Cynthia Bridges, SEC. Dept. of Rev., State of Louisiana v. Nelson Industrial Steam Co.

STATE OF LOUISIANA
COURT OF APPEAL, THIRD CIRCUIT

14-1250

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

VERSUS

NELSON INDUSTRIAL STEAM CO.

Consolidated With
14-1251

NELSON INDUSTRIAL STEAM CO.

VERSUS

CALCASIEU PARISH SCHOOL SYSTEM SALES AND USE TAX DEPT.,
ET AL.

Consolidated With
14-1252

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

VERSUS

NELSON INDUSTRIAL STEAM CO.

Consolidated With
14-1253

NELSON INDUSTRIAL STEAM CO.

VERSUS

CALCASIEU PARISH SCHOOL SYSTEM SALES AND USE TAX DEPT.,
ET AL.

**********

APPEAL FROM THE
FOURTEENTH JUDICIAL DISTRICT COURT
PARISH OF CALCASIEU, NO. 2008-6375, C/W 2010-3564,
C/W 2010-5853 & C/W 2013-2661
HONORABLE RONALD F. WARE, DISTRICT JUDGE

**********

ULYSSES GENE THIBODEAUX
CHIEF JUDGE

**********

Court composed of Ulysses Gene Thibodeaux, Chief Judge, Billy Howard Ezell,
and John E. Conery, Judges.

CONERY, J., dissents and assigns reasons.

AFFIRMED.

H. Alan McCall
Stockwell, Sievert, Viccellio, Clements & Shaddock
Post Office Box 2900
Lake Charles, Louisiana 70602
Telephone: (337) 436-9491
COUNSEL FOR:
Defendant/Appellant - Nelson Industrial Steam Co.

Christopher J. Dicharry
Linda S. Akchin
Kean Miller LLP
400 Convention Street - Suite 700
Baton Rouge, Louisiana 70802
Telephone: (225) 387-0999
COUNSEL FOR:
Defendant/Appellant - Nelson Industrial Steam Co.

Russell J. Stutes, Jr.
Stutes & Lavergne, LLC
600 Broad Street
Lake Charles, Louisiana 70601
Telephone: (337) 433-0022
COUNSEL FOR:
Plaintiffs/Appellees - Cynthia Bridges, Sec., Dept. of Rev., State of
Louisiana; Calcasieu Parish School System Sales & Use Tax Dept., and
John Collins, Tax Administrator

Cheryl M. Kornick
Liskow & Lewis
One Shell Square
701 Poydras Street - Suite 5000
New Orleans, Louisiana 70139-5009
Telephone: (504) 581-7979
BRIEF OF AMICUS CURIAE - Louisiana Chemical Association

THIBODEAUX, Chief Judge.

Nelson Industrial Steam Company (NISCO) appeals four judgments

rendered against it in four consolidated tax cases. Two judgments in favor of

Cynthia Bridges, Secretary, Louisiana Department of Revenue, State of Louisiana

(State) ordered NISCO to pay taxes, penalties, and interest owed. Two judgments

in favor of Calcasieu Parish School System Sales and Use Tax Department as

Central Collector of Sa1es and Use Tax for the Parish of Calcasieu, and John

Collins1 in his Capacity as Administrator of the Calcasieu Parish School System

Sales and Use Tax Department (Parish), dismissed NISCO’s two suits for refunds

of taxes, penalties, and interest paid under protest. Finding no legal error or

manifest error in the judgments of the trial court, we affirm.

I.

ISSUES

We must decide:

(1) whether the trial court erred in granting judgment against
NISCO on the further processing issue;

(2) whether the trial court manifestly erred in not granting
NISCO’s request for attorney fees in suit no. 2013-2661 against
the Parish;

(3) whether the trial court manifestly erred in imposing penalties
against NISCO in suit nos. 2010-3564 and 2013-2661 against
the Parish.

1
John Collins is now deceased.

II.

FACTS AND PROCEDURAL HISTORY

NISCO constructs and operates power-generating facilities in the

Lake Charles area. During the relevant tax periods, NISCO’s revenue from the

sale of electricity was $739 million. NISCO purchased sand and limestone for its

generating process at a cost of $46 million. Generally, raw materials which are

sold at retail and used up in the manufacturing process are considered tangible

personal property, and they are subject to sales tax at the time of their purchase,

unless a special exemption or exclusion applies. NISCO sought to be exempt from

paying sales tax on its purchase of sand and limestone by invoking the “further

processing” statute.2

The claims of taxes owed by the tax collecting agencies and the

claims of NISCO for the tax exemption/exclusion ultimately resulted in four

consolidated cases: two suits against NISCO by the State to collect taxes for the

tax periods 2005–2007 and 2008–2012; 3 and two suits against the Parish by

NISCO for refunds of taxes paid under protest for tax periods 2007–2009 and

2010–2012.4

The trial court initially heard cross-motions for summary judgment on

the further processing issue and granted summary judgments in favor of the State
2
Louisiana Revised Statutes 47:301(10)(c)(i)(aa) states: “The term ‘sale at retail’ does
not include sale of materials for further processing into articles of tangible personal property for
sale at retail.”
3
Suit no. 2008-6375, Cynthia Bridges, Secretary, Department of Revenue, State of
Louisiana v. Nelson Industrial Steam Company; and suit no. 2010-5853, Cynthia Bridges,
Secretary, Department of Revenue, State of Louisiana v. Nelson Industrial Steam Company,
respectively.
4
Suit no. 2010-3564, Nelson Industrial Steam Company v. Calcasieu Parish School
System Sales and Use Tax Department, et al.; and suit no. 2013-2661, Nelson Industrial Steam
Company v. Calcasieu Parish School System Sales and Use Tax Department, et al., respectively.

2

and the Parish in the first three suits. On appeal, this court affirmed. Bridges v.

Nelson Industrial Steam Co., 12-477 (La.App. 3 Cir. 11/7/12), 106 So.3d 147. The

Louisiana Supreme Court granted NISCO’s writ application and vacated the

summary judgment rulings, finding that genuine issues of material fact precluded

summary judgment. Bridges v. Nelson Industrial Steam Co., 13-171 (La. 3/8/13),

108 So.3d 1168. On remand, following a trial on the merits which included the

fourth suit, the trial court rendered judgments again in favor of the State and the

Parish, signing four separate judgments, one for each of the consolidated cases.5

NISCO appealed. For the reasons that follow, we affirm the judgments of the trial

court.

III.

STANDARDS OF REVIEW

Questions of law, such as the proper interpretation of a statute, are

reviewed by an appellate court under the de novo standard of review. Land v.

