On December 10, 2021, the Louisiana Supreme Court affirmed the decision of the Third Circuit Court of Appeal in Calcasieu Parish School Board Sales & Use Department, et al. v. Nelson Industrial Steam Company (“NISCO”), in which it held that the 2016 statutory amendment relative to the taxation of materials purchased for further processing into a byproduct for sale constituted a new tax and is unconstitutional and invalid as a result of the bill containing that amendment not being passed by a two-thirds vote by both the House and Senate (i.e., a supermajority).1
This is the latest iteration of Louisiana sales tax cases related to the purchase of materials by a manufacturer for further processing. In fact, this decision is the final word in a matter in which the Louisiana Supreme Court ended up issuing multiple opinions relative to roughly the same legal issue for the same litigants. Consequently, courts and practitioners alike refer to this decision as “NISCO II”, the first NISCO decision (“NISCO I”) refers to the Louisiana Supreme Court’s determination from May 2016 that determined that NISCO’s production of ash was an intended result of its manufacturing process, and the corresponding purchase of limestone was within the scope of Louisiana’s further processing sales tax exclusion. Distinguishably, the final decision in NISCO II hinged upon the state’s determination regarding the validity of the legislation which amended the sales tax exclusion relating to materials purchased for further processing: Act 3 of the 2016 2nd Extraordinary Louisiana Legislative Session (“Act 3”).
The taxpayer, NISCO, manufactures steam using petroleum coke (i.e., petcoke) as its fuel source. This steam is converted into electricity at a generation facility in Lake Charles, Louisiana located in Calcasieu Parish. NISCO produces electricity, steam, and ash at its Calcasieu Parish plant. The transactions which led to the specific sales and use tax at issue relate to the purchase of limestone which NISCO introduced into its manufacturing process by burning with the petcoke for the dual purpose of decreasing the amount of air pollution caused by sulfur emissions released into the air surrounding the generation facility as well as producing ash – a sellable byproduct resulting from the chemical reaction between the limestone and sulfur. The sales price of the ash is a fraction of the purchase price of the limestone.
There are multiple legal concepts at play in NISCO II. First, introduced in the International Paper case, is the Louisiana Supreme Court’s three-pronged test for determining if a specific material used within the manufacturing process qualifies for inclusion in the definition of materials for further processing for the purpose of applying the Louisiana sales tax exclusion.2 The court’s three-pronged test requires that (1) the material must be recognizable and identifiable in the end product; (2) the material must be beneficial to the end product; and (3) the material must be purchased for the purpose of further processing and incorporation into the end product, albeit not necessarily purchased for the primary purpose of being incorporated into the end product.3
Louisiana law stipulates that the term “sale at retail” shall not include the sale of materials for further processing into articles of tangible personal property for sale at retail, subject to certain statutorily enumerated qualifications enacted in 2016 by the Louisiana Legislature through Act 3.4 The statutorily enumerated qualifications in-part consist of the codification of the court’s three-pronged test from its decision in International Paper. The statutorily enumerated qualifications also attempt to address the taxability question surrounding the purchase of materials that ultimately result in the production of byproducts through their use and role within the manufacturing process, specifically “incidental products” that are ultimately sold for a sales price less than the cost of purchasing the component materials.5 Act 3 states that if a byproduct is sold at retail for a price less than the cost of producing said byproduct, then the purchase of the materials which lead to the ultimate production of the byproduct do not qualify for the further processing sales tax exclusion and are subject to sales and use tax in Louisiana.
Act 3 became effective in June 2016 and was intended to clarify existing law and given retroactive application – as stated by the legislature within Section 2 of the act itself. NISCO I was already decided in the taxpayer’s favor prior to the passage of Act 3, and therefore the court in that case did not have to apply the cost/benefit analysis test contained within Act 3 to the transactions at issue. However, Calcasieu Parish filed suit against NISCO in August 2017 (NISCO II), citing Act 3’s retroactive application as its basis for staking a claim to the almost $18 million in sales and use tax due in association with its purchase of limestone during the three-year period between 2013 and 2015.
