By Zachary Atkins and Pilar Mata
The Louisiana Supreme Court rejected the Louisiana Department of Revenue’s attempt to look through a foreign single member limited liability company (SMLLC) and assess its owner for unpaid sales tax. The owner, a resident of Louisiana, formed the SMLLC under the laws of Montana and caused it to purchase a recreational vehicle (RV) from a Louisiana dealer. As the court noted in its opinion, Montana LLCs are commonly used to avoid paying sales tax on RVs because Montana is the only state that does not impose a sales tax on the purchase of such vehicles by residents. The fact that the owner formed the SMLLC solely to avoid paying tax was undisputed, but the court held that the Department could not ignore the SMLLC’s separate existence and assess the owner for unpaid sales tax. The Montana SMLLC was validly formed, and the bill of sale, certificate of title and purchase agreement for the RV indicated that the SMLLC was the buyer. Therefore, as explained by the court, the Department should have assessed the SMLLC if it believed sales tax was due. The court dismissed the Department’s argument that it should be permitted to pierce the veil of the SMLLC, noting that the Department raised this argument only after the owner challenged the assessment. Furthermore, Louisiana law provides that the personal liability of members of a limited liability company is governed by the law of the state of organization—in this case Montana—and the Department never applied Montana law in deciding whether the SMLLC’s veil could be pierced. The court also rejected the Department’s assertion that the SMLLC’s veil could have been pierced on the grounds of fraud, holding that the Department presented no evidence of fraud, that tax avoidance (as distinguished from tax evasion) is not tantamount to fraud, and that “[a] finding that the formation of an LLC solely for tax avoidance and not for any ‘legitimate’ purpose constitutes fraud would have destabilizing implications for Louisiana law.” Thomas v. Bridges, No. 2013-C-1855, 2014 WL 1800076 (La. May 7, 2014).
Although the Thomas case arose in the context of a sales tax assessment, the emphasis on separate legal entity status is consistent with the Louisiana Court of Appeals’ decision in UTELCOM, Inc. v. Bridges, 77 So.3d 39 (La. Ct. App. 2011), cert. denied, 83 So.3d 1046 (La. 2012), which held that a corporation’s passive ownership interest in a limited partnership doing business in Louisiana will not, in and of itself, subject the corporation to the Louisiana corporate franchise tax.