers would be entitled
to a credit for the amount of Texas franchise taxes paid absent Act 109. Additionally,
because Act 109 levels a double tax on interstate income, but not intrastate income,
it violates the dormant Commerce Clause.
The Department opposed Taxpayers’ Motion for Summary Judgment, arguing
that the Texas franchise tax is not a tax on net income because it contains both a net
income component and a net capital component, which are not divisible. Relative
to the dormant Commerce Clause, the Department denied that Act 109 burdens
interstate commerce because it is within the state’s power to regulate state income
tax.
Following a hearing, the district court reasoned that the First Circuit Court of
Appeal in Perez v. Secretary of Louisiana Department of Revenue & Taxation, 98-
330 (La.App. 1 Cir. 3/8/99), 731 So.2d 406, writ denied, 99-951 (La. 6/4/99), 743
So.2d 1256, had already addressed and affirmatively concluded that the Texas
franchise tax was an income tax under Louisiana law; thus, it was settled law and
binding on the court. Further, the district court concluded that the United States
3
Supreme Court decision in Comptroller of Treasury of Maryland v. Wynne, 135 S.Ct.
1787 (2015), was dispositive of the constitutional issue raised. The district court
found the resolution to be “straightforward,” given the holdings of Perez and Wynne.
For these reasons, the district court granted Taxpayers’ Motion for Summary
Judgment, declared Act 109 unconstitutional, and rendered judgment in favor of
Taxpayers for $23,180.00, plus interest as provided by law.
The Department, pursuant to Louisiana Constitution Article V, § 5(D),
directly and suspensively appealed the district court judgment to this Court.
LAW AND ANALYSIS
Act 109
Prior to 2015, a Louisiana taxpayer who derived income from another state,
and who paid net income taxes on that income in that other state, received a full
credit for the payment of out-of-state taxes pursuant to La.R.S. 47:33. Prior to 2015,
La.R.S. 47:33 provided in pertinent part:
A. Subject to the following conditions, resident individuals shall be
allowed a credit against the taxes imposed by this Chapter for net
income taxes imposed by and paid to another state on income taxable
under this Chapter, provided that:
(1) The credit shall be allowed only for taxes paid to the other state on
income which is taxable under its law irrespective of the residence or
domicile of the recipient.
In 2015, the Louisiana legislature adopted Act 109, which amended La.R.S.
47:33. Act 109 amended La.R.S. 47:33(A)(4) through (6) to provide:
A. Subject to the following conditions, resident individuals shall be
allowed a credit against the taxes imposed by this Chapter for net
income taxes imposed by and paid to another state on income taxable
under this Chapter, provided that:
....
(4) The credit shall be allowed only if the other state provides a similar
credit for Louisiana income taxes paid on income derived from property
4
located in, or from services rendered in, or from business transacted in
Louisiana.
(5) The credit shall be limited to the amount of Louisiana income tax
that would have been imposed if the income earned in the other state
had been earned in Louisiana.
(6) The credit shall not be allowed for income taxes paid to a state that
allows a nonresident a credit against the income taxes imposed by that
state for taxes paid or payable to the state of residence.
As a result of the 2015 amendment to La.R.S. 47:33, 4 a Louisiana taxpayer is
allowed to take a credit for out-of-state taxes paid on income earned out of state only
if that other state’s tax laws provide a reciprocal credit for residents of that state who
earn income in Louisiana. Further, even if a reciprocal credit exists, the credit is
limited to the amount the taxpayer would have paid in Louisiana taxes.
Motion for Summary Judgment
In this case, the district court’s ruling was pursuant to Taxpayers’ Motion for
Summary Judgment. La.Code Civ.P. art. 966. Summary judgments are reviewed
de novo on appeal, with the reviewing court using the same criteria that govern the
trial court’s determination of whether summary judgment is appropriate; whether
there is any genuine issue of material fact, and whether the movant is entitled to
judgment as a matter of law. La.Code Civ.P. art. 966; Louisiana Safety Ass’n of
Timbermen-Self Insurers Fund v. Louisiana Ins. Guar. Ass’n, 09-23, p. 5 (La.
6/26/09), 17 So.3d 350, 353. In this case, there are no material issues of fact in
dispute. We are called upon to interpret the law at issue. Questions of law are
reviewed de novo, without any deference to the legal conclusions reached by the
district court, as this court is the ultimate arbiter of the meaning of laws of this state.
Jackson v. City of New Orleans, 12-2742, 12-2743, p. 6 (La. 1/28/14), 144 So.3d
4Louisiana Revised Statutes 47:33 was again amended by 2018 La. Acts No. 6; however, said
2018 amendment to La.R.S. 47:33 has no bearing on the issues presented in this case.
