Mar 21, 2016
From KPMG TaxWatch
The Louisiana Supreme Court recently held that materials, machinery, and equipment that became part of a drilling barge during its reconstruction following a fire were exempt from Parish sales and use taxes. The taxpayer at issue owned a barge that was badly damaged in a 13-hour fire. The barge was repaired, but no sales tax was paid on the materials, machinery, and equipment used in the $11 million reconstruction. The Parish tax collector assessed local use tax on the items and the taxpayer protested. After a trial court and the appeals court ruled in the Parish’s favor, the taxpayer appealed.
Under Louisiana law, there is a statutory sales and use tax exemption for machinery, materials, and equipment that become component parts of ships, vessels and barges with a displacement of more than 50 tons that are built in Louisiana. A regulation promulgated by the Department of Revenue further provides that the materials, machinery, and equipment must be added to the vessel during construction or reconstruction and goes on to provide that the reconstruction of a vessel will qualify for the exemption if the reconstruction restores a vessel to seaworthiness following its destruction by sinking, collision, or fire. However, items that “replace worn components” are not exempt.
The taxpayer argued that it qualified for the exemption per the regulation because the items were used to restore the barge to seaworthiness after the 13-hour fire. The Parish tax collector, on the other hand, argued that the exemption applied only to purchases made in connection with the original building of certain new barges and that the regulation was unconstitutional as it exceeded the scope of the statute by applying the exemption to “reconstructions.” Specifically, the tax collector argued that the Department in essence created a new, expanded exemption that exceeded the Legislature’s grant of authority to the agency.
After reviewing the history and purpose of the regulation, the court first concluded that the legislature intended to include reconstruction within the purview of the exemption. Reconstruction is the commercial equivalent of new construction, and it has the effect of retaining certain types of jobs in Louisiana which was what the legislature intended. In the court’s view, nothing in the plain language of the statute restricted the reading to a more narrow definition of new construction. The court also found that its primary purpose here was to discern legislative intent and other rules of statutory construction (e.g., exemption are construed strictly against the taxpayer) are secondary to that purpose.
After reversing the lower courts on the issue of whether the regulation was unconstitutional, the court addressed various theories under which the Parish tax collector argued that the exemption did not apply to the facts in the case. Among other things, the tax collector argued that the damage the barge suffered as a result of the fire did not rise to the level of “destruction” as required under the regulation. The court rejected this argument, noting that the fire burned for 13 hours, and the record was replete with evidence of the extensive damage to the barge. In addition, following the fire, the barge could no longer float without assistance received during the recovery effort and the reconstruction was necessary to restore it to a sea-worthy condition. The court concluded that the materials, equipment, and machinery used in the post-fire reconstruction process fit squarely within the statutory exemption as interpreted under the regulation. Please contact Randy Serpas at 504-569-8810 with questions on Coastal Drilling Company, LLC v. Dufrene.
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