Sales and Use Tax Laws – Differentiating Between Exemptions and Exclusions Under Louisiana Law

Most U.S. states and many local governments raise revenues through the imposition and collection of sales and use taxes. Compliance with the welter of sales and use tax laws that impact interstate commerce is becoming increasingly complicated. Even the best, most expensive software may not be accurate. In the last few years, another complication has arisen as an increasing number of states have begun to challenge (either directly, as in the case of Alabama, South Dakota and Wyoming, or indirectly through notice and reporting requirements, as in the case of Colorado and Louisiana) the long-standing Supreme Court decision in Quill Corp. v. North Dakota, that limited the exercise of state tax jurisdiction over nonresident businesses. Remote vendors relying on the Quill holding that physical presence nexus is required before the remote vendor can be legally obligated to collect a state’s use taxes ignore this trend at their peril.

State laws may impose the tax directly on the seller in interstate transactions, on consumers or on the transaction itself. States that impose sales and use taxes typically also have statutes allowing collection of tax from a vendor that failed to collect the tax at point of sale. Accordingly, a nonresident remote vendor may find itself fighting an assessment of tax in a foreign state where it has customers regardless of whether the vendor has physical presence in that state. This is problematic in that the vendor may be unaware of its obligations under the laws of a remote state in which it has no property or workers and a limited role, if any, in the political process.

In this environment, it is important to understand sales and use tax concepts that can present pitfalls for the unwary. Louisiana law arguably presents more than its fair share of such pitfalls, the subtleties of which are not always caught by compliance software. By way of example, this article discusses certain nuances of sales and use tax laws that are frequently misunderstood, using Louisiana law as an example.

Louisiana sales tax, like any other state’s sales tax, only applies to sales that occur in the state. That is, Louisiana sales tax law applies to “the sale at retail, the use, the consumption, the distribution, and the storage for use or consumption in this state, of each item or article of tangible personal property, as defined” under Louisiana sales tax law. A sales transaction occurring outside of Louisiana is not taxable by Louisiana.

This could make it cheaper for Louisiana residents to purchase goods and taxable services in out-of-state transactions, particularly from vendors in states with no sales tax or from out-of-state vendors that do not collect Louisiana tax. Louisiana, however, like many other states, imposes a “use tax” to complement its sales tax and to prevent in-state merchants from operating at a competitive disadvantage to out-of-state merchants. The Louisiana use tax law ensures that an out-of-state purchase triggers a tax liability when the property is brought into the state. The use tax is not imposed on the out-of-state transaction itself: it is due as the result of importing tangible personal property into the state that is to be “used, consumed, distributed, or stored to be used or consumed in Louisiana.”

The difference between sales taxes and use taxes is a source of much confusion but nonetheless important. In Louisiana, as in many other states, sales tax is levied upon sales, rentals or leases, and taxable services purchased in the state; use tax is imposed on the importation of tangible personal property into the state for use, consumption, storage or distribution in the state.

In those instances in which a Louisiana consumer purchases goods or taxable services out of state, pays tax on the purchase to another state, and imports the property into Louisiana, a credit for the tax paid elsewhere is allowed against the Louisiana use tax. There is no credit against Louisiana sales tax for sales that occur outside of the state because they are not subject to Louisiana sales tax in the first instance.

Louisiana, again like many other states, also imposes sales tax on sales of services specifically enumerated in the sales tax law. Sales Tax Regulations provide:

State and local sales or use tax law basically treats the furnishing of services and permission to use certain kinds of property the same as the sale of merchandise, and the law classifies those items as sales of services. Only those services specifically itemized under the provisions of R.S. 47:301(14)(a)-(g), are subject to state and local sales or use tax law.

For example, Louisiana sales tax applies to repairs to tangible personal property, but not to repairs to real property. Louisiana sales tax does not ordinarily apply to charges for transportation, freight or hauling.

Another important nuance under Louisiana law, common to other states which impose sales and use taxes, is how a tax exemption differs from a statutory exclusion. Specifically:

[A] tax exemption is a provision that exempts from tax a transaction that would, in the absence of the exemption, otherwise be subject to tax. That is, there has been a statutory decision not to tax a certain transaction that is clearly within the ambit and authority of the taxing statutes to tax. … An exclusion, on the other hand, relates to a transaction that is not taxable because it falls outside the scope of the statute giving rise to the tax, ab initio. Transactions excluded from the tax are those which, by the language of the statutes, are defined as beyond the reach of the tax.

The NISCO court cited various authorities in stating that a tax exemption is “strictly construed” in the state’s favor and must be “affirmatively established” by the claimant, whereas tax exclusions are construed against the taxing authority. Thus, a taxpayer bears the burden of proving that a transaction qualifies for a tax exemption, but the Department of Revenue bears the burden of proving that a transaction or a taxpayer is not excluded from tax.

Currently, Louisiana sales and use tax law sets out approximately 200 sales and use tax exclusions and exemptions. These exclusions and exemptions are, to some extent, organized by type. Exclusions, which are not taxable by definition, are largely contained in the definitional section of the sales and use tax laws under Louisiana Revised Statutes (La. R.S.) § 47:301. Exemptions are generally contained in the exemption section of the law under La. R.S. §§ 47:305 – 305.71. It is important to note that there are no “magic words” that determine whether something is an exemption or an exclusion. Rather, a taxpayer must look to the specific words used by the legislature to determine whether the legislature intended to create an exemption or an exclusion.

In Louisiana, taxpayers have difficulty on occasion when state and local auditors conflate exemptions and exclusions and try to apply the characteristics of exemptions to exclusions. For example, because the taxpayer bears the burden of proving an exemption applies, a taxpayer traditionally is required to collect and maintain a tax exemption certificate to claim an exemption. In contrast, unless the law otherwise provides, a taxpayer is not required to obtain a certificate documenting an excluded transaction. In Louisiana, the Department of Revenue and Louisiana localities frequently take the position that a taxpayer is required to obtain an exemption certificate for an excluded transaction, even though the law imposes no such requirement. Knowledge of the applicable law may assist a business on audit and such distinctions should be considered when faced with an assesssment.