5
876, 882, cert. denied, 135 S.Ct. 197 (2014), (citing Catahoula Par. Sch. Bd. v.
Louisiana Mach. Rentals, LLC., 12-2504, p. 9 (La. 10/15/13), 124 So.3d 1065,
1071).
Louisiana Revised Statutes 47:33
The initial inquiry is whether the Taxpayers’ payment of the Texas franchise
tax is a “net income tax[] imposed by and paid to another state[,]” pursuant to La.R.S.
47:33(A). As recognized by the district court, this precise issue was decided by the
First Circuit Court of Appeal in the case of Perez, 731 So.2d 406, which held that
Texas franchise tax paid by an S corporation is a net income tax paid by individual
shareholders of the S corporation, and that such shareholders are entitled to a credit
for the tax paid to Texas against their Louisiana tax liability.
The taxpayers in Perez were Louisiana residents and sole shareholders of a
Louisiana S corporation. The Perezes filed a Louisiana individual income tax return
and claimed a credit under La.R.S. 47:33 for Texas franchise taxes paid by their
S corporation to Texas. The Department denied their claim and argued that the credit
is allowed only for net income taxes paid to another state and that the Texas franchise
tax was not an income tax. The Department also argued that the credit was not
allowed because the S corporation paid the tax, the Perezes did not. The court of
appeal concluded that the Texas franchise tax, “to the extent it was imposed on an
income base, is a net income tax imposed by and paid to another state on income
also taxable under Louisiana’s income tax laws, as required for the application of
[La.R.S.] 47:33.” Perez, 731 So.2d at 408-09. The court of appeal also held that
“the fact that the Corporation paid the Texas tax does not prevent the tax from being
available to an individual taxpayer for a credit pursuant to [La.R.S.] 47:33.” Id. at
409.
6
Notably, the Department acquiesced in the Perez decision in its Statement of
Acquiescence No. 03-001 issued September 10, 2003. Therein, the Department
concluded that “[t]axes on net income paid by an S corporation shall be considered
taxes on net income paid by shareholders of the S corporation for purposes of
computing the credit allowed under [La.R.S.] 47:33.”5
The Department now reverses its position and currently asserts that the Texas
franchise tax is not an income tax pursuant to La.R.S. 47:33 and that the district court
erred in relying on Perez and concluding to the contrary. First, the Department urges
that the district court reached its erroneous conclusion by failing to recognize that
the credit granted by La.R.S. 47:33 must be strictly construed against the
Taxpayers. 6 The Department claims that not only did the Perez decision fail to
adhere to the rule of strict construction, but it also failed to cite the Texas
Constitution, which forbids the imposition of an income tax absent voter
referendum. Moreover, the Department now rejects Perez, as that decision predates
the revisions to the Texas franchise tax in 2006; therefore, it contends that Perez did
not analyze La.R.S. 47:33 after its 2015 amendment in relation to the Texas franchise
tax provisions after its 2006 revisions.
5
The Statement of Acquiescence contains the following language:
A Statement of Acquiescence or Nonacquiescence (SA/SNA) is issued under the
authority of LAC 61:III.101(C). It is a written statement to provide guidance to the
public and to Department of Revenue employees. An SA/SNA is a written
statement issued to announce the Department’s acceptance or rejection of specific
unfavorable court or administrative decisions. If a decision covers several disputed
issues, an SA/SNA may apply to just one issue, or more, as specified. An SA/SNA
is not binding on the public, but is binding on the Department unless superceded by
a later SA/SNA, declaratory ruling, rule, statute, or court case.
6
“[E]xemptions from taxation are to be strictly construed against the person claiming the
exemption, and any plausible doubt is fatal, Mattingly v. Vial, 193 La. 1, 190 So. 313 (1939), and
that an exemption being an exceptional privilege, it must be clearly, unequivocally and
affirmatively established. Meyers v. Flournoy, 209 La. 812, 25 So.2d 601 (1946).” Ethyl Corp.
v. Collector of Revenue, 351 So.2d 1290, 1293 (La.App. 1 Cir. 1977), writ denied, 353 So.2d 1035(La.1978).
7
The Department’s initial argument is that Taxpayers in this case are not
entitled to claim the credit because, strictly construing La.R.S. 47:33(A), the Texas
franchise taxes paid are not “net income taxes imposed by and paid to another
state[.]” The Department argues that because it is not an income tax, Taxpayers are
not entitled to the credit under the plain language of La.R.S. 47:33; thus, the district
court erred in deciding the constitutionality issue. Instead, the Department maintains
that this Court may resolve this matter solely on the basis that the Taxpayers do not
qualify for the credit on statutory grounds.
