Nearly everyone who has practiced civil litigation long enough has experienced a case so meritless that allegations of frivolity and the need for sanctions are thrown around. Despite these feelings, the typical result is a simple dismissal of the case and the defendant footing the bill. Rarely are sanctions ever actually awarded against the frivolous plaintiff or his counsel for filing the suit, despite the intent of Rule 11 and their appropriateness of the sanction. Even rarer are instances where a defendant is sanctioned for defending itself at trial.

Recently, the U.S. 5th Circuit Court reviewed such a case from the WDLA. Our earlier blog article covering the trial court opinion in Dr. George T. Moench, et al. v. M/V Salvation, et al. may be found here. What makes this case unusual is the sanction of attorneys’ fees against the defendant based on the court’s belief that the defendant (or its counsel) essentially wasted everyone’s time by trying liability. According to the court, Marquette “clearly knew the extent of its liability based on the circumstances of the case and the actions of its captain … [and] was fully aware of the fact that [plaintiff] had no liability whatsoever for this allision.” Because attorneys’ fees are not a recoverable item of damages in admiralty cases, the plaintiff made no request for them. Instead, by invoking its inherent authority, the district court sua sponte awarded the full amount of Plaintiff’s expended attorneys’ fees ($295,000) as a punitive sanction against Marquette. For these reasons, among others, Marquette appealed the trial court’s ruling.

On appeal, the 5th Circuit considered the prudence of the attorney’s fees award. Despite the unavailability of attorneys’ fees as a recoverable damage, a court may award attorneys’ fees as a sanction against a party that has acted in “bad faith, vexatiously, wantonly, or for oppressive reasons.” This includes raising frivolous arguments or even meritorious ones simply for the sake of harassment. Such behavior constitutes a sanctionable abuse of the judicial process. While every litigant has a right to vigorously defend or prosecute its claim, the 5th Circuit noted that advocacy designed for no other purpose than to burden an “opponent with unnecessary expenditures of time and effort” is an abuse of the judicial process. In this case, the district court found that Marquette’s defense warranted sanctions for two reasons: (1) Marquette refused to concede liability and (2) Marquette relied on expert valuations that were glaringly inaccurate.

By uncontested testimony from Marquette’s captain, Marquette’s vessel struck the plaintiff’s moored vessel after the captain left the helm unattended during a period of dangerously high waters in the Atchafalaya River. By the time the captain returned the wheel, the Marquette vessel and its tow were out of control, and the captain chose to strike the plaintiff’s vessel to avoid significant damage to his tow. In the face of law and facts to the contrary, Marquette continued to not only deny liability but also argue that the plaintiff’s stationary vessel somehow caused the allision. The district court found that such a meritless defense was made in bad faith and deserving of sanctions. The 5th Circuit found no fault in the district court’s determination that Marquette’s continued contestation of liability was abusive.

Compounding the liability issue, the 5th Circuit also found – like the district court – that Marquette’s use of experts challenging Dr. Moench’s damages claim was also abusive. In support of its damages defense, Marquette used two experts who produced woefully unreliable reports with amazing errors in their damage evaluations. Marquette’s first expert opined on value “without including any comparables, without considering the equipment on the vessel, without an accurate description of the vessel, and without reliable underlying information,” and its second expert “not only failed to correct the glaringly incorrect information set forth in the first expert’s report, but incorporated it into his own.” Given these findings, the 5th Circuit found no abuse of discretion by the district court.

While both the district court and 5th Circuit considered other issues in this case, the discussion of a court’s inherent authority to award attorneys’ fees as a sanction bears great attention. “Zealous” or “vigorous” advocacy is often thrown around, usually unsuccessfully, in defense of a lawyer’s conduct when it is the subject of a sanctions motion. The 5th Circuit’s ruling stands as a continued warning to all litigants that “vigorous advocacy” does not include advancing far-fetched legal theories or legitimate legal theories with obviously unreliable evidence. And while sanctions for abuse of the judicial process are still the exception rather than the rule, attorneys and their clients alike should take note when developing their claims, evidence, and defenses to ensure that are not asserting frivolous arguments, or even meritorious ones that could be perceived as harassing an opponent or wasting the Court’s time.