Vidrine, 10-1342 (La. 3/15/11), 62 So.3d 36. An appellate court may not set aside
5
June 2, 2014 judgment in suit no. 2008-6375, Cynthia Bridges, Secretary, Department of
Revenue, State of Louisiana v. Nelson Industrial Steam Company, in favor of the State, ordered
NISCO to pay $591,071.91 in taxes, $12,929.10 in penalties, and $410,812.31 in interest through
March 25, 2014, plus accruing interest (Appeal No. 14-1250);

June 2, 2014 judgment in suit no. 2010-3564, Nelson Industrial Steam Company v.
Calcasieu Parish School System Sales and Use Tax Department, et al., in favor of the Parish,
dismissed NISCO’s suit for refund of $911,683.79 in taxes, $227,921.01 in penalties, and
$271,162.18 in interest through July 12, 2010, that were paid under protest (Appeal No. 14-
1251);

June 2, 2014 judgment in suit no. 2010-5853, Cynthia Bridges, Secretary, Department of
Revenue, State of Louisiana v. Nelson Industrial Steam Company, in favor of the State, ordered
NISCO to pay $1,216,895.77 in taxes, $6,598.41 in penalties, and $310,589.16 in interest
through March 25, 2014, plus accruing interest (Appeal No. 14-1252); and

June 2, 2014 Judgment in suit no. 2013-2661, Nelson Industrial Steam Company v.
Calcasieu Parish School System Sales and Use Tax Department, et al., in favor of the Parish,
dismissed NISCO’s suit for refund of $1,076,032.73 in taxes, $269,008.29 in penalties, and
$275,788.58 in interest through May 13, 2013, that were paid under protest (Appeal No. 14-
1253).

3

a trial court’s findings of fact in the absence of manifest error or unless the findings

are clearly wrong. Stobart v. State, Through DOTD, 617 So.2d 880 (La.1993);

Rosell v. ESCO, 549 So.2d 840 (La.1989). If a trial court’s findings are reasonable

based upon the entire record and evidence, an appellate court may not reverse

those findings even if it is convinced that had it been sitting as trier of fact it would

have weighed the evidence differently. Housely v. Cerise, 579 So.2d 973

(La.1991). This principle of review is grounded upon the better capacity of the

trial court to evaluate live witnesses and also upon the proper allocation of trial and

appellate functions between the respective courts. Canter v. Koehring Co., 283

So.2d 716 (La.1973).

IV.

LAW AND DISCUSSION

The trial court’s reasons for judgment consist of one short paragraph:

It is indisputable that the [CFB] technology
process NISCO employs in its production of steam and
electricity requires the use of limestone. And,
unavoidably, also produces ash, which it sells -- NISCO
sells. It is also indisputable that limestone in any form,
or its component parts, are not found in the steam and
electricity produced. Just because the ash is an incidental
byproduct of the [CFB] process, its production, even in
combination with the production of steam and electricity,
does not in and of itself permit NISCO to claim the
benefit of the further processing tax exclusion on its
purchase of limestone.

NISCO assigns seven errors regarding the above application of the

further processing statute, La.R.S. 47:301(10)(c)(i)(aa). Whether the statute

applies is essentially one issue and will be treated as such. NISCO assigns two

additional errors regarding the imposition of penalties against NISCO and the

4

failure to award attorney fees to NISCO in NISCO’s suits against the Parish. Thus,

there are three main issues for review.

General Legislation

A manufacturer, like any consumer, is taxed on items of tangible

personal property that it purchases and uses in manufacturing its product, pursuant

to La.R.S. 47:302(A), which states 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 . . . .”

Louisiana Revised Statutes 47:301(10) (emphasis added) states in

pertinent part:

(a)(i) 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, or for the lease of automobiles in an arm’s
length transaction, and shall mean and include all such
transactions as the secretary, upon investigation, finds to
be in lieu of sales . . . [.]

(ii) Solely for purposes of the imposition of the
sales and use tax levied by a political subdivision or
school board, “retail sale” or “sale at retail” shall mean a
sale to a consumer or to any other person for any purpose
other than for resale in the form of tangible personal
property, or resale of those services defined in Paragraph
(14) of this Section provided the retail sale of the service
is subject to sales tax in this state, and shall mean and
include all such transactions as the collector, upon
investigation, finds to be in lieu of sales; provided that
sales for resale be made in strict compliance with the
rules and regulations. Any dealer making a sale for
resale, which is not in strict compliance with the rules
and regulations shall himself be liable for and pay the
tax. A local collector shall accept a resale certificate
issued by the Department of Revenue, provided the
taxpayer includes the parish of its principal place of

5

business and local sales tax account number on the state
certificate. However, in the case of an intra-parish
transaction from dealer to dealer, the collector may
require that the local exemption certificate be used in lieu
of the state certificate. The department shall
accommodate the inclusion of such information on its
resale certificate for such purposes.

Thus, generally, items that are purchased for the purpose of reselling

them in the open market are not taxed until they are sold at retail to the end

consumer. There are numerous specific inclusions and specific exclusions or

exemptions to the general rules.6

Further Processing Statute: La.R.S.47:301(10)(c)(i)(aa)

Here, NISCO seeks to be exempt from paying sales tax on its $46

million purchase of sand and limestone by asserting that it did not use up the raw

materials in manufacturing steam and electricity; rather, they were purchased for

the purpose of resale because NISCO sold the ash that was created in the

manufacturing process for $6.8 million. Specifically, NISCO invokes La.R.S.

47:301(10)(c)(i)(aa) which states, in full: “The term ‘sale at retail’ does not

include sale of materials for further processing into articles of tangible personal

property for sale at retail.”

The Louisiana Secretary of Revenue has promulgated rules and

regulations in La.Admin. Code tit. 61, pt. I, § 4301, entitled, “Uniform State and

Local Sales Tax Definitions,” which define the terms and phrases and provide

examples for La.R.S. 47:301(1)–(27) “for illustration only [but] in no case should

6
The taxing agencies assert that NISCO seeks an exemption from the only taxable
component of its operation that remains because it already receives exemptions for: the petcoke
it purchases to fuel its boilers pursuant to La.R.S. 47:305(D)(1)(d) and (h); the electricity and
steam it sells pursuant to La.R.S. 47:305(D)(1)(b) and (d); the ash it sells for resale pursuant to
La.R.S. 47:301(10)(a)(i); and, that most of NISCO’s manufacturing equipment is exempt from
local sales tax pursuant to La.R.S. 47:301(28).

6

they be construed to impose a limitation” on the statute. La.Admin.Code tit. 61, pt.

I, § 4301(C). Under § 4301(C) of the regulations, the definition of

“Retail Sale or Sale at Retail—,” provides in pertinent part:

a. The major tax levied by state and local sales or
use tax is imposed upon retail sales or sales at retail
which contemplates the taxing of any transaction by
which title to tangible personal property is transferred for
a consideration, whether paid in cash or otherwise, to a
person for any purpose other than for resale.

b. While specific exclusions are provided in R.S.
47:301(10) with respect to sales of materials for further
processing into articles for resale and with respect to
casual, isolated, or occasional sales, and exemptions are
provided for sales of particular items or classes of
property by R.S. 47:305 and R.S. 47:305.1 through R.S.
47:305.52, the intent of the law is to classify every sale
made to the final user or consumer for any imaginable
purpose, other than for resale, as a retail sale or a sale at
retail. For purposes of R.S. 47:301(10), whether a
transaction is exempt from taxation by statute,
jurisprudence, or by constitution has no bearing on
classification of the transaction.