Since the Perez decision in 1999, which holding the Department acquiesced
in since 2003, a Louisiana taxpayer who paid the Texas franchise tax on income
derived from sources in Texas has been entitled to claim a credit for those taxes paid
against its Louisiana tax liability. Indeed, even after Texas revised its franchise tax
provisions, the Department did not revoke or modify its Statement of Acquiescence,
and it made no change in its position relative to a taxpayer’s entitlement to a credit.
The Department now reverses its longstanding position and asserts that the Texas
franchise tax is not an income tax pursuant to La.R.S. 47:33. We find no merit in
this contention.
The Perez court correctly held that the Texas franchise tax is a tax on net
income, applying the test established by this Court in City of New Orleans v.
Scramuzza, 507 So.2d 215 (La.1987).7 In Scramuzza, 507 So.2d at 218, this Court
7
At issue in Scramuzza was an earnings tax, which this Court found was an income tax because it
operated to tax income. In Scramuzza, this Court reasoned that “[t]o ascertain a precise definition
of an income tax would prove to be a near impossible task[,]” and that any “definition must
necessarily vary to conform to the various systems of income taxation.” Scramuzza, 507 So.2d at
218 (footnote omitted). This Court stated, therefore, that its task was not to provide a definition
of income tax; instead, it merely had to determine if the earnings tax should be classified as an
income tax. This Court recognized that an “[i]ncome tax . . . may be understood both technically
and in more general terms[,]” and concluded that “[a]n income tax in most generally understood
terms is a tax on income.” Id. at 218. This Court recently affirmed the Scramuzza test in Beer
Industry League of Louisiana v. City of New Orleans, 18-280, 18-285, p. 10 (La. 6/27/18), 251
So.3d 380, 387.
8
held that the “[c]lassification of a tax must be determined by its operational effect
rather than by the descriptive language used in drafting the enactment.” Perez
recognized that “in classifying a tax[,] the operational and consequential effect of
the tax must be given paramount consideration.” Perez, 731 So.2d at 408 (citing
Scramuzza, 507 So.2d at 219). Pursuant to Scramuzza, the Perez court concluded
that the “operational effect” of the Texas franchise tax was to tax the income of the
corporation. Perez, 731 So.2d at 408.
In considering the current version of the Texas franchise tax, the relevant
inquiry remains whether the operational and consequential effect of the law is to
impose a tax on income that is subject to the Louisiana income tax. Scramuzza, 507
So.2d 215. Therefore, we must examine the current version of the Texas franchise
tax.8
In its current form, the Texas franchise tax uses a three-step calculation to
arrive at a “taxable margin.” Tex. Tax Code § 171.101. Step one of the calculation
begins with a taxpayer’s gross receipts; from the gross receipts, the taxpayer deducts
certain amounts for returns and other allowances. Tex. Tax Code §§ 171.101;
171.1011. Secondly, the Texas tax code allows for additions or deductions to arrive
at a “total revenue” figure. Tex. Tax Code §§ 171.101; 171.1011. The amount of
“total revenue” is the figure used for the third step of the calculation. In the final
step, the taxpayer uses one of four alternative methods to determine the “taxable
margin”: (1) seventy percent of the “total revenue”; (2) “total revenue” minus
$1,000,000.00; (3) “total revenue” minus wages; or, (4) “total revenue” minus cost
of goods sold. Tex. Tax Code § 171.101. Once the “taxable margin” is derived, the
8
See In re Nestle USA, Inc., 387 S.W.3d 610 (Tex.2012) (discussing the history of the Texas
franchise tax on domestic and foreign corporations since 1893).
9
taxpayer then apportions that amount and takes other allowable deductions. Tex.
Tax Code §§171.106; 171.107-09.
Considering the manner in which the current Texas franchise tax is calculated,
it is still essentially imposed on an income basis. The Perez court opined that “the
Texas tax, to the extent it was imposed on an income base, is a net income tax
imposed by and paid to another state on income also taxable under Louisiana’s
income tax laws, as required for the application of [La.R.S.] 47:33.” Perez, 731
So.2d at 408-09. The sole question, as espoused in Scramuzza, is whether the
operational and consequential effect means that the tax can be fairly classified as a
tax on net income. The Perez court correctly determined that it did, and we conclude
that the revisions to the Texas franchise tax in 2006 did not change this result. The
current version of the Texas franchise tax begins with revenue, applies the three-step
calculation, and taxes income that is also taxable under Louisiana law. For these
reasons, like the franchise tax prior to 2006, the Texas franchise tax post 2006 is a
net income tax for purposes of La.R.S. 47:33.
