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Jamie C. Yesnowitz
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The Louisiana Board of Tax Appeals recently ruled that a taxpayer’s purchases of a caustic chemical used as part of a procedure to comply with state and federal pollution control laws and environmental permits qualifies as a pollution control device or system eligible for the state’s statutory sales tax exclusion.1
The Board disagreed with an interpretation provided by the Louisiana Department of Environmental Quality (DEQ) that the pollution control device or system exclusion only applies to permanent equipment capable of being installed. Because legal ambiguities pertaining to exclusions are required to be interpreted in favor of the taxpayer, the Board concluded that the taxpayer was entitled to a sales tax refund after determining that the taxpayer installed caustic as required by the exclusion.
During the 2012-2014 tax years, the taxpayer, Monsanto, purchased sodium hydroxide, a caustic chemical, for use at its manufacturing facility in Luling, Louisiana to reduce the toxicity in the processing of raw materials and wastewater. Monsanto made the purchase in order to comply with federal and state environmental laws along with its air emission, water discharge and waste disposal permits as required by the DEQ. Monsanto uses raw materials in the manufacturing process to produce a commercial herbicide.
In October 2017, Monsanto filed a refund claim with the Louisiana Department of Revenue for approximately $4 million in sales tax paid on the purchases of the caustic. Monsanto argued that the caustic was excluded from sales and use tax under La. Rev. Stat. Sec. 47.301(10)(1) as a pollution control device or system. The Department submitted Monsanto’s claim to the Louisiana DEQ. Upon review, the DEQ determined that the chemical did not qualify for the exclusion because it could not be installed as a pollution control device or system. Based on the DEQ’s interpretation, the Department summarily denied Monsanto’s refund claim in May 2018 on the basis that the chemicals are not considered as part of a pollution control system. In denying the refund claim, the Department did not consider the law, regulations or policy regarding Monsanto’s refund claims, or conduct an independent investigation into Monsanto’s use of the chemicals as a pollution control device or system.
The Board had previously denied Monsanto’s motion for summary judgment in the same case because the taxpayer did not prove that the DEQ’s judgment was arbitrary or capricious. The Louisiana Fifth Circuit Court of Appeal subsequently denied Monsanto’s writ application from the Board’s decision but ordered the Board to review the DEQ’s decision without giving deference to the DEQ’s interpretation of the term “installed” in the statute. Agreeing that material factual disputes existed in the case, the Fifth Circuit also held that the Board must interpret the statute pertaining to the word “install” liberally in favor of the taxpayer and against the Department.
Board of Tax Appeals decision
Under Louisiana law, a “pollution control device or system” includes tangible personal property that is sold or leased and used or intended for the purpose of eliminating, preventing, treating, or reducing the volume, toxicity, or potential hazards of industrial pollution of air, water, ground water, noise, solid waste, or hazardous waste.2
In order to qualify for the sales tax exclusion, the pollution control device or system must demonstrate either: (i) a net decrease in the volume, toxicity, or potential hazards of pollution, as a result of the installation of the device; or (ii) the necessity of the installation to comply with federal or state environmental laws or regulations.3
Following the instructions of the Fifth Circuit, the Board did not defer to the DEQ’s interpretation of the law. When interpreting a sales tax exclusion, the Board must interpret the statute in favor of the taxpayer and against the taxing authority.4
While deference is given to administrative agencies because of their expertise in the matters that such agencies review,5
the Board acknowledged that no deference is owed to the DEQ’s interpretation of law when there are mixed questions of law and fact. Here, there existed mixed questions of law and fact, as the record reflected that the DEQ made no factual determinations regarding the taxpayer’s pollution control device or system application. Accordingly, the Board found that the DEQ’s strict construction of the exclusionary statute should be liberally construed in Monsanto’s favor.
In this case, the Board found that the DEQ made a legal determination that Monsanto’s use of a caustic was not a pollution control device or system by strictly interpreting the statute pertaining to the word “install” to be applicable only to tangible personal property, and not consumable chemicals. The Board, finding that laws should be construed according to the common and approved usage of the language, consulted the Merriam-Webster’s Dictionary definition of “install,” which is defined as “to set up for use or service,” or “to establish in an indicated place, condition, or status.” Under a liberal construction of the definition, the Board reasoned that “use” may be interpreted to refer to something consumed or used up. The Board also noted that the statute references items that are “sold or leased and used.” For these reasons, the Board disagreed with the DEQ’s interpretation of the word “install” to exclude items that are used or consumed such as a caustic. Finding that Monsanto set up caustic for use in its pollution control scheme, the Board concluded that the use of caustic fell within a common and approved definition of the term “install.”
Recognizing that caustic is not a pollution control “device,” the Board next considered whether Monsanto’s use of caustic was part of a "system” to reduce pollution. The Board noted that the word “system” is defined in Black’s Law Dictionary as “[d]etailed procedures, methods and routines to carry out an activity, problem solve or perform a duty.” Again construing the exemption in favor of Monsanto, the Board concluded that the caustic is being introduced as part of a detailed procedure and method for the express purpose of pollution control. Based on the Department’s agreement that Monsanto uses caustic as part of a procedure for pollution control, the Board concluded that Monsanto’s caustic fell under the definition of a pollution control system. Accordingly, the Board concluded that the Department incorrectly denied Monsanto’s refund claim and that Monsanto was therefore entitled to a refund of sales tax paid.
A taxpayer-favorable ruling that incentivizes businesses to act in an environmentally responsible manner, the Board’s decision confirms that chemicals used or consumed in the pollution control process likely qualify for the pollution control device or system exclusion from Louisiana sales tax. Central to the Board’s ruling was the fact that use of the caustic was necessary for Monsanto to be compliant with state and federal pollution control laws in addition to DEQ regulations. Moreover, DEQ’s approval was a required element of satisfying the statutory exclusion. Construing the statute liberally in favor of Monsanto based on its reading of case law, the Board found that DEQ strictly construed the language of the exemption in a way that added requirements to the exemption.
Beyond the specific public policy objectives that this decision supports, some interesting questions for future consideration follow. For example, are sales tax exclusion statutes to be interpreted liberally when such an exclusion does not depend on an interpretation of a non-tax administrative authority like DEQ? If the DEQ had stated that it had interpreted the exclusion statute in a liberal manner and came to the same conclusions, would the result have been different? In addition, what is the limit to how liberally an exclusion statute may be interpreted?
At the very least, if the result is not successfully challenged on appeal, the decision presents a potential opportunity for taxpayers to file sales tax refund claims on purchases of similar chemicals for use in the pollution control process that may have previously been denied by the Department under the same reasoning. Similarly, Louisiana taxpayers may be able to claim exempt use of chemicals purchased or used in the manufacturing process for the purpose of pollution control on a prospective basis. However, it should be noted that the exclusion statute does not incorporate consumables – including liquids such as lubricants, oils, and coolant – as qualifying tangible personal property that is used in the manufacturing process.
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