....

d. 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 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

7

further processing and the sale is not exempt under this
provision.

The seminal cases interpreting the statute and the regulations are

Traigle v. PPG Industries, Inc., 332 So.2d 777 (La.1976), and Vulcan Foundry,

Inc. v. McNamara, 414 So.2d 1193, 1196 (La.1981) (on rehearing). A three-

pronged test has developed to determine whether a manufacturer’s purchase of raw

materials will be exempt from the sales and use tax under the “further processing”

statute. The raw materials, or their component molecular parts, (1) must be of

benefit to the end product; (2) must be a recognizable and identifiable component

of the end product; and (3) must have been purchased for the purpose of

reprocessing into the end product. International Paper v. Bridges, 07-1151 (La.

1/16/08), 972 So.2d 1121.

In Traigle, 332 So.2d 777, the Department of Revenue brought a

proceeding to collect sales and use taxes on graphite blades purchased by PPG for

use in its production of chlorine. The trial court found that taxes were due, and this

court reversed. The Louisiana Supreme Court reversed this court and reinstated

the trial court. Justice Tate held that graphite could not be regarded as having been

purchased for processing into the finished article because the raw material was not

an integral part of the end product. Justice Tate articulated as follows:

The issue concerns the liability of the defendant
chemical manufacturer for Louisiana sales/use taxes
upon some five million dollars worth of graphite blades
bought by it and used for the production of chlorine. The
state Collector of Revenue sues to collect some one
hundred thousand dollars of taxes allegedly due upon the
purchase of this graphite.

....

As we will state more fully below, the precise
issue of tax law relates to whether, under a tax definition,

8

the graphite is used by the manufacturer as an ultimate
consumer, as in the case of machinery or fuel (for which
a sales/use tax is due when purchased by it); or whether,
instead, the graphite is processed into the final product,
so that the purchase of the latter, as the ultimate
consumer, pays the tax (not the manufacturer).

Id. at 779.

In discussing the factual context of PPG’s operations, Justice Tate

explained:

Chlorine is produced from salt water brine by an
electrolytic process--i.e., the passage of electricity
through a substance (the electrolyte) from a positive
electrode or terminal (the anode) to a negative electrode
or terminal (the cathode). In the present case, the electric
current is passed through a salt water brine (the
electrolyte) from the anode (the graphite blades here
sought to be taxed, embedded in lead) to a cathode (a
perforated steel screen, covered with asbestos). The
passage of the electric current through the salt water
brine breaks the salt water down into chlorine, hydrogen,
and caustic soda, all saleable products.

In the process, the graphite (carbon) blades of the
anode and the asbestos of the cathode become unusable
and must be replaced. The carbon anodes last about six
months, and the asbestos diaphragms last about 150 days.
(The steel and lead do not appreciably deteriorate
through their use in the process.)

The taxpayer no longer contends that the asbestos
is exempt from taxation. However, essentially because a
residue of the carbon (graphite) is found within the final
chlorine product, the taxpayer claims that (all) the
graphite is non-taxable material, as included within the
manufactured product; rather than being a taxable
material used by the manufacturer, as the ultimate
consumer, during its production of the ultimate article
sold by it to the consumer.

Id. at 779-80.

The court found the taxpayer’s contention tenable because the literal

wording of La.R.S. 47:301(10) permitted that, “if the substance used in the

9

manufacture enters into the final article produced for resale (however unintended

or useless or minutely), the substance [could] be regarded as purchased for

‘processing into’ the article produced for sale[.]” Id. at 781. The court, however,

concluded:

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

Id.

In summary, the Traigle court found that carbon residue from graphite

blades was identifiable in the chlorine produced by Traigle, but the trace residue

was unintended and unavoidable waste. It was not integrated into or of any benefit

to the chlorine, and the graphite used in the manufacturing process was not

purchased for the purpose of resale or for further processing into the chlorine

produced for sale.

In Vulcan, 414 So.2d 1193, the plaintiff manufactured manhole covers

made of iron. The product standards required that the iron contain between 3.10

and 3.30 percent of carbon, which meant that, depending on how deficient the

scrap iron was, carbon might have to be added during processing. As a heat source

for melting the iron, Vulcan used coke which gives off carbon as it burns. Vulcan

argued that its purchases of coke should be exempt from sales and use taxes

10

because its purpose in using coke was to process the carbon into the iron for sale at

retail. The trial court found that two exemptions applied to Vulcan’s purchases of

coke: the further processing exclusion under La.R.S. 47:301(10), and the boiler

fuel exemption under La.R.S. 47:305(4). The appellate court affirmed based upon

the further processing exclusion alone. On original hearing, the Louisiana

Supreme Court affirmed solely on the boiler fuel exemption. On rehearing,

however, the Louisiana Supreme Court found that neither exemption applied.

In discussing the reprocessing exclusion of La.R.S. 47:301(10), the

court determined that if the item was bought for further processing into items of

tangible personal property for sale at retail, the item was exempt; but if the item

was part of the manufacturing process, the manufacturer was the ultimate

consumer, and the tax was owed. Based upon the testimony of a metallurgist, a

chemist, and Vulcan’s general manager, the court determined that using coke

resulted in a net increase in carbon of less than one half of one percent, that there

were other methods for adding carbon to the product, and that the addition of

carbon through the use of coke was a secondary benefit. The court stated that,

while the presence of carbon in the final product was “beneficial” to Vulcan, the

“proper inquiry” was the “purpose” for which the coke was bought. Id. at 1198.

Ultimately, the Vulcan court found that carbon, an element of the raw material

coke, was identifiable and beneficial (but still only incidental) to the iron products

that Vulcan manufactured; and the coke was purchased by Vulcan as a consumer

for the purpose of heating scrap iron, not for further processing into an article for

resale.

In International Paper, 972 So.2d 1121, the court found that three

chemicals were exempt from the tax because they were purchased by a paper

11

manufacturer with the purpose of incorporating them into their white products.

This conclusion was in spite of a contractual agreement that the chemicals were

primarily used for bleaching and whitening the pulp that was then pressed into

paper. The evidence indicated that the manufacturer chose the chemicals because

they served as oxidizing agents; that the oxygen from the raw chemicals became a

recognizable, identifiable, and integral part of the white paper products; and that

the presence of the oxygen within the final products was not only beneficial to the

products but also necessary to their production. In applying the criteria, each of

the above courts examined the factual context of the manufacturer’s process.

Here, NISCO was formed in an April, 28, 1988 partnership

agreement, (“Partnership Agreement” or “Agreement”) between Gulf State

Utilities (“GSU,” now known as “Entergy”) and three other companies that had

facilities in Lake Charles, Louisiana: Citgo, Conoco, and Vista (now, “Sasol”).