In addition to finding that the Texas franchise tax was a net income tax, Perez
also addressed the fact that the payment of that tax was made by a pass-through
entity doing business in Texas, but the credit was being claimed by individual
shareholders of the S corporation stating:
The Department contends that the credit cannot be given to the
Perezes for a tax liability owed and paid by the Corporation. There is
no statutory requirement that the tax be imposed on the individual
shareholders of an “S” Corporation or that the shareholders have
personal liability for the tax in order for the credit to be allowed.
[La.R.S.] 47:33 does not require that the tax paid to the other state be
imposed on or paid by the individual taxpayer. As long as a net income
tax of another state is “paid” to that other state on income also taxable
by Louisiana, a credit is allowed. Therefore, the fact that the
Corporation paid the Texas tax does not prevent the tax from being
available to an individual taxpayer for a credit pursuant to [La.R.S.]
47:33.
10
Perez, 731 So.2d at 409. We agree and reiterate that the Department acquiesced in
this holding stating in its Statement of Acquiescence No. 03-001 that “[t]axes on net
income paid by an S corporation shall be considered taxes on net income paid by
shareholders of the S corporation for purposes of computing the credit allowed under
[La.R.S. 47:33].”
At present, and reversing its position, the Department now urges that it is not
plausible that the Texas franchise tax imposed upon the S corporation and the LLC
can be characterized as a net income tax imposed upon Taxpayers individually.
Because of the legal nature and manner of taxation of S corporations and LLCs, for
the shareholders or members of these pass-through entities, the operational and
consequential effect is a tax on the individual taxpayer. The pass-through entity does
not pay a tax on its income. To the contrary, that income is distributed to the
shareholders or members, and the shareholder or member individually pays income
tax on the distributions. Therefore, we find no merit to the Department’s assertion
that the requisite strict construction of the statute against Taxpayers results in the
conclusion that it does not apply to a franchise tax imposed upon Taxpayers’ Pass-
Through Entities.
In its original brief to this Court, the Department relies on Graphic Packaging
Corp. v. Hegar, 471 S.W.3d. 138, 147 (Tex. App. Austin 2015), 538 S.W.3d 89(Tex. 2017), wherein a Texas appellate court held “that the [Texas] franchise tax is
not ‘a tax imposed or measured by net income’ and, therefore, that it does not fall
within chapter 141’s definition of an ‘income tax’. See Tex. Tax Code § 141.001,
art. II.4.” Relying on Graphic Packaging, the Department also seeks to distinguish
the Texas franchise tax from the earnings tax addressed in Scramuzza.
First, this Court is not bound by a Texas appellate court decision interpreting
a provision of a Texas statute. Second, Graphic Packaging did not address whether
11
the franchise tax was an income tax pursuant to La.R.S. 47:33. Moreover, in
affirming the appellate court, the Texas Supreme Court did not reach that conclusion,
stating: “Even were we to agree with Graphic that its franchise tax for the years in
question amounted to the same thing as chapter 141’s income tax (an issue we do
not decide) . . . . ” Graphic Packaging, 538 S.W.3d at 96. Thus, the supreme court
of Texas has not so declared.9
Additionally, with respect to the Department’s specific argument relative to a
gross receipts tax as discussed in Graphic Packaging, we find that the district court
in this case correctly referenced and relied upon the United States Supreme Court in
Wynne, 135 S.Ct. 1787, as authority. In Wynne, the United States Supreme Court
directly addressed the distinction between a tax on gross receipts and a tax on net
income in the context of a dormant Commerce Clause analysis. The Wynne Court
opined that the nature of the tax is determined by its practical effect. Specifically,
the Court stated that it saw “no reason why the distinction between gross receipts
and net income should matter, particularly in light of the admonition that we must
consider ‘not the formal language of the tax statute but its practical effect.’” Wynne,
135 S.Ct. at 1795 (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279,
97 S.Ct. 1076, 1079 (1977)). The Wynne Court stated:
And we have now squarely rejected the argument that the Commerce
Clause distinguishes between taxes on net and gross income. See
[Oklahoma Tax Comm’n v. Jefferson Lines, 514 U.S. 175, 190, 115
S.Ct. 1331, 1341 (1995),] (explaining that the Court in [Central
Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 68 S.Ct. 1260 (1948),]
9
The Department filed a supplemental brief to discuss the recent decision of Goggin v. State Tax
Assessor, 191 A.3d 341 (Me. 2018). We are not persuaded by that decision wherein a Maine
resident, who was a member of a New Hampshire LLC, sought Maine’s tax credit for business
taxes imposed by New Hampshire on the LLC. The court found that Maine’s credit for income tax
paid in another state did not include business taxes paid in the other state. The Goggin court noted,
first, that the LLC was an out-of-state (New Hampshire) LLC; therefore, the LLC was bound by
New Hampshire’s tax laws, not Maine’s tax laws. “Second, the term ‘income tax’ in Maine’s
statute is a term of art” that provides “a credit only for income taxes paid by individuals on income
derived from other states[,]” and it did not apply to taxes imposed on business entities. Id. at 346.