Click here to review a Practice Note explaining how to enforce arbitral awards in the state and federal courts in Louisiana.  This Note explains the procedure for confirming an arbitration award in Louisiana, and the grounds on which a party may challenge enforcement under Louisiana and federal law, including the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the Federal Arbitration Act (FAA), and the Louisiana Binding Arbitration Law (BAL). This Note also briefly explains the procedure for vacating, modifying, or correcting an arbitral award in Louisiana.

During the 2016 regular Legislative session, the Louisiana Legislature amended and reenacted several statutes relative to the practice of telemedicine. Under the prior legislation, a physician was required to conduct an in-person patient history and physical exam before engaging in a telemedicine encounter.   Now, a physician who is either licensed in the state of Louisiana or has a Louisiana telemedicine permit may treat a patient residing in Louisiana via telemedicine if: the physician has access to the patient’s medical records; creates his or her own medical record on the patient; and, if necessary, provides a referral to a physician in Louisiana or arranges for follow-up care in Louisiana as may be indicated.   Another change is that the physician is no longer required to utilize video to communicate with the patient, and instead can use interactive audio (i.e. telephone) if, after accessing and reviewing the patient’s medical records, the physician determines that he is able to meet the same standard of care as if the healthcare services were provided in person.

The Legislature also enacted a new statute, La. R.S. 37:1271.1, to provide for conditions and authorizations relative to the practice of telemedicine at Louisiana licensed healthcare facilities that hold a current registration with the U.S. Drug Enforcement Administration. If a physician uses telemedicine to treat a patient at the facility, the physician, using the same standard of care as if the healthcare services were provided in person, can prescribe a controlled substance without conducting an in-person patient history or physical exam. For example, this revision to the law will permit a physician to prescribe controlled substances to a hospitalized patient via telemedicine without prior in-person contact with the patient.

The Legislature instructed the Louisiana healthcare licensing boards to promulgate Rules consistent with the statutory amendments. On October 20, 2016, the Louisiana State Board of Medical Examiners responded by issuing a Notice of Intent to revise its Rules to conform to the amendments. The LSBME’s proposed revisions incorporate the statutory changes identified above. The physician will no longer be required to conduct an in-person visit, but must be able to refer the patient to another physician in Louisiana or arrange for follow-up care in Louisiana if required by the standard of care. Additionally, the LSBME proposes to remove the current requirement that a physician practicing medicine by telemedicine have a physical practice location in the state or have an arrangement with a physician who maintains a physical practice location in Louisiana to accept patients on referral and for follow-up care.   However, a physician will be required to identify on the application for a telemedicine permit the primary locations from which telemedicine will be utilized by the physician.

The LSBME’s proposed Rules impose two changes affecting documentation of telemedicine encounters. First, the record maintained by the physician must clearly state that the patient encounter occurred via telemedicine. Second, the medical record must be made available to the LSBME upon request.

With regard to controlled substances, the LSBME proposed Rules incorporate the new statutory exception for prescribing to patients being treated in licensed healthcare facilities, but maintains the prohibitions against prescribing controlled substances via telemedicine for the treatment of non-cancer related chronic or intractable pain or obesity.

The LSBME is accepting written comments on the proposed rule amendments until November 21, 2016.   If requested, a public hearing will be held on November 28, 2016 at 1:30 a.m. at the LSBME office to consider data, views, arguments, information or comments from the public. The amendments to the Rules will not become final until the Legislative oversight process is complete and the Final Rules published in the Louisiana Register.