The collector won at the district court but lost on appeal as the result of the Louisiana Third Circuit Court of Appeal concluding that the production of the ash was not merely incidental, but an intended consequence of NISCO’s manufacturing process and therefore not a “byproduct” within the scope of Act 3’s definition of the word.6 The appellate court pointed out that the state’s highest court had determined the ash to be “a well-planned intentional end product” in NISCO I, but failed to reach a determination as to the validity of Act 3.7 In its response to an appeal by Calcasieu Parish, the Louisiana Supreme Court expressed disagreement with the appellate court’s narrow application of the term byproduct and its application of the word incidental within the context of interpreting Act 3, but ultimately remanded the case back to the appellate court in order for it to answer the question relating to Act 3’s constitutionality.8
The Tax Limitation Clause of the Louisiana Constitution states that the levy of a new tax, an increase in an existing tax, or a repeal of an existing tax exemption shall require the enactment of a law by two thirds of the elected members of each house of the legislature (a “supermajority”).9 In an April 2021 decision, the appellate court determined that the ultimate consequence of Act 3’s passage was to create a new tax in an effort to increase the state’s tax revenue, and therefore its validity hinged upon meeting the requirements set forth within the Tax Limitation Clause.10 Although having been passed by greater than a two-thirds vote in the State Senate, Act 3 was not passed by a two-thirds vote within the State House of Representatives and failed to meet the supermajority threshold.11
Consequently, the appellate court declared Act 3 to be unconstitutional and invalid – reversing the district court’s decision in NISCO II and finding in favor of the taxpayer.12 In December 2021, the Louisiana Supreme Court affirmed that decision.13 This decision stands for the notion that application of the Louisiana further processing sales tax exclusion for materials purchased by a manufacturer extends to those materials which become byproducts as a result of their role and use within the manufacturing process regardless of the value for which those byproducts are sold at retail – assuming the materials meet the requirements of the court’s three-pronged test from International Paper. The decision also provides state and local tax practitioners and prognosticators with an opportunity to engage in one of their all-time favorite pastimes of waiting to see if the legislative branch is willing take this cue from the state’s judicial branch as a “call to arms” and once again take up its mighty quill. Per usual, only time will tell.
1 Calcasieu Parish School Board Sales & Use Department, et al. v. Nelson Industrial Steam Company, 2021-OC00552 (12/10/2021).
2 International Paper, Inc. v. Cynthia Bridges, Secretary of Department of Revenue, State of Louisiana, 2007-C-1151 (1/16/2008).
3 International Paper, Inc. v. Cynthia Bridges, Secretary of Department of Revenue, State of Louisiana, 2007-C-1151 (1/16/2008).
4 La. R.S. Sec. 47:301(10)(c)(i)(aa)
5 La. R.S. Sec. 47:301(10)(c)(i)(aa)(III)(aaa)
6 Calcasieu Parish School Board Sales & Use Tax Department, et al. v. Nelson Industrial Steam Company, COA of Louisiana, Third Circuit 19-0315 (3/18/2020).
8 Calcasieu Parish School Board Sales & Use Tax Department, et al. v. Nelson Industrial Steam Company, 2020-C00724 (10/20/2020).
9 La. Const. Art. VII, Sec. 2
10 Calcasieu Parish School Board Sales & Use Tax Department, et al. v. Nelson Industrial Steam Company, COA of Louisiana, Third Circuit 19-0315 (4/7/2021).
11 Website of the Louisiana State Legislature (http://www.legis.la.gov/legis/BillInfo.aspx?s=162ES&b=ACT3&sbi=y)
12 Calcasieu Parish School Board Sales & Use Tax Department, et al. v. Nelson Industrial Steam Company, COA of Louisiana, Third Circuit 19-0315 (4/7/2021).
13 Calcasieu Parish School Board Sales & Use Department, et al. v. Nelson Industrial Steam Company, 2021-OC00552 (12/10/2021).