Thus, the Maine case is readily distinguishable.
12
“understood the gross receipts tax to be simply a variety of tax on
income”); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 280, 98 S.Ct. 2340,
57 L.Ed.2d 197 (1978) (rejecting a suggestion that the Commerce
Clause distinguishes between gross receipts taxes and net income
taxes); id., at 281, 98 S.Ct. 2340 (Brennan, J., dissenting) (“I agree with
the Court that, for purposes of constitutional review, there is no
distinction between a corporate income tax and a gross-receipts tax”);
Complete Auto[Transit, Inc., 430 U.S.] at 280, 97 S.Ct. 1076(upholding a gross receipts tax and rejecting the notion that the
Commerce Clause places “a blanket prohibition against any state
taxation imposed directly on an interstate transaction”).
Id. at. 1796 (footnote omitted).
For the foregoing reasons, we hold that a taxpayer’s payment of Texas
franchise taxes under the 2006 revisions of the Texas statutes are income taxes
pursuant to the 2015 revisions of La.R.S. 47:33, as amended by Act 109. In so
concluding, we reject the Department’s invitation to resolve this matter on statutory
grounds without reaching the constitutional question before this Court.10 Having
found that the Texas franchise tax is income tax for purposes of La.R.S. 47:33, we
must next address whether the district court erred in finding Act 109 to be
unconstitutional.
The Dormant Commerce Clause
The Department argues that even if the Texas franchise tax is an income tax
for purposes of La.R.S. 47:33, it, nevertheless, does not violate the dormant
Commerce Clause. As an initial matter, we note that statutes are presumed to be
constitutional; therefore, the party challenging the validity of the statute bears the
burden of proving that statute to be unconstitutional.11 The “party challenging the
10
“Courts ‘should avoid constitutional rulings when the case can be disposed of on non-
constitutional grounds.’” Burmaster v. Plaquemines Par. Gov’t., 07-2432, p. 7 (La. 5/21/08), 982
So.2d 795, 802 (quoting Ring v. State, Dep’t of Transp. & Dev., 02-1367, p. 4 (La. 1/14/03), 835
So.2d 423, 427).
11
State v. Citizen, 04-1841, p. 11 (La. 4/1/05), 898 So.2d 325, 334; Louisiana Mun. Ass’n v. State,
04-227, p. 45 (La. 1/19/05), 893 So.2d 809, 842; Bd. of Comm’rs of North Lafourche Conservation,
Levee & Drainage Dist. v. Bd. of Comm’rs of Atchafalaya Basin Levee Dist., 95-1353, p. 3 (La.
1/16/96), 666 So.2d 636, 639.
13
constitutionality of a statute must point to a particular provision of the constitution
that would prohibit the enactment of the statute, and must demonstrate clearly and
convincingly that it was the constitutional aim of that provision to deny the
legislature the power to enact the statute in question.” 12 Finally, the presumption of
constitutionality is especially forceful in cases involving statutes related to taxation
and public finance.13 With these principles in mind, we now turn to the merits of
the dormant Commerce Clause challenge.
“The Commerce Clause grants Congress power to ‘regulate Commerce . . .
among the several States.’ Art. I, § 8, cl. 3.” Wynne, 135 S.Ct. at 1794. “Although
the Clause is framed as a positive grant of power to Congress, ‘we have consistently
held this language to contain a further, negative command, known as the dormant
Commerce Clause, prohibiting certain state taxation even when Congress has failed
to legislate on the subject.’” Id. (quoting Jefferson Lines, Inc., 514 U.S. at 179).