The partnership was formed for the purpose of generating cost-effective electrical

power for the three industrial partners and then selling the excess power to

Entergy. The Agreement provided the partners’ intent as follows:

WHEREAS, the Industrial Participants want to stabilize
electric power and energy costs by generating power in
facilities which use the most economic fuel at any given
time, including fuel coke, coal, refinery-product gas, or
other fuels that may become available, and selling the
resultant energy to GSU, and GSU desires to buy such
energy; and

WHEREAS, the Industrial Participants have expressed to
GSU their intent to develop an electric power generation
project to secure an electric energy supply for their
operations in the Lake Charles, Louisiana area at the
lowest practical stable cost; and

WHEREAS, the Participants desire to establish a
partnership to design, construct own, operate, and control
electric power generating facilities; and

12

WHEREAS, GSU desires to sell energy to the Industrial
Participants and certain of their subsidiaries in a manner
so as to stabilize energy costs to the Industrial
Participants and certain of their subsidiaries, and the
Industrial Participants and certain of their subsidiaries
desire to buy such energy[.]

The Partnership Agreement specifically set forth the purpose of the

venture under its own heading, as follows:

Purpose:

The venture is created, and shall be conducted, for the
purpose of designing, constructing, owning, operating,
and controlling electric power generating facilities in the
Lake Charles, Louisiana area, and producing electricity
for sale to GSU and steam to supply all or a portion of
the steam needs of the industrial facilities of the
Industrial Participants in the Lake Charles Louisiana
area, and conducting any activities related thereto or
contemplated by this Agreement.

The parties to the 1988 Agreement initially began producing both

electricity and steam using natural gas as fuel for the boilers. The Agreement

indicated the partners’ future intent to convert its facilities from natural gas

technology to a “circulating fluidized boilers” (CFB) technology in order to lessen

and stabilize their energy costs. The CFB technology incorporates the use of

petroleum-coke (“petcoke”) as fuel for the boilers. When petcoke is burned, it

emits unacceptable levels of sulfur into the air, and the process is therefore

regulated by the DEQ and the EPA. The use of limestone, considered a scrubbing

agent, is required in order to capture the sulfur burning off of the petcoke. The

limestone reduces the emission of sulfur into the air by 90%. After the limestone

interacts with the petcoke, it produces a burnt residue, or by-product, called ash.

This occurs when calcium carbonate from the limestone combines with the sulfur

13

from the petcoke to make calcium sulfate, the ash. The original Agreement

provided for the eventual handling of the ash.

NISCO switched to the CFB technology in 1992. Initially, NISCO

stored the ash on site at its facility and shortly thereafter located a buyer for the ash.

By 1996, NISCO was selling all of its ash to LA Ash. LA Ash resells some of the

ash in its original state and processes some of it into other products for resale for

industrial, construction, environmental, and governmental applications.

As stated by the trial court, it is undisputed that the limestone did not

appear in any form in the electricity produced and sold by NISCO. And NISCO

does not contend that it purchased the limestone for further processing into steam

and electricity. Rather, NISCO argues that the limestone does appear in and

benefit the ash, and that NISCO intentionally purchased limestone for the

additional purpose of manufacturing ash which it sells on the market as a third

product. Essentially, NISCO’s assigned errors concern the trial court’s failure to

apply each of the three criteria to the production of ash as a co-product. The taxing

agencies argue that the ash is a residue, not a purposefully created product; that no

manufacturer produces ash alone as a product; and that no business would spend

$46 million on limestone to manufacturer ash that sold for only $6.8 million.

The testimony of Sandi Boyles, NISCO’s business manager, reveals

that the sand does not appear in the ash. The testimony of LA Ash President and

CEO, Gary Livengood, and NISCO’s own charts indicate that the valuable calcium

in the limestone is essentially used up in absorbing the sulfur from the burning of

the petcoke as fuel. The ash that remains is not re-used or reprocessed by NISCO,

and NISCO does not collect sales tax from LA Ash when it “resells” the ash to LA

Ash. LA Ash then resells the ash to tax-exempt governmental agencies for parking

14

lots and highways, and also to commercial establishments, some of which resell it

again to their customers. It appears, then, that one of the ultimate consumers who

finally pays the tax on NISCO’s $46 million purchase of limestone is the neighbor

John Doe who buys a sack of ash at Home Depot to put in the hole that he dug in

his backyard in preparation of planting his new azalea bush.

With regard to NISCO’s assertion that NISCO’s payment of the tax

on the limestone would result in double taxation, Justice Tate in Traigle stated as

follows:

The defendant taxpayer alleges that, to permit the
tax on the graphite, is to permit double taxation, since a
sales tax is collected on the chlorine from its ultimate
purchaser. The contention overlooks the statutory
scheme of taxing the ultimate consumer of the particular
product purchased, in this case the manufacturer. The
purchaser of the chlorine (who pays the sales tax
thereupon, as its ultimate consumer) is no more the
ultimate purchaser of the graphite anodes used up in the
present electrolytic manufacturing process than he is of
the lead components of the anode, or the steel cathodes
and the used-up asbestos diaphragms which are
components thereof, or the machinery used in the
manufacture of the chlorine—all of which are likewise
taxable to the manufacturer, as their ultimate consumer.

Traigle, 332 So.2d at 783 (emphasis added where underlined).

Similarly here, the ultimate consumer of the residual ash seems no

more the purchaser of the $46 million in limestone than he is of the pet coke or

other ingredients in NISCO’s manufacturing process.

As to the benefit element of the analysis, the limestone is an integral

part of the ash, but the evidence indicates that the precise makeup is accidental in

that NISCO does nothing purposeful to affect the quality of the ash. In fact, it

worked to keep the quantity of production of the ash down. More specifically, the

deposition of Andrew Guinn, Sr., president of Port Aggregates, who supplied

15

between 225,000 and 250,000 tons of limestone to NISCO annually, reveals that

the more calcium in the limestone, the more sulfur is absorbed from the petcoke,

and the less limestone is required in the process for creating electricity.

Consequently, there is less cost. The amount of sulfur in the petcoke varies, as

does the calcium content in limestone. Thus, a blend was created that kept

NISCO’s process within DEQ and EPA regulations. Limestone from different

quarries has varying amounts of calcium, and the limestone use is always adjusted

to accommodate the sulfur content in the petcoke being used. E-mails between

former NISCO business manager Sandi Boyles and senior management supervisor

Dick Gooley, and copied to former operations manager Rick Zagar, indicate that

the sale value of ash changes depending on the quality of the limestone. Other

documentation indicates that much testing was done on the limestone for the

production of electricity.

However, as to the “production” of ash, there was apparently no

testing to determine how a particular quality limestone would impact the ash

product. When current NISCO business manager Mitchell Todd Barnett was asked

at trial to identify documents that addressed testing of the ash product, he could not

locate any. Moreover, while less limestone meant lower costs for producing

electricity, more limestone meant a greater production of ash. Yet, evidence

indicated that NISCO wanted to produce less ash. Slides attached to Sandi Boyles’

e-mail indicated that a power company in Alexandria was considering selling its

ash for $2 to $3 dollars per ton, and that other power plants were paying ash

companies to take their ash because it was cheaper than putting it in a land fill.