Governor John Bel Edwards has sued Louisiana Attorney General Jeff Landry over Mr. Landry’s refusal to approve certain private legal counsel contracts. Governor Edwards alleges that Mr. Landry is the “chief legal officer of the state,” is “charged with the assertion or protection of any right or interest of [Louisiana],” and “is ethically required by the Rules of Professional Conduct promulgated by the Louisiana Supreme Court to abide by [his] client’s decisions concerning the objective of representation and to consult with [his] client as to the means by which they are to be pursued.” Governor Edwards seeks the immediate issuance of an alternative writ of mandamus compelling Mr. Landry “to perform his statutory ministerial duty to give written approval of the choice of counsel of the executive branch entities…” Governor Edwards alleges that Mr. Landry has rejected most of the contracts “on the grounds that the contracting attorneys should not have agreed not to discriminate in employment and the rendering of services in accordance with Executive Order No. JBE 2016-11.”

Governor Edwards alleges that the procedures for retention and employment of private counsel for the State of Louisiana are found in Louisiana Revised Statute § 42:262 and Louisiana Revised Statute § 49:258. Specifically, Revised Statute § 42:262(F)(1) provides in pertinent part:

In the event it should be necessary to protect the public interest, for any state board or commission to retain or employ any special attorney or counsel to represent it in any special matter for which services any compensation is to be paid, the board or commission may retain or employ such special attorney or counsel solely on written approval of the governor and the attorney general and pay only such compensation as the governor and the attorney general may designate or approve in the written approval.

And Revised Statute § 49:258 provides in pertinent part:

Notwithstanding the provisions of any other law to the contrary and specifically the provisions of any law that authorizes the state or a state agency to appoint, employ, or contract for private legal counsel to represent the state or a state agency, including but not limited to the provisions of R.S. 42:261, 262, and 263, and R.S. 40:1299.39(E), any appointment of private legal counsel to represent the state or a state agency shall be made by the attorney general with the concurrence of the commissioner of administration.

Governor Edwards argues that Revised Statute § 42:262 cannot be read alone and the discretion set forth with respect to boards and commissions is superseded by Revised Statute 49:258, which sets forth a “ministerial process for approval of private counsel, by both the Division of Administration and the Attorney General, and appointment by the Attorney General.” Governor Edwards asserts that Mr. Landry “has refused to perform” this ministerial duty.

A copy of the Petition for Writ of Mandamus can be found here:  Edwards v Landry.

Continuing a trend among other courts, a recent ruling from U.S.D.C., Middle District of Louisiana, recognized the discoverability of plaintiff’s social media postings.  Baxter v. Anderson, 2016 U.S. Dist. LEXIS 110687 (M.D. La. Aug. 18, 2016).  In Baxter, Magistrate Judge Bourgeois addressed the discoverability of social media in a recent discovery ruling on August 19, 2016.  The discovery requests calling for production of plaintiff’s social media information, as propounded, were overly broad.  However, the court was still willing to permit the discovery with some limitations. 

Magistrate Judge Bourgeois was not willing to permit unfettered access to a plaintiff’s social media account just because a personal injury lawsuit was filed, which placed plaintiff’s mental and physical conditions at issue.  However, the ruling permitted access to any postings that met one of the following criteria:

  1. Postings by the plaintiff that relate to the accident;
  2. Postings related to any emotional distress or treated received that relate to the accident;
  3. Postings or photographs that relate to alternative potential emotional stressors, or that are inconsistent with the alleged mental injuries;
  4. Postings that relate to physical injuries sustained as a result of the accident and any treatment therefor;
  5. Postings that relate to other, unrelated physical injuries; and,
  6. Postings or photographs that reflect physical capabilities that are inconsistent with the alleged injuries at issue.

Accordingly, the court acknowledged that social media posts/photographs are subject to discovery, which is consistent with numerous other rulings within Louisiana, as well as around the nation.