The United States Supreme Court established a four-part test to assess the
validity of state taxes under the Commerce Clause in Complete Auto Transit, Inc.,
430 U.S. 274 (“Complete Auto”). Under the Complete Auto test, a state tax on
interstate commerce is upheld if the tax: (1) is applied to an activity with a
substantial nexus with the taxing state; (2) is fairly apportioned; (3) does not
discriminate against interstate commerce; and, (4) is fairly related to the services
provided by the state. Id. at 279. In this case, Taxpayers do not argue the absence
of a substantial nexus with the state or the lack of a fair relationship to the services
12
Fruge v. Bd. of Tr. of Louisiana State Emp.’s Ret. Sys., 08-1270, pp. 5-6 (La. 12/2/08), 6 So.3d
124, 128 (citing World Trade Ctr. Taxing Dist. v. All Taxpayers, Property Owners, 05-374, p. 12
(La. 6/29/05), 908 So.2d 623, 632; Caddo-Shreveport Sales & Use Tax Comm’n v. Office of Motor
Vehicles Dep’t of Pub. Safety & Corr. of the State, 97-2233, pp. 5-6 (La. 4/14/98), 710 So.2d 776,
779; Polk v. Edwards, 626 So.2d 1128, 1132 (La.1993)).
13
Beer Indus. League of Louisiana, 251 So.3d at 386 (citing Caddo-Shreveport Sales & Use Tax
Comm’n, 710 So.2d at 779); Bd. of Dirs. of Louisiana Recovery Dist. v. All Taxpayers, Property
Owners, and Citizens of State of Louisiana, 529 So.2d. 384, 387 (La.1988).
14
provided by the state. Taxpayers argue that Act 109 violates the second and third
prong of the Complete Auto test pertaining to the apportionment of the tax and
discrimination against interstate commerce.
The second prong of the Complete Auto test “‘ensures that each State taxes
only its fair share of an interstate transaction.’” Jefferson Lines, Inc., 514 U.S. at
184 (quoting Goldberg v. Sweet, 488 U.S. 252, 260-61, 109 S.Ct. 582, 588 (1989)).
In Jefferson Lines, the Supreme Court recognized that since Goldberg, it has
“assessed any threat of malapportionment by asking whether the tax is ‘internally
consistent’ and, if so, whether it is ‘externally consistent’ as well.” Id. at 185
(quoting Goldberg, 488 U.S. at 261).
In Wynne, 135 S.Ct at 1802 (quoting Jefferson Lines, 514 U.S. at 185), the
Court explained the application of the internal consistency test, which “‘looks to the
structure of the tax at issue to see whether its identical application by every State in
the Union would place interstate commerce at a disadvantage as compared with
commerce intrastate.’” The Department contends that Act 109 meets the internal
consistency test because “[i]f every state offered the same credit against income
taxes as does Louisiana, all [states] would grant a credit that precisely reduced the
taxpayers in-state income tax to the same amount they would pay if they earned all
that income in-state.” The Department argues that in such instance, “[a]ny additional
tax owed by the in-state taxpayer would simply result from the higher rate charged
on the income by a foreign state,” and “the dormant Commerce Clause does not
protect interstate commerce from a succession of taxes by differing jurisdictions.”
Moorman Mfg. Co., 437 U.S. 267; Jefferson Lines, 514 U.S. 175.
As stated hereinabove, even if a tax is internally consistent, it must also meet
the second component of fair apportionment, i.e., external consistency. Jefferson
Lines, 514 U.S. at 184. External consistency looks to “the economic justification for
15
the State’s claim upon the value taxed, to discover whether a State’s tax reaches
beyond that portion of value that is fairly attributable to economic activity within the
taxing State.” Id. at 185 (citing Goldberg, 488 U.S. at 262). “[T]he threat of real
multiple taxation (though not by literally identical statutes) may indicate a State’s
impermissible overreaching.” Id.Taxpayers argue that Act 109 fails the fair apportionment test because its tax
liability does not reasonably reflect how and where Taxpayers’ income is generated.
Act 109 fails to fairly apportion the tax according to each state’s relation to the
income. Since no credit is given with respect to the taxes paid on income earned
from sources in Texas, Taxpayers maintain that Act 109 fails to apportion the out-
of-state income in the first instance. Not only is it not apportioned, it creates the
potential for multiple taxation of the same income. We agree with Taxpayers that
Act 109 fails the external consistency test.
The third prong of the Complete Auto test addresses whether the state tax
discriminates against interstate commerce. “A State may not ‘impose a tax which
discriminates against interstate commerce . . . by providing a direct commercial
advantage to local business.’” Jefferson Lines, 514 U.S. at 197 (quoting
Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct.
357, 362 (1959)). “Thus, States are barred from discriminating against foreign
enterprises competing with local business . . . and from discriminating against
commercial activity occurring outside the taxing State[.]” Id. (citations omitted).