Regarding the purpose element of the analysis, NISCO points to the

testimony of its business manager, Mr. Barnett, its site operations manager, Shelly

16

Hacker, and La Ash CEO, Mr. Livengood, confirming that NISCO had a dual

purpose in purchasing the limestone and that the original Partnership Agreement

provided for the future handling of ash at its facility. NISCO points to the

International Paper, 972 So.2d 1121, case as support for its position that the

purpose for which a raw material is purchased does not have to be the

manufacturer’s “primary” purpose. However, the second purpose of the three

chemicals found exempt in International Paper had nothing to do with a secondary

product. The only product at issue was the manufacturer’s production of white

paper products, and the white paper products were not a by-product of residue left

over after the production of other products. The admonition of the second circuit

by the supreme court in International Paper was that the intermediary court had

misinterpreted Traigle and Vulcan to require that the primary purpose for the

purchase of the material must be to process it into the end product, which was an

unacceptable expansion of Traigle and Vulcan.

In International Paper there was actually a written agreement from

the 1980’s between the Department of Revenue and the majority of paper

manufacturers, including International Paper, stating that the chemicals used in

the manufacturer of white paper products were taxable because their primary

purpose was bleaching and whitening the pulp, as opposed to the chemicals’

incorporation into the final paper product. International Paper found that the

chemicals were incorporated into the end product and made it clear that the

primary stated purpose of bleaching the pulp in one step of the process did not

foreclose the additional purpose of incorporating the chemicals into the final

product when the pulp was pressed into paper.

17

The record does not support NISCO’s argument that it purchased the

limestone for the purpose of incorporating it into a co-product, the ash. In an email

from NISCO’s former business manager, Johnny Botley, to the school board’s tax

audit manager, Cathey Fetus, Mr. Botley stated (emphasis added):

Sand is utilized in the NISCO process for injection into
the circulating fluidized bed boiler along with petroleum
coke and limestone for the purpose of producing
electricity for sale.

The true nature of the ash as an incidental by-product that cannot be

seen as co-product is evidenced in the original Partnership Agreement, which

briefly provides for monitoring the volume and movement of the ash. It states on

page 76 that income from the sale of ash will first be credited against the cost of

power and energy generation. It then states that inventory will be assessed.

“However, no value will be attributed to the inventory in the financial statements.”

The Agreement then states if the cost of disposing of the ash is expected to exceed

the revenue from the sale of the ash, then the anticipated excess cost would be

accrued to the financial statements.

Dr. Daryl Burckel, a tenured professor at McNeese State University,

testified in the area of tax and cost accounting. He was experienced in business

evaluation, financial analysis, and he had been a financial officer for industrial and

construction companies. He essentially confirmed that NISCO did not treat the ash

as a co-product. Dr. Burckel testified that in his review of over 900 pages of

documents, he found no indication that NISCO performed any analysis to

determine what impact changing the limestone would have on the ash product. By

definition, he characterized the ash as an incidental by-product that was saleable,

and he pointed out that the sale of the ash constituted less than one percent (1%) of

18

NISCO’s sale of electricity. The ratio of electricity sales to ash sales in the taxable

period was almost one hundred to one. Consequently, he stated that by definition

the ash would be considered a by-product. Dr. Burckel testified that the purchase

of the limestone was for the purpose of complying with DEQ and EPA permit

requirements in controlling the sulfur emissions.

Upon being asked more than twenty times by NISCO’s attorney at

trial to agree that NISCO “also had a purpose and a will and an intent to make and

sell ash,” Dr. Burckel answered (emphasis added):

A. Look. Every one of those businesses are looking for
every revenue stream that they can find; and just because
they can find it doesn’t mean that the purpose for which
you buy a product changes. The purpose for that
product, that I keep coming back to, was to inhibit sulfur.
Now, they found other ways in which to benefit their
company from what was left over. And that is savvy
business … looking constantly to drop down the cost of
electricity to their partners.

Dr. Burckel’s analysis under the purpose element of the three-prong

test regarding taxability is in line with the jurisprudence. Faced with arguments

similar to NISCO’s herein, the supreme court in Vulcan stated as follows:

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. Hence, the court of
appeal erred in concluding that Vulcan is not liable for
the sales/use tax on the coke purchased by it for use in
the manufacture of “municipal castings” made of ACTM
Class 30 gray iron. We must reverse.

Vulcan, 414 So.2d at 1199 (emphasis added).

Dr. Burckel further testified that the Partnership Agreement clearly

stated that the purpose of the venture was constructing, owning, operating, and

19

controlling electric power generating facilities, without any mention of producing

ash. He further testified that the Agreement’s reference at the end of the “purpose”

paragraph regarding “conducting any activities related thereto,” harkened back to

the purpose stated at the beginning of the paragraph, which was designing,

constructing, owning, operating, and controlling the electric power generating

facilities. He further indicated that the ash was considered an incidental by-

product because, while its production could be anticipated and planned for, the

relative sales value rendered it incidental; and because “no one would undertake a

production process with the sales of the byproduct alone.”

Sandi Boyles, NISCO’S business manager, was asked this precise

question:

Q. Would you purchase limestone to manufacture and
sell ash if you didn’t have the electricity to sell?

A. That’s not our business.

Q. Okay, I understand that. I understand that’s not your
business. My question to you is: Would you or anybody
construct a facility to purchase limestone for the sole
purpose of producing ash and reselling
ash.

A. No.

Ms. Boyles’ testimony further contained the following colloquy:

Q. Let’s assume that you no longer can get anybody to
pay you for the ash, okay, but they’re willing to come
and pick it up for free. So that basically the ash is taken
off your hands, you don’t pay anything, but you don’t
receive any revenue from it. You understand?

A. Yes.

Q. But you still need to generate electricity and generate
that, roughly, 195 million dollars a year in revenue
you’re getting from electricity. Would you still buy the
limestone?

20

A. More than likely, yes.

Based upon the evidence in the record, NISCO’s contentions

regarding the purchase of limestone for the purpose of producing ash do not

survive a full analysis under the test enunciated in International Paper as

developed through its predecessors, Traigle and Vulcan. Accordingly, we affirm

the trial court’s judgments finding that NISCO’s purchases of sand and limestone

are subject to sales and use tax, and not exempt or excluded under the further

processing statute.7

Attorney Fees

NISCO contends that the trial court erred in failing to award NISCO

attorney fees in its suit no. 2013-2661 against the Parish. Louisiana Revised

Statutes La.R.S. 47:337.13.1(B)(1) provides that “the prevailing party in a dispute,

contest, or other controversy involving the determination of sales and use tax due

shall be entitled to reimbursement of attorney fees and costs, not to exceed ten

percent of the taxes, penalties, and interest at issue . . . .” Because NISCO is not

the prevailing party, this issue is moot.

Penalties

NISCO contends that the trial court erred in imposing penalties

against NISCO in both of NISCO’s suits against the Parish, nos. 2010-3564 and

2013-2661, asserting that NISCO’s failure to pay the taxes timely was based upon

a good faith belief that the purchases were excluded from taxation. Louisiana
7
As seen in the above jurisprudence and the department of revenue’s regulations, the
further processing statute has been referred to as both an exemption and an exclusion. We do not
find it necessary to address NISCO’s arguments regarding whether the statute should be treated
as an exemption or an exclusion for the reasons expressed by Justice Al Tate in Traigle v. PPG
Industries, 332 So.2d 777.

