Hon. Elizabeth W. Magner, U.S. Bankruptcy Judge.
Willow Bend Ventures, L.L.C. ("Debtor") filed Objections to Proofs of Claim 4 and 5 filed by the Louisiana Department of Revenue ("LDR"). P-53 and 55. Cross Motions for Partial Summary Judgment filed by Debtor and LDR came before the Court on May 29, 2018. P-214 and 216.
Summary Judgment is proper when no genuine issues of material fact exist, and the moving party is entitled to judgment as a matter of law. Hassan v. Lubbock Independent School District, 55 F.3d 1075, 1079 (5th Cir. 1995); F.R.C.P. 56(c); F.R.B.P. 7056(c). The Court must view the evidence introduced and all factual inferences in the light most favorable to the party opposing summary judgment. Hightower v. Texas Hospital Ass'n, 65 F.3d 443, 447 (5th Cir. 1995). The movant bears the burden of proving an absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). "An issue is material if its resolution could affect the outcome of the action." Weeks Marine, Inc. v. Fireman's Fund Insurance Co., 340 F.3d 233, 235 (5th Cir. 2003).
By stipulation, Debtor and LDR have agreed to the following facts:
Debtor owns and operates a clay pit located in Edgard, Louisiana. P-221, ¶ 3. Debtor's primary business is the sale of dirt, clay, fill, and other aggregate materials to contractors. Id. at ¶ 2. Debtor excavates clay and then processes it to the moisture content prescribed by its customers. Id. at ¶ 4.
Debtor did not file Louisiana sales and use tax returns for the period of January 31, 2009, to June 30, 2012. Id. at ¶ 16. LDR performed audits of Debtor's sales and use tax liability for the tax periods January 31, 2009, through June 30, 2012, and January 1, 2014, through April 30, 2017. (Collectively "Taxable Periods") Id. at ¶ 6.
As a result of the audits, LDR assessed sales and use taxes for the Taxable Periods in the amounts contained in proofs of claim nos. 4 and 5 as amended. Id at ¶ 7, 8, and 9.
On December 30, 2013, LDR filed suit against Debtor in state court for sales and use taxes assessed from January 31, 2009, to June 30, 2012. The suit sought taxes, penalties, and interest in the total amount of $1,109,643.21, plus post-petition interest. P-221, Exh. 9. The suit is still pending.
On May 9, 2017, Debtor filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code, and LDR's state suit against Debtor was stayed.
Proof of claim 4 as amended seeks taxes for the period of January 31, 2014, through March 31, 2017, of $55,047.31; $4,163.96: and $25,179.36 in penalties. See Amended Proof of Claim 4-5, P-221, Exh. 2.
Debtor Objected to Claims 4 and 5 as amended. P-53 and 55. The parties filed the instant Cross Motions for Partial Summary Judgment.
After the parties filed their Cross Motions for Summary Judgment, LDR filed Amended Claim 5-3 asserting a claim of $1,077,786.89 and a second, unsecured claim of $316,778.36 or $760,334.55 in taxes; $317,452.34 in interest through April 24, 2018; and $228,125.18 in penalties through April 24, 2018.
The parties seek partial summary judgment on five (5) disputed legal issues:
The proper construction of La. R.S. 47:301(10)(g) depends in large part on whether the provision is an exemption or exclusion. The Louisiana Supreme Court in Bridges v. Nelson Industrial Steam Co., 2015-1439 (La. 5/3/16), 190 So.3d 276, explained the difference:
Id. at 280 (quoting Harrah's Bossier City Inv. Co., LLC v. Bridges, 2009-1916, pp. 9-10 (La. 5/11/10), 41 So.3d 438, 446).
LDR argues that because Louisiana could have taxed these transactions, their elimination under subsection 10(g) is an exemption from taxation. Debtor argues that the provision excludes the transactions.
Based on existing jurisprudence, the State might have taxed the transactions in question. However, it clearly elected to
LDR cites as authority for its position Bridges v. Cepolk Corp., 2013-01051 (La. App. 3 Cir. 2/12/14), 153 So.3d 1137. In Cepolk, a heating and air conditioning contractor for the United States military ("Cepolk") installed heating and air conditioning systems at Fort Polk and continued to maintain those systems after installation. Cepolk claimed that equipment and materials used in the maintenance of the systems were not subject to taxation because they was purchased with the intent to resell to the United States. LDR argued that the contract was for construction and the materials or equipment were not for resale but instead consumed in connection with the services and labor provided. Ultimately, the Circuit Court agreed, finding that the taxpayer was a contractor and the tangible property it used in connection with its services was not acquired for resale but consumed as part of its construction services. In its opinion, the Court referred to La. R.S. 47:301(10)(g) as an "exemption" from taxation.