The Centers for Medicare and Medicaid Services, Office of the Inspector General (“OIG”) published a Proposed Rule in the September 20, 2016 Federal Register that would change the structure and expand the authority of State Medicaid Fraud Control Units (“MFCU”). The OIG wants to change the Federal participation in the costs attributable to establishing and operating a MFCU as well as incorporate into the rule statutory and policy changes that have occurred since 1977. Those changes include:

  1. raising the Federal matching rate for ongoing operating costs from fifty (50) to seventy-five (75) percent;
  2. establishing a Medicaid State plan requirement that a State must operate an “effective MFCU”;
  3. establishing standards under which MFCUs must be operated;
  4. allowing MFCU’s to seek approval from the Inspector General to investigate and prosecute violations of State law related to fraud in any aspect of the provision of health care services under any Federal health care program, including Medicare, as long as the fraud is primarily related to Medicaid; and
  5. giving MFCUs the option to investigate and prosecute patient abuse, neglect, or misappropriation of patient funds regardless of whether the providing facility receives Medicaid payments.

The Proposed Rule adds or revises several definitions to expand the authority of the MFCU to prosecute. For example, “board and care facility” would be added so that under item (5) listed above the MFCUs investigative authority would now include complaints of abuse or neglect at facilities at non-Medicaid assisted living facilities. The definition of “provider” would be amended to include those who are required to enroll in a State Medicaid program, such as ordering and referring physicians. The intent of this amendment is to clarify the providers who are not furnishing items or services for which payment is claimed directly under Medicaid, such as those providers enrolled in managed care, can be the subject of a MFCU investigation and prosecution. A definition of “fraud” is to be added to clarify the MFCU’s authority to investigate and prosecute both criminal and civil fraud.

The Proposed Rule would change MFCU staffing requirements to require all employees, whether part-time or full-time, to devote their “exclusive effort” to MFCU functions. Each MFCU must employ a director who would supervise all MFCU employees. The MFCU must be a “single identifiable entity in State government” and would operate under its own budget separate from that of its parent agency.

All MFCU’s under the Proposed Rule would be required to submit all convictions to the OIG for purposes of program exclusion within 30 days of sentencing. MFCUs would also be required to make information on investigations involving the same suspects or allegations to the OIG investigators and attorneys.  If the MFCU discovers an overpayment made to a provider or facility, the MFCU must either recover the overpayment or refer the matter to the proper State agency for collection.

The MFCU changes outlined in the Proposed Rule are not yet final. Any person can submit comments to the OIG by 5:00 p.m. Eastern Standard Time on November 21, 2016. If the changes in the Proposed Rule are made, it could result in increased investigations and prosecutions by State MFCUs against a broader scope of providers and facilities.

The Louisiana Board of Pharmacy promulgated a Final Rule on September 20, 2016 giving Louisiana licensed pharmacists the authority to perform medication synchronization and refill consolidation services for their patients.   Under the Rule, the pharmacist may adjust the dispensing quantity and refill schedule for multiple medications so that all of the patient’s medications can be dispensed on the same day each month ultimately reducing the number of trips a patient has to make to the pharmacy.

While the pharmacist may adjust the quantity or refill schedule originally ordered by the prescribing physician, the pharmacist cannot dispense more than the total quantity of the original prescription plus refills. For example, if the original prescription was for thirty (30) pills taken over thirty (30) days with three (3) refills, the total quantity of pills would be one hundred and twenty (120) pills. With refill consolidation, the pharmacist can adjust the quantity to initially dispense 15 pills with refills of 45, 30, and 30 to achieve the same total quantity originally prescribed over the same time period.

If the prescription is for a controlled substance where refills have been authorized by the prescriber, the pharmacist can partially fill the prescription, but cannot exceed the quantity noted on the original prescription. If the prescription is for a Schedule II controlled substance and the pharmacist is unable to supply the full quantity called for in the prescription, the pharmacist may partially fill that prescription; however the remaining portion of the prescription should be dispensed within 72 hours. Otherwise, the pharmacist must notify the prescriber and a new prescription must be written.

