Nelson Industrial Steam Co. v. Calcasieu Parish School System Sales & Use Tax Dept.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

CA 12-477 consolidated with CA 12-478, CA 12-479

CYNTHIA BRIDGES, SEC. DEPT. OF REV., STATE OF LOUISIANA

VERSUS

NELSON INDUSTRIAL STEAM CO.

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APPEAL FROM THE
FOURTEENTH JUDICIAL DISTRICT COURT
PARISH OF CALCASIEU, NO. 2008-6375 C/W 2010-3564 C/W 2010-5853
HONORABLE RONALD F. WARE, DISTRICT JUDGE

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BILLY HOWARD EZELL
JUDGE

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Court composed of Oswald A. Decuir, Billy Howard Ezell, and Phyllis M. Keaty,
Judges.

AFFIRMED.

William Boyce Monk
Stockwell, Sievert, Viccellio, Clements & Shaddock
P. O. Box 2900
Lake Charles, LA 70602
(337) 436-9491
COUNSEL FOR DEFENDANT/APPELLANT:
Nelson Industrial Steam Co.

Linda Sarradet Akchin
Kean Miller
P. O. Box 3513
Baton Rouge, LA 70821-3513
(225) 387-0999
COUNSEL FOR DEFENDANT/APPELLANT:
Nelson Industrial Steam Co.

Cheryl Mollere Kornick
Attorney at Law
701 Poydras Street, Suite 5000
New Orleans, LA 70139-5099
(504) 581-7979
COUNSEL FOR OTHER:
Louisiana Chemical Association

Russell Joseph Stutes Jr.
Stutes & Lavergne, LLC
600 Broad Street
Lake Charles, LA 70601
(337) 433-0022
COUNSEL FOR PLAINTIFF/APPELLEE:
Cynthia Bridges, Sec. Dept. of Rev., State of Louisiana

EZELL, Judge.

Nelson Industrial Steam Company (NISCO) appeals the decision of the trial

court granting summary judgment in favor of the Louisiana Department of Revenue

(the State) and the Calcasieu Parish School System Sales and Use Tax Department

(Calcasieu) in three consolidated cases concerning the application of the further

processing exclusion from sales tax to its purchases of limestone and sand. For the

following reasons, we hereby affirm the judgments of the trial court.

NISCO manufactures electricity and steam using Circulating Fluidized Boiler

(CFB) technology. The CFBs produce heat energy which creates steam and activates

turbines which generate electricity. NISCO uses petroleum coke (petcoke) as fuel in

the CFBs. Petcoke contains sulfur, which if not captured, is emitted into the

atmosphere. NISCO introduces limestone into the CFBs in order to control sulfur

emissions. Its CFBs are specifically designed for the injection of limestone, and

NISCO could not manufacture electricity and steam without the injection of limestone.

Through the manufacturing process, limestone is turned into ash by the binding of the

calcium in the limestone with the emitted sulfur. For a portion of the period at issue,

NISCO also injected sand into the process in an attempt to prevent clogging of j-

valves in the boiler system. NISCO sells all of the electricity generated to Entergy for

resale to NISCO‟s members and all of the steam produced to one of its members. It

sells its ash by-product to a third party for use in various commercial, industrial, and

environmental applications.

NISCO did not pay sales and use taxes on the limestone and sand used,

claiming they were purchased for further processing and, therefore, exempt from sales

taxes. The State filed two suits for the collection of tax and interest owed on the

purchases of limestone and sand. In one of the suits, the State also sought a penalty

for the delinquent taxes. NISCO filed one suit against Calcasieu for refund of sales

tax, penalty, and interest paid under protest for the same purchases. All three suits

were consolidated in the trial court and are consolidated on appeal.

All three parties filed motions for summary judgment. On September 16, 2011,

a hearing was held on the motions. The trial court rendered a ruling in favor of the

State and Calcasieu, granting their joint motion for summary judgment, denying

NISCO‟s cross motion, and awarding all taxes, penalties, and interest assessed in

these matters. From that decision, NISCO appeals.

NISCO first claims that the trial court erred in granting the State‟s motion for

summary judgment where it alleges undisputed facts establish that the limestone and

sand were purchased for further processing for sale. We disagree.

An appellate court reviews a trial court judgment on a motion for summary

using the de novo standard of review, “using the same criteria that govern the trial

court‟s consideration of whether summary judgment is appropriate, i.e., whether there

is a genuine issue of material fact and whether the mover is entitled to judgment as a

matter of law.” Supreme Servs. & Specialty Co., Inc. v. Sonny Greer, Inc., 06–1827, p.

4 (La. 5/22/07), 958 So.2d 634, 638. The motion should be granted only “if the

pleadings, depositions, answers to interrogatories, and admissions on file, together

with the affidavits, if any, show that there is no genuine issue as to material fact, and

that mover is entitled to judgment as a matter of law.” La.Code Civ.P. art. 966(B).

The Louisiana Supreme Court set forth the law regarding further processing

exclusions from Louisiana sales and use tax as follows in International Paper, Inc. v.