21

Revised Statutes 47:337.71 of the Uniform Local Sales Tax Code (ULSTC)

provides:

If the failure to make any return at the time such
return becomes due or the filing of a return without
remittance of the full amount due is attributable not to the
negligence of the taxpayer, but to other cause set forth in
written form and considered reasonable by the collector,
the collector may remit or waive payment of the whole or
any part of the specific penalty provided for such failure.

NISCO argues that the ULSTC applies and takes the opposition to

task for its citation of pre-2003/ULSTC cases; then NISCO itself proceeds to cite

cases from 1986 through 2002. According to the clear wording of the above

statute, waiver of the penalty is in the province of the collector, and it is

permissive, not mandatory. We find no merit in NISCO’s position.

V.

CONCLUSION

Based upon the foregoing, we affirm the trial court judgments

rendered on June 2, 2014, in these four consolidated cases. Costs of this appeal

are assessed against NISCO.

AFFIRMED.

22

No. 14-1250, (c/w) No. 14-1251, (c/w) No. 14-1252, (c/w) No. 14-1253

COURT OF APPEAL, THIRD CIRCUIT

STATE OF LOUISIANA

No. 14-1250; Cynthia Bridges, Sec. Dept. of Rev., State of Louisiana v. Nelson
Industrial Steam Co.

(c/w)

No. 14-1251; Nelson Industrial Steam Co. v. Calcasieu Parish School System Sales
and Use Tax Dept., et al.

(c/w)

No. 14-1252; Cynthia Bridges, Sec. Dept. of Rev., State of Louisiana v. Nelson
Industrial Steam Co.

(c/w)

No. 14-1253; Nelson Industrial Steam Co. v. Calcasieu Parish School System Sales
and Use Tax Dept., et al.

CONERY, J., dissenting.

The central issue in these four consolidated cases is whether NISCO’s

purchase of limestone used in its manufacture of electricity, steam, and ash should

be excluded from sales tax pursuant to La.R.S. 47:301(10)(c)(i)(aa), expressly

referred to by the supreme court as the “further processing exclusion.” Int’l Paper

Inc. v. Bridges, 07-1151 (La. 1/16/08), 972 So.2d 1121, 1128. The statute at issue

providing for the exclusion states, “The term ‘sale at retail’ does not include sale

of materials for further processing into articles of tangible personal property

for sale at retail.” La.R.S. 47:301(10)(c)(i)(aa) (emphasis added). Because a tax

exclusion is at issue, the statute must be liberally construed in favor of the taxpayer

and against the State (LDR) and Parish (CPSS), herein collectively referred

textually as “Tax Collectors.” Harrah’s Bossier City Inv. Co., LLC v. Bridges, 09-

1916 (La.5/11/10), 41 So.3d 438. The trial court and majority incorrectly

interpreted the law as though the exclusion in question was a tax exemption and

construed the “exemption” narrowly in favor of the Tax Collectors. I submit their

decisions were wrong as a matter of law and respectfully dissent.

For many years prior to the audits at issue, the Tax Collectors treated

limestone used in NISCO’s manufacturing process to reduce sulfur emissions in

the production of electricity, steam, and ash as a raw material subject to the further

processing exclusion, thus excluding NISCO’s purchase of limestone from sales

tax. The CFB technology employed by NISCO in its manufacture of electricity,

steam, and ash required the use of limestone and was contemplated by NISCO

from the inception of its April 28, 1988 partnership agreement for production of

those products. NISCO’s facility was converted from natural gas to the CFB

technology it now uses in 1992, as originally planned. That technology

incorporates the use of petcoke as opposed to natural gas as fuel for the boilers

used in the process. As correctly noted by the majority, limestone is required to

reduce the emissions of sulfur from the petcoke burned in the boilers as fuel, and in

the process, the limestone is simultaneously processed into an ash. The ash is the

result of a combination of the carbon and oxygen from the limestone and the sulfur

from the petcoke, which results in a mixture of calcium oxide and calcium sulfate

ash. There is a ready market for the ash, one of the products to be sold as planned

from the beginning. Neither the CFB technology, nor the law applicable to the

further processing exclusion, La.R.S. 47:301(10)(c)(i)(aa), has changed since 1992.

What did change was the decision by the Tax Collectors in this case to tax the

limestone used in the manufacturing process beginning with audits dating back to

the tax year 2005.

2

The trial court in its judgment, and cryptic reasons for ruling, affirmed by

the majority, found, “It is also undisputed that limestone in any form, or its

component parts, is not found in the steam and electricity produced” by NISCO.

The trial court further stated, “Just because the ash is an incidental byproduct of the

[CFB] process, its production, even in combination with the production of steam

and electricity, does not in and of itself permit NISCO to claim the benefit of the

further processing tax exclusion on its purchase of limestone.”

Respectfully, the trial court and majority misconstrued the law applicable to

a tax exclusion in this case. In affirming, the majority states, “Here, NISCO seeks

to be exempt from paying sales taxes on its $46 million purchase of sand and

limestone[.]” To the contrary, it is the Tax Collectors who are bringing this suit

and the Tax Collectors who must bear the burden of establishing that the raw

materials used in NISCO’s manufacturing process are not subject to the tax

exclusion provided by the legislative act in question. This case, essentially, is

about statutory construction.

The trial court and the majority have determined that since the ash, one of

the three products produced in the manufacturing process and sold by NISCO, is

not the primary product sold by NISCO, and is not as economically profitable as

electricity and steam, then the limestone purchased by NISCO and required to be

used in its process is not subject to the further processing exclusion and is subject

to sales tax. The undisputed record, however, supports NISCO’s argument that

NISCO always contemplated sale of the ash as one of the products produced for

resale, along with electricity and steam, and continued to develop its market for its

ash product. Since 1996 through today, NISCO has sold 100% of its ash output to

LA Ash. According to the record, it is estimated that NISCO sells approximately

3

600-800 pounds of ash daily and some 200,000 to 250,000 tons annually. Ash is

clearly more than just a “by product” of NISCO’s manufacturing process. It is

especially clear, and not subject to dispute, that ash is one of the products, plural,

produced for resale in the manufacturing process, though admittedly, not the

primary or most profitable product.

