Louisiana farmers will get to avoid paying sales taxes on what they feed their critters if they sell what comes out the other end for fertilizer.
That is the logical outcome of a recent state Supreme Court decision, according to Jeannette Knoll in a somewhat mischievous dissent. When ranchers get wind of this, the dung market should experience a major boost.
The implications go way beyond animal husbandry, however. We are not talking chicken feed, or, at least, not just chicken feed. At risk are many millions in revenue for local and state government just when the fisc is more than usually strapped.
The crisis is due to the “further processing exclusion,” a provision of tax law that seldom generates headlines. It would not be doing so now if lower court rulings had held up. But the state’s high court decided that the humbler judges had erred by yielding to the siren song of “common sense dictating against inequity” when they decided that a utility company should be taxed on the limestone it buys to be used as a scrubber in the generation of electricity. Really! If common sense were an acceptable standard, learned jurists would hardly be necessary.
The court rejected any such subversive notion by ruling that the company was not liable for sales taxes on the limestone, because it sells the ash that is a byproduct of the generating process. The further processing exclusion says materials are not taxable if they are to be transformed into “articles of tangible personal property.” It makes no difference, the high court ruled, that the tangible personal property here was just leftover ash. The law applies equally to incidental commodities.
Thus did the Supreme Court open the door for various manufacturers to seek similar relief for the purchase of raw materials, to the consternation of government officials throughout the state. All along the industrial corridor between Baton Rouge and New Orleans, lawyers will be looking for ways to invoke the exclusion. Out in the country, meanwhile, maybe farmers will take their cue from Knoll and argue that excrement is to them what ash is to utility companies. After all, if peristalsis is not “further processing,” what is?
The direct beneficiary of the ruling is a company called NISCO, which produces electricity in Lake Charles and uses limestone to control sulfur emissions. That limestone costs $46 million a year of which NISCO recoups $6.8 million by selling the ash to be used, for instance, in road construction and the treatment of acidic waste.
The state and Calcasieu Parish argued that NISCO was liable for sales taxes on the $39 million difference between the cost of the limestone and the retail value of the ash. But the Supreme Court decided that NISCO need pay nothing, and that tax was due only from the purchaser of the ash. Whether or not the decision will give farmers ideas, it will sure cause taxing authorities to have a cow.
The purpose of the further processing exclusion, the court notes, is to avoid double taxation. The effect of this decision, however, is to avoid single taxation. Nuts it may be, but that doesn’t mean the court’s exegesis is wrong.
NISCO would have to buy limestone even if it couldn’t sell the ash, and the revenue it produces are no more than a handy offset. But the law makes no distinction between primary and secondary end-products, the court ruled, so the further processing exclusion means that the NISCO is off the hook for the limestone because it sells the ash on the side.
The obvious rationale for the further processing exclusion is that industry will turn raw materials into more valuable goods, and thus generate more tax revenue. It cannot have been intended to let a company avoid taxes on its primary business by running a secondary one that recoups pennies on the dollar. The Supreme Court is not blind to the absurdity, but is constrained by the wording of the statute, which it invites the Legislature to amend so that the further processing exclusion applies only to products that are profitable or “primary.”
Two other justices wrote that NISCO should be liable for sales tax on “that portion of the limestone that is not incorporated into the ash,” but otherwise concurred in the opinion, leaving Knoll as the only one to call it a complete turkey.
James Gill’s email address is firstname.lastname@example.org.