Bridges, 07-1151, pp. 10-23 (La. 1/16/08), 972 So.2d 1121, 1128-35 (footnotes

omitted)(first, second, sixth, seventh, and twelfth alterations in original):

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LA.REV.STAT. § 47:302 is the statutory provision which outlines the
imposition of sales and use taxes. Specifically, LA.REV.STAT. § 47:302(A)
provides, in pertinent part:

There is hereby levied a tax upon 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 herein. . . .

“Sale at retail” can take on different meanings, depending upon the
taxing authority involved and/or the product(s) being sold. LA.REV.STAT.
§ 47:301(10)(a)(i) provides, in pertinent part:

Solely for the purposes of the imposition of the state sales
and use tax, “retail sale” or “sale at retail” means a sale
to a consumer or to any other person for any purpose
other than for resale as tangible personal property . . . .
(Emphasis added).

Furthermore, LA.REV.STAT. § 47:301(10)(c)(i)(aa) (i.e., the “further
processing exclusion”) provides:

The term “sale at retail” does not include sale of
materials for further processing into articles of tangible
personal property for sale at retail. (Emphasis added).

....

While the issue of the proper interpretation of the “further
processing exclusion” is not res nova, the Legislature has not yet
delineated what, exactly, is meant by “materials for further processing
into articles of tangible personal property.” However, there is a DOR rule
which specifically addresses the “further processing exclusion,” and
which may be found in the Louisiana Administrative Code. La. Admin.
Code, Title 61, Part I, § 4301, Retail Sale or Sale at Retail (d)
2006)(“LAC 61:I.4301”), provides:

Sales of materials for further processing into articles of
tangible personal property for subsequent sale at retail do
not constitute retail sales. This exemption does not cover
materials which are used in any process by which tangible
personal property is produced, but only those materials
which themselves are further processed into tangible
personal property. Whether materials are further processed
or simply used in the processing activity will depend
entirely upon an analysis of the end product. Although any
particular materials may be fully used, consumed,
absorbed, dissipated or otherwise completely disappear
during processing, if it does not become a recognizable

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and identifiable component which is of some benefit to the
end product, it is not exempt under this provision. The fact
that a material remained as a recognizable component of
an end product by accident because the cost of removal
from the end product was prohibitive or for any other
reason, if it does not benefit the property by its presence, it
was not material for further processing and the sale is not
exempt under this provision. (Emphasis added).

It is from the aforementioned rule that a “three-pronged test” developed,
in order to determine the taxability of those materials purchased for
further processing. As the Board noted in its decision:

The Secretary’s regulation, LAC 61:I.4301(10) and the
case law provides that in order to be “material for further
processing,” as contemplated by the above statute, the raw
materials or their component molecular parts must meet
three criteria: (1) they must be of benefit to the end product;
(2) they must be a recognizable and identifiable component
of the end product, and (3) they must have been purchased
for the purpose of reprocessing into the end product.

....

In Traigle v. PPG Industries, Inc., 332 So.2d 777 (La.1976), this
Court examined whether the purchase of graphite blades, utilized in the
manufacture of chlorine, was excluded from the sales and use tax
provisions. . . . The Traigle Court concluded:

The Louisiana sales/use tax is a tax upon the sale at retail,
use, consumption, distribution, or storage for use in
consumption, of materials sold or used in Louisiana. La.R.S.
47:302(A). It is measured by the sales price if the item is
sold at retail, or upon the cost price when not sold at retail
but rather used, consumed, or stored for use or consumption.
La.R.S. 47:302(A).

Pertinently to the present issue, La.R.S. 47:301(10) defines
“sale at retail” as: “ * * * A sale to a consumer or to any
other person for any purpose other than for resale in the
form of tangible personal property. . . . The term „sale at
retail‟ does not include sales of materials for further
processing into articles of tangible personal property for sale
at retail * * *.”

....

….V]iewing the definition of La.R.S. 47:301(10) as a whole,
the better or more reasonable interpretation, we believe, is

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that the substance cannot be regarded as purchased for
processing “into” the finished article (and, thus, as non-
taxable to the manufacturer), when in fact the “purpose”
for which it is bought is not for incorporation “into” the
manufactured product but rather only to be used in the
process of producing the manufactured product for sale-at
least where, as here, the inclusion of the waste residue of
the substance results from an unintended (although
unavoidable) inefficiency of the manufacturing process, is
of no benefit to the product sold, and is of the nature of an
impurity rather than of an integral part of the finished
product.

Accordingly, the Traigle Court recognized that the “further
processing exclusion” applied to those raw materials purposefully
incorporated within the final products (i.e., not incidentally/accidentally
incorporated within the final products), such that said incorporation
resulted in the raw materials providing integral and beneficial parts to the
final products produced….

....

Several years after the Traigle decision, this Court was again faced
with a question involving the taxability of raw materials utilized in the
“further processing” of final products for resale. In Vulcan Foundry, Inc.
v. McNamara, 414 So.2d 1193 (La.1982), [that court noted:]

It is clear from the evidence in this case that coke is
purchased for the purpose of heating the scrap iron; the
small amount of carbon in the finished product is
incidental. The fact that using coke as a fuel has a
beneficial side effect does not change the purpose for which
it is bought. Accordingly, we conclude that Vulcan‟s
purchase of coke is as a “consumer” for a “purpose other
than for resale,” that is, for its use as a heat source to melt
scrap iron and not for further processing into an article of
tangible property for sale at retail.