The Department states that there is no discrimination in this case because it
has repeatedly been acknowledged by the United States Supreme Court that
interstate commerce can be subject to a myriad of different taxes as it moves through
the distribution chain. 14 The Department then makes the conclusory statement that
14
The Department quotes the following language from Jefferson Lines, Inc., 514 U.S. at 187-88:
16
“the imposition of Louisiana income tax and Texas franchise tax to the Taxpayers’
interstate activity does not discriminate against interstate commerce or violate the
dormant Commerce Clause.” However, under the third prong of Complete Auto, the
inquiry is whether the tax discriminates by disparate treatment between interstate
and intrastate commerce.
Taxpayers maintain that Act 109 discriminates against interstate commerce in
two ways. First, the amended language of La.R.S. 47:33(A)(4) exposes one hundred
percent of the interstate income of Louisiana residents to double taxation. By virtue
of their ownership in the Pass-Through Entities, which earned income was derived
from sources in Texas, Taxpayers paid taxes on income from Texas sources.
Additionally, since Texas has no reciprocal credit provision, Act 109 does not allow
a credit to Taxpayers on their Louisiana income taxes for the income taxes they paid
on the revenue earned from Texas sources. Therefore, in this case, Taxpayers are
paying income tax twice on their interstate income. However, on income earned in
Louisiana, Taxpayers pay only the Louisiana income tax.
In deriving this rule covering taxation to a buyer on sales of goods we were
not, of course, oblivious to the possibility of successive taxation of related events
up and down the stream of commerce, and our cases are implicit with the
understanding that the Commerce Clause does not forbid the actual assessment of
a succession of taxes by different States on distinct events as the same tangible
object flows along. Thus, it is a truism that a sales tax to the buyer does not preclude
a tax to the seller upon the income earned from a sale, and there is no constitutional
trouble inherent in the imposition of a sales tax in the State of delivery to the
customer, even though the State of origin of the thing sold may have assessed a
property or severance tax on it. See [McGoldrick v. Berwind-White Coal Mining
Co., 309 U.S. 33, 53, 60 S.Ct. 388, 396]; cf. Commonwealth Edison Co. v. Montana,
453 U.S. 609, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981) (upholding severance tax on
coal mined within the taxing State). In light of this settled treatment of taxes on
sales of goods and other successive taxes related through the stream of commerce,
it is fair to say that because the taxable event of the consummated sale of goods has
been found to be properly treated as unique, an internally consistent, conventional
sales tax has long been held to be externally consistent as well.
17
Additionally, Taxpayers state that La.R.S. 47:33(A)(5) provides another
provision for the double taxation of a portion of a Louisiana resident’s interstate
income. The amended language now provides that even if a state offers a reciprocal
credit (thereby satisfying the requirement of La.R.S. 47:33(A)(4)), the amount of the
credit is limited to the amount of Louisiana income tax a taxpayer would have paid
if the income had been earned in Louisiana. Therefore, the effect is to discriminate
against interstate commerce by twice taxing a portion of a taxpayer’s out-of-state
income.
We agree with Taxpayers that Act 109 results in the double taxation of
interstate income as compared with the taxation of intrastate income. This disparate
treatment impermissibly discriminates against interstate commerce, and it fails the
third prong of the Complete Auto test. Our conclusion herein is supported by the
reasoning and holding in Wynne.
As stated above, the district court found Wynne to be dispositive on the issue
of the constitutionality of Act 109. We likewise find Wynne instructive and
applicable herein. Not only did Wynne eliminate any question regarding the
distinction between taxes on net and gross income, as in the instant matter, but it also
involved the potential tax liability of shareholders of an S corporation and whether
the Maryland tax law violated the dormant Commerce Clause.
As analyzed in Wynne, 135 S.Ct. 1787, Maryland imposed an income tax on
its residents for income earned inside and outside Maryland, which was composed
of a state income tax and a county income tax. If a Maryland resident paid income
tax to another state for income earned there, Maryland allowed the taxpayer a credit
against the state portion of the tax paid to the other state, but not the county portion
of the tax. According to the Maryland tax scheme, income of nonresidents was also
taxed in two parts. Nonresidents were required to pay the Maryland state income
18
tax on all income that was earned from sources within Maryland. Nonresidents, not
subject to the county tax, were required to pay a “special nonresident tax” in lieu of
the county tax. Wynne, 135 S.Ct. at 1792. The “special nonresident tax” was levied
on income earned from sources within Maryland. Maryland did not tax the income
of nonresidents earned from sources outside Maryland. Id.The taxpayers in Wynne were Maryland residents who owned stock in an
S corporation, which earned income and filed state income tax returns in multiple
states. The taxpayers earned pass-through income from the S corporation. When
filing their Maryland tax returns, the Wynnes claimed an income tax credit for the
income taxes paid to other states. The Maryland Comptroller of the Treasury
allowed the credit only for the state portion of the income tax and disallowed the
credit for the county income tax.