The Cepolk decision turned on Cepolk's status either as a contractor under La. R.S. 47:301(10)(a)(i) or a dealer under La. R.S. 47:314. If Cepolk was a contractor, the movables used in the services it provided were consumed rather than sold.
In Odebrecht Construction Inc. v. Department of Revenue, 2015-0013 (La.App. 1 Cir. 9/18/15), 182 So.3d 132, a case factually close to the one at hand, the First Circuit reviewed an appeal from the Louisiana Board of Tax Appeal. The case involved a subcontractor for the Corps of Engineers ("Corps"). The subcontractor claimed that purchases of clay were excluded from sales tax under La. R.S. 47:301(10)(g). There was no question that the purchases involved movables and that title to them passed to the Corps on delivery by the taxpayer. The question before the Court was whether or not the subsection was an exemption or exclusion. The Board of Tax Appeal held:
Id. at 136.
The First Circuit agreed finding:
Id. at 143.
In Bridges v. Nelson Industrial Steam Co., 2015-1439 (La. 5/3/16), 190 So.3d 276, the Louisiana Supreme Court considered whether La. R.S. 47:301(10)(a)(i)(c)(i)(aa) was an exemption or an exclusion. Commonly referred to as the "further processing exclusion," the Court considered whether the provision should be construed liberally in favor of the taxpayer or strictly in favor of the State. In Nelson as in this case, LDR argued that every sale is subject to taxation unless exempted; therefore, the provision not to tax must be an exemption. A plain reading of the defined term "retail sale" resulted in a ruling that the transaction was excluded from retail sales. Therefore, the statute created an exclusion, not an exemption.
The foregoing decisions establish that when a type of transaction is removed from the definition of transactions subject to tax, the effect is to exclude. In this case, sales to the Corps or its agents are not considered retail sales. As a result, they are not included in the category of transactions subject to tax. Although LDR argues that they are exempted rather than excluded, to be exempt from tax would require that the transaction first be subject to tax. The Legislature did not elect this option. Therefore, the Court holds that La. R.S. 47:301(10)(g) is an exclusion to be liberally construed in favor of Debtor.
LDR's claims are a result of audits conducted on Debtor's business operations from January 31, 2009, through June 30, 2012, and January 1, 2014, through April 30, 2017. The audits uncovered transactions between Debtor and third parties for the sale of clay and for which sales tax was not paid. Debtor asserts the transactions fall within the confines of La. R.S. 47:301(10)(g), are not taxable, and LDR bears the burden of proving they are taxable. LDR claims that all transactions by a dealer are presumed to be retail sales. Therefore, Debtor bears the burden of proving the transactions are excluded.
The burden of proof is a substantive aspect of a claim. As an essential element of the claim itself, the parties are entitled to the burden of proof normally imposed. Raleigh v. Illinois Department of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Thus, state law controls which party bears the burden of proof on the issues.
Generally, the burden is on a plaintiff in a civil action to establish a prima facie case. The opposing party need not supply any countervailing evidence until this is done. If the plaintiff fails, his cause of action will be defeated. If a plaintiff succeeds in establishing a prima facie case, the burden will shift to the defendant to overcome the initial allegations then back to the plaintiff to prove his case by preponderance of evidence. Once plaintiff proves his case by a preponderance of
"[T]ax laws are liberally interpreted in favor of the taxpayer." Parish of East Baton Rouge v. Kosay Enterprises, Inc., 368 So.2d 178 (La.App. 1 Cir. 1979) (citing Colonial Pipeline Co. v. Mouton, 228 So.2d 718 (La.App. 1 Cir. 1969), and Higgins, Inc. v. Walker, 129 So.2d 840 (La.App. 1 Cir. 1961)). In all tax disputes the State bears the initial burden of establishing that the activity or transaction in question is subject to a tax.
LDR argues that La.R.S. 47:301 et. seq. imposes a tax on all retail sales transactions in the State. However, since the statute excludes several types of transactions from the definition of retail sales, LDR initially bears the burden of establishing that the transactions in question fall within the definition of a retail sale. Bridges v. Geoffrey, Inc., 2007-1063 (La.App. 1 Cir. 2/8/08), 984 So.2d 115. In order to meet its burden, LDR counters with the presumption created by La. R.S. 47:314 which provides in pertinent part:
LDR is correct that all transactions by a dealer are initially presumed to be retail sales. Therefore, LDR might initially rely on its presumption. At this juncture, the burden rests with the party challenging the presumption. However, the opponent need only convince the trier of fact that his proposed conclusion is more correct than the presumed one. "A presumption does not have any probative value, but merely provides the fact-finder with a conclusion in the absence of proof to the contrary." Turner v. Turner, 455 So.2d 1374 (La. 1984) (citation omitted).