Statutory Interpretation

In McLane Southern, Inc., 11-1141, pp. 5-7 (La. 1/24/12), 84 So.3d 479, 483,

the Louisiana Supreme Court succinctly stated the requirements for the judicial

interpretation of statutes:

“It is a fundamental principle of statutory interpretation that
when a ‘law is clear and unambiguous and its application does not
lead to absurd consequences, the law shall be applied a written, and no
further interpretation may be made in search of the intent of the
legislature.’” Harrah’s Bossier City Inv. Co., LLC v. Bridges, 09-
1916 (La.5/11/10), 41 So.3d 438, 446-447 (citing La. C.C. art. 9).
This principle applies to tax statutes. Cleco Evangeline, LLC v.
Louisiana Tax Com’n, 01-2162 (La.4/3/02), 813 So.2d 351, 354;
Tarver v. E.I. Du Pont De Nemours and Co., 93-1005 (La.3/24/94),
634 So.2d 356, 358. When the law is not clear and unambiguous or
its application leads to absurd consequences, we must rely on the
secondary rules of statutory interpretation to discern the meaning of
the statutes at issue. Id. The fundamental question in all cases of
statutory interpretation is legislative intent and the ascertainment of
the reason or reasons that prompted the Legislature to enact the law.
Pumphrey v. City of New Orleans, 05-0979 (La.4/4/06), 925 So.2d
1202, 1210 (citing In re Succession of Boyter, 99-0761 (La.1/7/00),
756 So.2d 1122, 1128). The rules of statutory construction are
designed to ascertain and enforce the intent of the Legislature. Id.;
Stogner v. Stogner, 98-3044 (La.7/7/99), 739 So.2d 762, 766.

The meaning and intent of a law is determined by considering
the law in its entirety and all other laws on the same subject matter
and placing a construction on the provision in question that is
consistent with the express terms of the law and with the obvious
intent of the Legislature in enacting it. Pumphrey, supra at 1210
(citing Boyter, supra at 1129; Stogner, supra at 766). The statute
must, therefore, be applied and interpreted in a manner, which is
consistent with logic and the presumed fair purpose and intention of
the Legislature in passing it. Id. (Citing Boyter, supra at 1129.) This
is because the rules of statutory construction require that the general

4

intent and purpose of the Legislature in enacting the law must, if
possible, be given effect. Id. Courts should give effect to all parts of a
statute and should not give a statute an interpretation that makes any
part superfluous or meaningless, if that result can be avoided. Id. It is
likewise presumed that the intention of the legislative branch is to
achieve a consistent body of law. Id. (Citing Stogner, supra at 766).

Tax exclusions are to be liberally construed in favor of the taxpayer and

strictly construed against the taxing authority. In Harrah’s, the supreme court

explained the difference between a tax exemption and a tax exclusion as follows:

According to the leading Louisiana sales tax treatise, 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.”
Bruce J. Oreck, Louisiana Sales & Use Taxation (2d ed.1996), § 3.1.
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.” Id. Oreck’s definitions have been widely adopted by Louisiana
courts.

Harrah’s, 41 So.3d at 446 (footnote omitted).

Our courts have continued to apply the principle of statutory construction

that, “Taxing statutes must be strictly construed against the taxing authority; where

a tax statute is susceptible of more than one reasonable interpretation, the

construction favorable to the taxpayer is to be adopted.” Cleco Evangeline, LLC, v.

La. Tax Com’n, 01-2162, p. 8 (La. 4/3/02), 813 So. 2d 351, 356.

Therefore, the task of the trial court was to apply the law as stated by the

legislature and enlightened by the jurisprudence interpreting Louisiana’s taxation

of goods sold at retail.

5

Applicable Law

Louisiana Revised Statutes 47:302(A) states 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.” (Emphasis added.)

The definition for “sale at retail” is found in La.R.S. 47:301(10)(a)(i), which

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.)

As previously indicated, La.R.S. 47:301(10)(c)(i)(aa), expressly referred to

as the “further processing exclusion,” further clarifies, “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.) Int’l Paper

Inc., 972 So.2d at 1128.

Under either statute, the ash in this case is clearly a product manufactured

for resale as tangible personal property.

The regulations adopted by the Department of Revenue also require that the

Tax Collectors give a broad or liberal interpretation in favor of the taxpayer.

Louisiana Administrative Code, Title 61, Part I, § 4301 entitled, “Uniform State

and Local Sales Tax Definitions,” provides under section 4301(A) in pertinent part:

A. General. Words and phrases shall be read with their context and the
specific section of law to which they are applicable. They shall be
construed according to the common usage of the language. Technical
words and phrases, and such others as may have acquired a
peculiar meaning in the field of taxation shall be construed
according to such peculiar meaning.

6

(Emphasis added.)

Louisiana Administrative Code, Title 61, Part I, § 4301(C) further provides

under the definition of “Retail Sale or Sale at Retail” the following:

d. 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 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.)

Clearly, the ash produced in this case also meets the definition contained in

the regulation, tangible personal property for subsequent sale at retail. See La.R.S.

47:301(10)(c)(i)(aa). There is no “primary purpose test” or “economic benefit

test” in either the statute or regulation. The controlling supreme court

jurisprudence requires a liberal interpretation in favor of the taxpayer and

specifically rejects the “primary purpose” test espoused by appellees. See Int’l

Paper, 972 So.1121; Harrah’s, 41 So.3d at 438.

In International Paper, the supreme court stated that, “‘Sale at retail’ under

La.R.S. 47:301(10)(a)(i) can take on different meanings, depending upon the

taxing authority involved and/or the product(s) being sold.” Int’l Paper, 972 So.2d

at 1128. The supreme court then conducted an exhaustive review of the history of

7

the “further processing exclusion.” See La.R.S. 47:301(10)(c)(i)(aa). The issue in

International Paper involved a process called “short sequence bleaching,” in

which chemicals or raw materials were used to bleach the brown color from pulp

in order to produce a lighter color suitable for certain paper production. The

chemicals or “Raw Materials” used in the bleaching process were sodium chlorate,

hydrogen peroxide, and elemental oxygen. See Int’l Paper, 972 So.2d 1121. The

Board of Tax Appeals found in favor of International Paper and excluded all of the

“Raw Materials” from taxation based on the further processing exclusion, as those

“Raw Materials” were used in the eventual production of the lighter colored paper

products it sold. The second circuit reversed on appeal, finding that a further test,

the “primary purpose test” had to be applied. See Int’l Paper, 972 So.2d at 1126-

27.

The supreme court then reversed the appellate court and held:

We find that the appellate court correctly determined that the
“further processing exclusion” applies to those raw materials
becoming recognizable and integral parts of the end products, while at
the same time, the raw materials subject to the tax exclusion must be
beneficial to the end products. However, our review of the applicable
law and jurisprudence does not suggest that the raw materials
themselves i.e., the exact chemical/physical compositions of the raw
materials) must appear in the end products, nor does the law suggest
that the primary purpose for the purchase of these raw materials
must be their incorporation into the end products.

Id. at 1133 (emphasis added).

In International Paper, the supreme court then concluded that the inclusion

of a primary purpose analysis applied by the appellate court was an improper

expansion of its prior rulings in Traigle v. P.P.G. Ind. Inc., 332 So.2d 777 (La.

1976) and Vulcan Foundry, Inc. v. McNamara, 414 So.2d 1193 (La. 1982):

To be excluded from the sales and use tax provisions, we also
agree that the raw materials must be purchased with the purpose of

8

incorporating said materials into the end products (i.e., the raw
materials are “material for further processing”); however, in the
instant case, the appellate court found that, to be excluded from taxes,
the raw materials must have been purchased for the primary purpose
of incorporation into the end products.
....

