By Christopher J. Dicharry and Jason R. Brown
On July 7, 2009, Louisiana Governor Bobby Jindal signed Act 442 (SB 9) into law, preserving Louisiana’s long-standing law excluding purchases, rentals and repairs of component parts of immovable property from state and local sales/use tax. Under a law enacted in 2008, purchases of several items previously considered non-taxable component parts of buildings and other immovables (e.g., installed commercial refrigerators and other commercial and industrial fixtures) could have been subjected to state and local sales/use tax. Many taxpayer representatives questioned the constitutionality of the 2008 Act and legislators agreed that it was not their intention to increase sales/use taxes during the 2008 Legislative Session. Act 442 became effective when it was signed by the governor and applies retroactively to all transactions occurring after the July 1, 2008 effective date of the 2008 Act.
Under Louisiana’s general tax law, all purchases, leases and repairs of tangible personal property, not specifically excluded or exempted from tax, are subject to state and local sales/use tax. The classification of an item as “tangible personal property” is, therefore, of great importance when determining whether purchases, leases and repairs are taxable. Prior to 2005, Louisiana law did not regard items permanently attached to a building and certain other property that would be expected to be a part of a building (e.g., commercial refrigerators/freezers in a grocery store and certain medical equipment in a hospital ) as “tangible personal property.” In the 2005 Willis-Knighton decision, the Louisiana Supreme Court rejected twenty-five years of interpretations of Louisiana’s property law and ruled that many items formerly considered as component parts (i.e. toilets, doors, cabinets) were properly classified as tangible personal property. In response to the Willis-Knighton decision, the legislature passed remedial legislation in 2005 and 2006 (Acts 301 and 594, respectively) making clear that all items regarded as component parts of an immovable prior to the Willis-Knighton decision retained their status as “component parts.” For purposes of state and local sales/use tax, therefore, the items did not qualify as taxable tangible personal property and their purchase, lease and repair was, once again, excluded from tax.
In 2008, the Legislature rewrote the law for all purposes, including real estate transactions and lien law. The 2008 Act created a great deal of uncertainty as to whether purchases of many items generally viewed as component parts of an immovable were taxable as tangible personal property. The new law explicitly states that purchases of the type discussed here are not.
Act 442, described in the legislation as “remedial, curative…procedural…and [to] be applied retroactively,” specifically states that the 2005 and 2006 laws (Acts 301 and 594) are controlling for sales/use tax purposes for determining which items qualify as component parts. The Act 442 changes discussed above originated as House Bill 882 by Representative Hunter Greene (HB 882), and was added by amendment to SB 9. Act 442 expressly provides that, “for purposes of sales and use taxes…the term ‘tangible personal property’ shall not include any property that would have been considered immovable property prior to” the 2008 law.
Even with the enactment of Act 442, there will continue to be disputes over what property qualifies as component parts. In the coming months, Kean Miller will be working with the Secretary of the Department of Revenue and others to better define “component parts” for sales and use tax purposes.
A copy of Act 442 may be found here.
If you have any questions regarding the effect that Act 442 may have on your business, please to do not hesitate to contact us.