Sep 28, 2015
From KPMG TaxWatch
Recently, a Louisiana appeals court affirmed a district court decision addressing whether a taxpayer could claim an inventory tax credit for property taxes paid on equipment that was rented to customers. Under Louisiana law, taxpayers may claim a tax credit against corporate income and franchise taxes for ad valorem taxes paid to local governments on inventory held by manufacturers, distributors, and retailers. The taxpayer, a seller and servicer of construction equipment, sought an inventory tax credit for all of its equipment held for sale, including equipment that had been rented to customers. Importantly, all of the taxpayer’s equipment was at all times for sale and ninety percent of the time a rental led to a completed sale. The Louisiana Department of Revenue disallowed the tax credit to the extent it included rented property. In the Department’s view, “inventory” for purposes of the credit did not include rental property, even if such property was also available for sale. After the Louisiana Board of Tax Appeals ruled in favor of the taxpayer and a trial court affirmed, the Department appealed.
Before the appeals court, the Department argued that the taxpayer was not a retailer when it leased or rented equipment and that the taxpayer’s rented and leased items did not count as inventory. As such, it was the Department’s position that the taxpayer was allowed a credit only for the items that were never rented or leased. The credit statute did not define “inventory,” however, the ad valorem tax statutes defined inventory as all finished goods held in inventory by retailers. The court rejected the Department’s argument that the taxpayer was not a “retailer” and that the items previous rented were not “inventory.” Nothing in the statute limited the tax credit to sellers of goods that had not been rented prior to sale. If it accepted the Department’s interpretation, the court observed, it would be impermissibly inserting language into the statutes that did not exist. The court noted that all of the taxpayer’s equipment, regardless of whether it was rented, was for sale and that renting the equipment was a marketing tool that enabled customers to buy the equipment later at a lower price and to obtain financing. The Department, the court concluded, had focused on the taxpayer’s classification of items as rental equipment or non-rental equipment for general ledger purposes and had improperly ignored the taxpayer’s actual business practices. The court concluded that the taxpayer was entitled to the credit for all of its inventory, including items leased or rented. For more information on Louisiana Machinery Company, LLC, v. Bridges, please contact Nikki Crighton at 212-954-8696.
For more information about TWIST or to view archived episodes, please visit our TWIST homepage.
To receive TWIST e-mails each Monday morning, make sure that state, local and indirect is checked off as one of your topics of interest on the KPMG TaxWatch registration site.
The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.