While recognizing that the carbon (from the coke) became an identifiable
and beneficial component of the final products, the Vulcan Court focused
upon the “purpose” for which the manufacturer purchased the raw
material. As such, this Court concluded that the coke was subject to sales
and use taxes because the presence of the carbon in the final products
was merely incidental to the manufacturing process.

....

As we previously discussed, the “further processing exclusion,”
which merely provides that “[t]he term “sale at retail” does not include

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sale of materials for further processing into articles of tangible personal
property for sale at retail,” has been further explained by the DOR‟s own
administrative rule (i.e., LAC 61:I.4301). From this rule, we recognize
that raw materials “further processed” into end products are excluded
from the sales and use tax provisions when: (1) the raw materials become
recognizable and identifiable components of the end products; (2) the
raw materials are beneficial to the end products; and (3) the raw materials
are material for further processing, and as such, are purchased with the
purpose of inclusion in the end products.

....

To be excluded from the sales and use tax provisions, we also
agree that the raw materials must be purchased with the purpose of
incorporating said materials into the end products. . . .

....

Accordingly, to be excluded from sales and use tax, we find that the raw
materials must have been purchased for the purpose of incorporation
within the end products, as the raw materials must be material for the
further processing of the final products produced.

It is clear from the record the purpose for which NISCO purchased the

limestone and sand. Rick Zagar, NISCO‟s operations manager, stated in his affidavit

that the petcoke burners were used because they were the most economical way to

generate electricity. He noted that federal regulations limit the amount of sulfur

released into the air and that those regulations “recognized limestone injection as the

„best available control technology‟ (BACT) for controlling the emission of sulfur

from these specific types of boilers.” He went on to state that the “CFB technology

requires the use of limestone,” that “[l]imestone is required to be used in CFB

technology,” and, most damningly, that “[t]here are no other options available.”

(Emphasis added.)

Sandi Boyles, NISCO‟s business manager, reiterated in her deposition that the

boilers used by NISCO could not operate to make electricity without limestone.

Likewise, attached to one of her affidavits is an email from Johnnie Botley, another

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NISCO business manager, to Calcasieu regarding the sand also at issue. Therein, Mr.

Botley states (emphasis ours):

Sand is utilized in the NISCO process for injection into the circulating
fluidized boiler along with petroleum coke and limestone for the purpose
of generating electricity for sale. The sand is necessary in the operation
of the circulating fluidized bed boiler to prevent agglomeration
(hardening) of the coke and limestone ash which would block the normal
process circulation of the fluidized bed thereby causing premature
shutdown of the boiler and thus the loss of electrical power/steam
production.

Thus, it is clear from NISCO‟s own evidence that the purpose of the limestone

was to comply with federal regulations and allow it to generate electricity for sale.

NISCO even goes so far as to admit in brief that it “could not manufacture electricity

and steam using CFB technology without the injection of limestone.” While NISCO

is able to recoup some of the money it spends on limestone by selling the ash by-

product, it is clear that the production of ash is not the purpose for which the

limestone is purchased.1 The trial court made no error in its ruling that the limestone

and sand were purchased to generate electricity and not for further processing.

Accordingly, those purchases were not exempt from the sales and use tax.

NISCO next claims that the trial court erred in assessing penalties on the

delinquent taxes because it claims it acted in good faith. Again, we disagree. As

noted in Boyd Racing, LLC v. Fruge, 08-581, p. 9 (La.App. 3 Cir. 11/5/08), 996 So.2d

659, 665, writ denied, 08-2835 (La. 2/6/09), 999 So.2d 780:

This court has repeatedly held that a good faith defense is not available in
tax delinquency cases, given the supreme court‟s decision in St. John the
Baptist Parish School Board v. Marbury–Pattillo Construction Co., Inc.,
259 La. 1133, 254 So.2d 607 (1971). See Mercury Cellular Tel. Co. v.
1
It should be further noted that NICSO produced electricity for years with natural gas
burners that did not produce ash, further undercutting its claim that it intended to produce ash for
sale. Moreover, while NISCO spent roughly $33,000,000 on limestone, it was able to sell the ash
for a mere $5,000,000. While this amount clearly offsets some of the cost of producing electricity, it
does not in any way change the reality that the limestone was purchased for the purpose of electrical
generation, not for processing into ash.

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Calcasieu Parish, 00–318 (La.App. 3 Cir. 12/13/00), 773 So.2d 914, writ
denied, 01–126 (La.3/16/01), 787 So.2d 314; Lake Charles Memorial
Hosp., 728 So.2d 454.

We find that the narrow exception to this rule articulated in BP Oil Co. v.

Plaquemines Parish Government, 93–1109 (La.9/6/94), 651 So.2d 1322, is

inapplicable in the instant case. This assignment of error is without merit.

For the above reasons, we hereby affirm the judgments of the trial court. Costs

of this appeal are assessed against NISCO.

AFFIRMED.

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