Jones v. LSU/EA Conway Medical Center, 45, 410 (La.App. 2 Cir. 8/11/10), 46 So.3d 205, 211 (quoting Turner, 455 So.2d at 1379); see also In re Leitch, 32, 021 (La. App. 2 Cir. 3/31/99), 732 So.2d 632, 636.
As a result, Debtor must respond to the presumption with evidence that supports a different conclusion. Assuming that Debtor will offer any evidence to refute LDR's presumption, LDR's presumption will fail as it is merely a proposed conclusion not resting on any particular evidence. The burden will shift back to LDR to provide evidence of its own to establish the nature of the transactions it seeks to tax.
At this point, LDR argues that its affidavits and pleadings suffice as actual admissible
After auditing Debtor's records, LDR assessed sales taxes on the transactions in question. It then prepared a proof of claim, attaching its audit. It claims that its proof of claim, pleadings, and audits meet its obligations to prove its claims by a preponderance of evidence. Therefore, LDR asserts that it is Debtor's burden to establish, by a preponderance of evidence, that the assessed sales tax is not due. LDR cites Barfield v. Diamond Construction Inc., 51, 291 (La.App. 2 Cir. 4/5/17), 217 So.3d 1211, in support of its position. In Barfield, the Court analyzed the burden of proof,
Id. at 1218.
Louisiana law provides for the enforcement of an assessment by ordinary or summary proceeding. When the State elects to collect an assessed tax by summary proceeding, state law allows LDR's pleadings, affidavits sworn to be true and correct, and audits to be given the effect of evidence. La.R.S. 13:5034 is in fact the statute that implements that procedure. However, when the matter is through ordinary process, the rules of evidence apply, and LDR must produce admissible evidence under the applicable rules of procedure in order to carry its burden.
In summary, LDR bears the burden of establishing any transaction is subject to taxation. If a taxpayer maintains records sufficient to make a showing that the transactions audited by LDR are excluded under La. R.S. 47:301(10)(g), in most cases, extrinsic evidence to establish the exclusion will not be necessary. The burden will fall on LDR to prove why the transactions do not meet the parameters of the exclusion by a preponderance of evidence. However, if the taxpayer's records are insufficient to support the exclusion on their face, the presumption that the transactions are subject to tax arises, and the taxpayer bears the burden of rebutting the presumption. As a consequence, the burden will shift to Debtor to prove that the transactions are not retail sales. Once Debtor introduces evidence sufficient to rebut LDR's presumption, it will be incumbent upon LDR to establish by preponderance of evidence that the exclusions do not apply.
Although the parties request that this Court detail what proof might be necessary to carry their burdens, the Court will not speculate on the answer to this question.
The Joint Statement of Uncontested Material Facts provides, "In certain instances, Debtor delivered the clay to some of its customers' work sites." P-221, ¶ 5. LDR maintains that when delivery or freight charges are included on the sales invoice, they are taxable pursuant to La. R.S. 47:301(13)(a). The statute provides:
La. R.S. 47:301(13)(a) does not specifically include freight charges as a component of the sales price. LDR relies on La. Admin. Code title 61, Pt. I, § 4301 which provides that "[c]osts included in the sales price are":
P-216, p. 19.
Although LDR enacted La. Admin. Code title 61, Pt. I, § 4301, "[t]ax regulations cannot extend the taxing jurisdiction of the statute, as taxes are imposed by the legislature, not the Department."
In Pensacola Construction Co. v. McNamara, 558 So.2d 231 (La. 1990), Pensacola Construction Co. ("PCC") purchased stone from Reed Crushed Stone Co. ("Reed"), which was located in a different state. PCC arranged for two (2) different barge companies to transport the stone, but Reed coordinated delivery and paid the barge companies. Reed billed PCC separately for the stone and freight. LDR assessed a "use tax" against Pensacola for freight charges. The Louisiana Board of Tax Appeal found in favor of LDR. On appeal, the trial court overturned the Board's decision, ruling that the freight charges were not part of the cost of the stones and, therefore, not subject to use tax. The appellate court affirmed, ruling that a use tax on interstate freight violated the Commerce Clause. The Louisiana Supreme Court granted a writ.
