United States

Louisiana: Chemicals Used in the Manufacture of Paper Products Qualify for “Further Processing Exclusion”

Feb 15, 2016
From KPMG TaxWatch

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Recently, a Louisiana appellate court addressed whether certain chemicals qualified for the “further processing exclusion” from sales and use tax. The taxpayer at issue, a paperboard products manufacturer, used various chemicals in the process of producing paperboard. Most of the chemicals were either recovered for reuse or washed away during the pulping process, but some were incorporated into the final paper products. The taxpayer filed a claim for a refund of local sales and use taxes paid on the purchased chemicals. The City of Monroe denied the claim, and the taxpayer filed suit. After a trial court ruled in favor of the taxpayer, the City appealed.

Under Louisiana law, sales at retail do not include sales of “materials for further processing into articles of tangible personal property for sale at retail.” Purchases of raw materials will qualify for the exclusion if they are (1) identifiable components of the end product, (2) are beneficial to the end product, and (3) are purchased for the purpose of inclusion in the end product. The trial court had determined that the second and third prongs of this test were met because the chemicals helped achieve conductivity and additional mass in the end product.  On appeal, the City argued that the taxpayer did not purchase the chemicals specifically for the purpose of achieving conductivity or additional mass in the end product. The court disagreed, observing that the City was “conflating the benefit and purpose prongs.” In the court’s view, the pertinent inquiry was whether the chemicals were purchased for the purpose of incorporation or inclusion into the end product, not whether they were purchased for the purpose of achieving some specific benefit in the end product. As such, the court, relying on the trial court’s findings, held that the chemicals qualified for the exclusion. The appeals court also rejected the City’s argument that the trial court erred by failing to apply a “divisible sales approach.” Under this approach, a refund would be allowed only for local taxes paid on the portion of chemicals that made their way into the final end product. The appeals court noted that the divisible sales approach had never been applied in the context of the “further processing exclusion.” For more information regarding Graphic Packaging International, Inc. v. Timothy Lewis, et. al., please contact Randall Serpas at 504-569-8810.

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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.