The Wynne court addressed whether Maryland’s taxation on income was a
violation of the dormant Commerce Clause. Reasoning that the dormant Commerce
Clause prohibits states from discriminating against interstate commerce by
subjecting it to a higher tax that would be collected if the commerce were solely
intrastate, the Court stated:
Under our precedents, the dormant Commerce Clause precludes
States from “discriminat[ing] between transactions on the basis of some
interstate element.” Boston Stock Exchange v. State Tax Comm’n, 429
U.S. 318, 332, n. 12, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977). This means,
among other things, that a State “may not tax a transaction or incident
more heavily when it crosses state lines than when it occurs entirely
within the State.” Armco Inc. v. Hardesty, 467 U.S. 638, 642, 104 S.Ct.
2620, 81 L.Ed.2d 540 (1984). “Nor may a State impose a tax which
discriminates against interstate commerce either by providing a direct
commercial advantage to local business, or by subjecting interstate
commerce to the burden of ‘multiple taxation.’ ” Northwestern States
Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 3
L.Ed.2d 421 (1959) (citations omitted).
Id. at 1794. Addressing Maryland’s particular tax provisions, the Court stated:
19
This case involves the constitutionality of an unusual feature of
Maryland’s personal income tax scheme. Like many other States,
Maryland taxes the income its residents earn both within and outside
the State, as well as the income that nonresidents earn from sources
within Maryland. But unlike most other States, Maryland does not offer
its residents a full credit against the income taxes that they pay to other
States. The effect of this scheme is that some of the income earned by
Maryland residents outside the State is taxed twice. Maryland’s scheme
creates an incentive for taxpayers to opt for intrastate rather than
interstate economic activity.
Id. at 1792.
The Wynne Court discussed tax schemes it had previously found to be
unconstitutional 15 because they “had the potential to result in the discriminatory
double taxation of income earned out of state and created a powerful incentive to
engage in intrastate rather than interstate economic activity.” Id. at 1801-02.
Although it did not use the term in those decisions, the Court recognized that it “held
that those schemes could be cured by taxes that satisfy what [it has] subsequently
labeled the ‘internal consistency’ test.” Id. at 1802 (quoting Jefferson Lines, 514
U.S. at 185). After conducting the internal consistency test, the United States
Supreme Court concluded that “Maryland’s income tax scheme fails the internal
consistency test.” Id. at 1803 (footnote omitted).
In reaching its ultimate conclusion, the Wynne Court explained that “[t]he
critical point is that the total tax burden on interstate commerce is higher, not that
Maryland may receive more or less tax revenue from a particular taxpayer.” Id. at
1805. Further, “[t]hat Maryland’s existing tax unconstitutionally discriminates
against interstate commerce is enough to decide this case.” Id. at 1806. For these
15
J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307, 58 S.Ct. 913 (1938); Gwin, White & Prince, Inc.
v. Henneford, 305 U.S. 434, 59 S.Ct. 325 (1939); Central Greyhound Lines, Inc. v. Mealey, 334
U.S. 653, 68 S.Ct. 1260 (1948). The Wynne Court explained “[o]ur existing dormant Commerce
Clause cases all but dictate the result reached in this case[.]” Wynne, 135 S.Ct. at 1794.
20
reasons, the Supreme Court held that Maryland’s tax scheme violated the federal
constitution.
Like the effect of Maryland’s tax scheme, Act 109’s failure to provide a credit
results in the double taxation of income that is earned outside Louisiana, i.e.,
interstate commerce, but not intrastate income. Because the income, if earned in
Louisiana, would only be taxed once, Act 109 “creates an incentive for taxpayers to
opt for intrastate rather than interstate economic activity” which, pursuant to Wynne,
is violative of the dormant Commerce Clause. Wynne, 135 S.Ct. at 1792. Louisiana
residents who earn interstate income are forced into double taxation on all or a
portion of their interstate income, whereas Louisiana residents with only intrastate
income are not. This tax scheme impermissibly discriminates against interstate
commerce and violates the dormant Commerce Clause of the United States
Constitution. For the above reasons, we hold herein that Act 109 is unconstitutional.
CONCLUSION
We find that the Taxpayers’ payment of the franchise tax under the 2006
revisions to Texas’ franchise tax provisions are income taxes paid to another state
pursuant to the 2015 revisions of La.R.S. 47:33. Further, we hold that Act 109 is
unconstitutional, as it is in violation of the dormant Commerce Clause of the United
States Constitution.
DECREE
For the reasons stated herein, we affirm the judgment of the district court in
its entirety.
AFFIRMED.
21