The appellate court appears to have expanded upon our
holdings in the aforementioned cases, as neither the Traigle Court, nor
the Vulcan Court, suggested that a “primary purpose” test was
required. Rather, both the Traigle and Vulcan Courts recognized the
necessity of a “purpose” test.

....

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.

Int’l Paper, 972 So.2d at 1135 (footnotes omitted) (emphasis in original).

In International Paper, the supreme court specifically found that the

application of the further processing exclusion does not require that “the exact

chemical/physical compositions of the raw materials[] must appear in the end

products, nor does the law suggest that the primary purpose for the purchase of

these raw materials must be their incorporation into the end products.” Int’l Paper,

972 So.2d at 1133. The supreme court in International Paper reaffirmed the three-

part test from its prior rulings, and specifically rejected the primary purpose test

utilized by the appellate court in that case in its ruling. See Int’l Paper, 972 So.2d

1121.

Notably, the supreme court in International Paper specifically used the word

“products,” plural, in discussing the “further processing exclusion,” and stated,

“Accordingly, to be excluded from sales and use tax, 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

9

products produced.” Int’l Paper, 972 So.2d at 1135 (second emphasis added).

NISCO’s manufacturing process produces three products, electricity, steam, and

ash, and buys and uses limestone as a necessary component to produce those final

three products.

The supreme court in Tin, Inc. v. Washington Parish Sheriff’s Office, 12-

2056 (La. 3/19/13), 112 So.3d 197, n. 2 (citations omitted), again applied the three

part test adopted in International Paper in connection with the further processing

exclusion referenced in La.R.S. 47: 301(10)(c)(i)(aa), and stated:

This Court has held that raw materials further processed into end
products are excluded from this sales and use tax provision if: (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. See International Paper, Inc. v. Bridges, 07-1151
(La.1/16/08), 972 So.2d 1121, 1136.

(Emphasis added.)

Again, the supreme court used the word products, plural. It is clear from

the supreme court’s decisions in International Paper and Tin, Inc., that products

purchased for sale at retail are deemed to be an exclusion from the imposition of

sales taxes. Further, a tax exclusion such as this one at issue is to be “construed

liberally in favor of the taxpayers and against the taxing authority” as found in

Harrah’s, 41 So.3d at 446. A tax exemption, on the other hand, is “strictly

construed in favor of the State and ‘must be clearly and unequivocally and

affirmatively established’ by the taxpayer.” Id. at 446. In this case, we are by

supreme court definition dealing with a tax exclusion.

The Tax Collectors also argue that NISCO’s cost for the purchase of the

limestone far outweighs the sale of the end product, the ash, on the retail market,

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the “economic benefits argument.” Therefore, the further processing exclusion, for

economic reasons, should not apply to NISCO’s purchase of limestone. Though an

excellent point, such policy arguments should be presented to the legislature so that

the tax exclusion provided for by the statute may be narrowed and further defined

by that body. In International Paper, 972 So.2d at n. 13, the supreme court

recognized that the legislative intent was made clear:

It is interesting to note that during the Legislature’s 2007 Regular
Session, a Senate Concurrent Resolution was adopted, which
resolution addressed the proper interpretation of the “further
processing exclusion.” Senate Concurrent Resolution No. 136 states,
in pertinent part:

WHEREAS, many states do not tax any chemicals or other property
required for the manufacturing of property for resale; and

WHEREAS, deviations from the three prong test make the taxability
of property required for manufacturing in Louisiana uncertain and
undermine the efforts of Louisiana to attract additional investment
dollars to the state.
THEREFORE, BE IT RESOLVED that the Legislature of Louisiana
does hereby urge and request the secretary of revenue to:

(1) Recognize the interpretation of R.S. 47:301(10)(c) that has been
long recognized by Louisiana courts and embrace the three prong test
for the non-taxability of further processing materials, to wit: materials
are nontaxable materials for further processing if (i) the material or its
components become an identifiable component of the product, (ii) the
material or its components are beneficial to the end product, and (iii)
the presence of the material in the end product is not incidental.

(2) Adopt regulations consistent with such interpretations.

(3) File pleadings consistent with such interpretations in court
proceedings concerning the interpretation of R.S. 47:301(10)(c)(i)(aa).
Since the legislative resolution and the supreme court decision in 2008, the

legislature has met eight times, including this year, when the legislature was

especially active in seeking additional revenue sources. The legislature has not

chosen to amend La.R.S. 47:301(10)(c)(i)(aa) to add the primary purpose test or

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an “economic benefit test,” or otherwise narrow the further processing tax

exclusion in any way. We must apply the further processing exclusion broadly in

favor of the taxpayer and against the taxing authorities. The trial court and the

majority failed to do so and, in my view, committed legal error as to a matter of

statutory interpretation. This court must interpret the statute in accordance with

legislative intent and long standing court precedent, recognizing that tax exclusions

must be “construed liberally in favor of the taxpayers and against the taxing

authority,” Harrah’s, 41 So.3d at 446. A careful reading of La.R.S.

47:301(10)(c)(i)(aa) and La.Admin.Code tit. 61, pt. I, § 4301 reveals that neither

the statute nor the Secretary’s regulation contain any such restrictions espoused by

appellees and approved by the trial court and the majority.

I dissent from the majority’s decision to judicially interpret the controlling

statute and regulation in such a narrow and restrictive manner contrary to

legislative intent and settled supreme court precedent.

CONCLUSION

I would reverse the June 2, 2014 judgments of the trial court in favor of

Cynthia Bridges, Secretary of the Department of Revenue for the State of

Louisiana, against Nelson Industrial Steam Company in Docket Nos. 14-1250 and

14-1252.

I would also reverse the trial court’s June 2, 2014 judgments in favor of the

Calcasieu Parish School System Sales and Use Tax Department, in Docket Nos.

14-1251 and 14-1253 and order the Calcasieu Parish School System Sales and Use

Tax Department, as Central Collector of Sales/Use Tax for the Parish of Calcasieu,

and Rufus Fruge in his capacity as Administrator of the Calcasieu Parish School

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System Sales and Use Tax Department, to refund the taxes, penalties, and interest

paid under protest by Nelson Industrial Steam Company in the following amounts:

District court no. 2010-3564: $911,683.79 tax; $227,921.01 penalty;
and $271,162.18 interest through July 12, 2010 (the date of payment
under protest), plus accrued legal interest thereon until the date of
refund, pursuant to La. R.S. 47:337.63(A)(3).

District court no. 2013-2661: $1,076,032.73 tax; $269,008.29 penalty
and $275,788.58 interest through May 13, 2013 (the date of payment
under protest), plus accrued legal interest thereon until the date of
refund, pursuant to La. R.S. 47:337.63(A)(3).

Costs on appeal should be assessed to the Calcasieu Parish School System

Sales and Use Tax Department, as Central Collector of Sales/Use Tax for the

Parish of Calcasieu, and Rufus Fruge in his capacity as Administrator of the

Calcasieu Parish School System Sales and Use Tax Department pursuant to La.R.S.

13:5112. Costs on appeal should not be assessed against the Louisiana Department

of Revenue in accordance with La.R.S.13:4521.

.

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