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Smith v. Robinson

Supreme Court of Louisiana

December 5, 2018

IVAN I. SMITH, JR. AND GLORIA G. SMITH
v.
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 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 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 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 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 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 ...


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