The Louisiana Supreme Court held that the use tax imposed on freight by La. R.S. 47:301(3)(a) was unconstitutional "because there is no parallel assessment of sales tax" in section 301(13)(a). Although not necessary to the holding, the Supreme Court also indicated that freight charges are not part of the statute and, therefore, not subject to tax.
In Pontchartrain Materials Corp. v. Plaquemines Parish Govt., 2003-1444 (La. App. 4 Cir. 3/31/04), 871 So.2d 1171, Pontchartrain Materials Corp. ("Pontchartrain") sold aggregate materials. Delivery was provided by either the customer or Pontchartrain. When delivered by Pontchartrain, a separate charge for delivery appeared on the invoice. Plaquemines Parish ("Plaquemines") sued Pontchartrain for sales taxes not paid on the freight charges. Plaquemines had a tax ordinance identical to La. R.S. 47:301(13)(a).
In discussing the question, the Fourth Court found that the freight charge was not part of the sales price and not taxable. The Court found:
Id. at 1175 (citing La. R.S. 47:301(13)).
In LDR v. Apeck Construction, Inc., 2017-738 (La.App. 3 Cir. 2/28/18), 238 So.3d 1045, the Third Circuit adopted Pontchartrain's ruling when considering the question under state law. It held:
Apeck, 238 So.3d at 1054 (quoting Pontchartrain, 871 So.2d at 1175).
This Court finds the rationale of the Third and Fourth Louisiana Circuit courts, and the dicta provided by the Louisiana Supreme Court, persuasive. As such, it finds that the definition of "sales price" in La. R.S. 47:301(13)(a) does not include freight when it is separately itemized.
The Joint Statement of Uncontested Material Facts makes no mention of equipment rented out of state. However, both Motions for Summary Judgment allege that Debtor rented equipment from a Mississippi company. P-214, p. 20; P-216, p. 20. The parties dispute whether these transactions occurred in Louisiana or Mississippi and who must prove where the transactions took place.
Debtor avers that it legally paid tax in Mississippi and is entitled to a credit equal to the tax already paid on any use tax assessed by LDR. LDR alleges that the sales tax paid in Mississippi was illegal. As such, it asserts that Debtor is not entitled to any credit and must recover the tax paid from Mississippi.
La. R.S. 47:303(A)(2) imposes a tax "[o]n all tangible personal property imported, or caused to be imported, from other states..." La. R.S. 47:303(A)(3) provides:
A credit is owed on Louisiana's tax when the tax paid to the other state was legally owed. J. Ray McDermott, Inc. v. Morrison, 96-2337 (La.App. 1 Cir. 11/7/97), 705 So.2d 195, 205.
LDR's claim is based on an allegation that Mississippi's taxes were illegally assessed.
River Cities Const. Co., Inc. v. Barnard & Burk, Inc., 413 So.2d 666 (La.App. 1 Cir. 1982). Assessment of tax is not presumed to be illegal. As such, LDR bears the burden of proving that the transaction giving rise to the tax was a Louisiana lease and improperly assessed by Mississippi.
LDR asserts that Debtor owes sales tax on transactions in which it failed to collect the tax.
La. R.S. 47:304 provides:
La. R.S. 47:304 is clear that if a dealer fails to collect sales tax, the dealer must pay the tax itself and that all sums collected
The only defense to a failure to collect a tax legally owed occurs when the item is returned to the dealer. In that case, La. R.S. 47:315 provides that the dealer is entitled to a credit or refund of the tax. Debtor asserts that in some cases, the amount of product sold was disputed by the purchaser. As a result, the actual amount of clay sold was less than invoiced. Provided Debtor establishes that a lesser amount of clay was actually sold than was invoiced, the sales tax assessed on the invoice would have to be decreased. Sales tax is based on retail sales of product. For the portion of product not delivered, no sale occurred. Ergo, no tax is due.
La.R.S.47:301(10(g) excludes from the definition of retail sales, certain transactions with the United States government. As an exclusion, it is liberally construed in favor of the taxpayer.
The burden of proof is on LDR to establish that the transactions in question are retail sales subject to tax. That burden might be initially met through the presumption created by La. R.S. 47:314. However, if Debtor offers evidence to establish facts sufficient to support a contrary conclusion, LDR's presumption will be defeated. It will then be LDR's burden to establish by preponderance of the evidence that the exclusion does not apply.
Separately stated freight charges are not included in the sales price subject to sales or use tax.
The burden is on LDR to establish that an out of state tax was illegally assessed.
The dealer is liable for sales tax on completed retail sales.
A separate, Partial Judgment will be rendered in accord with this Opinion.