The intent of medication synchronization and refill consolidation is to help reduce medication waste and improve medication adherence. According to the Louisiana Board of Pharmacy, there is evidence that patients with simple medication schedules are more likely to actually take their medications. By synchronizing medications prescribed by multiple prescribers such that a patient only has to make one visit to the pharmacy each month, there is also an increased likelihood of reducing transportation costs for the patients.

The Louisiana Board of Pharmacy notified all pharmacies and pharmacists of the new medication synchronization rule on September 21, 2016. Therefore, consumers can now work with their local pharmacists to get all of their prescription medications in sync.

The Louisiana Department of Health issued two Emergency Rules in the September 20, 2016 Louisiana Register amending licensing standards governing Pediatric Day Health Care Facilities in an effort to avoid a budget deficit in the medical assistance program. The Emergency Rules revised the PDHC’s Program description and criteria to provide that in order to receive PDHC services, a Medicaid recipient must not only have a medically fragile condition, but also must have a medically complex condition involving one or more physiological or organ systems and requires skilled nursing and therapeutic interventions performed by a registered nurse or licensed practical nurse on an ongoing basis in order to:

  1. preserve and maintain health status;
  2. prevent death;
  3. treat/cure disease;
  4. ameliorate disabilities or other adverse health conditions; and/or
  5. prolong life.

The above list is new and supersedes the former list of medically necessary interventions that could previously be performed by “professionals” at the PDHC centers, but now require performance by a licensed nurse.

The Emergency Rules further require that a physician must order the PDHC services and prepare a plan of care not to exceed 90 days specifying the frequency and duration of services. The Emergency Rules also changed the requirement that a re-evaluation of PDHC services be performed at least every one hundred and twenty (120) to now mandate that the PDHC’s medical director review the plan of care with the PDHC staff and the prescribing physician every ninety (90) days. The evaluation must include a review of the current plan of care and the provider agency’s documented current assessment and progress toward goals. A face-to-face evaluation must also be held every ninety (90) days by the child’s prescribing physician.

Finally, the Emergency Rules clarify that a parent, legal guardian or legally responsible person providing care to a medically complex child in a home or any other extended care or long-term care facility is not considered a PDHC facility and shall not be enrolled in the Medicaid Program as a PDHC services provider.

The Emergency Rules took effect September 1, 2016, and are expected to reduce expenditures in the Medicaid Program by $527,764.00 in state fiscal year 2016-2017.

One of the activities regulated and licensed by the Louisiana State Licensing Board for Contractors is Mold Remediation.  Any person engaging in or holding herself/himself out as engaging in mold remediation must have a mold remediation license issued by the Louisiana State Licensing Board for Contractors.  Persons violating that prohibition are subject to administrative and criminal sanctions.

One of the requirements for a mold remediation license is completing four hours of instruction in Louisiana’s Unfair Trade Practices and Consumer Protection Law, given by a board-approved provider. Kean Miller is a board approved provider, and one of the ways Kean Miller is helping the region recover from the 2016 flooding is offering this training on an on-demand basis.  If you are interested in Kean Miller’s board approved four hour course on Louisiana’s Unfair Trade Practices and Consumer Protection Law, please contact Steve Boutwell at (225) 389-3736 or steve.boutwell@keanmiller.com

INTRODUCTION

Louisiana law imposes a sales tax on “sales at retail.”  “Sale at retail” is defined in the sales tax law, and the definition provides that the term does not include “sales of materials for further processing into tangible personal property for sale at retail.”    This provision is commonly referred to as the “further processing exclusion.”[1]  The most recent Louisiana Supreme Court’s decision interpreting this “further processing exclusion,” Bridges v. Nelson Indus. Steam Co., 2015-1439 (La. 5/3/16), 190 So.3d 276 (the “NISCO decision”), recently became final.  The decision is significant for all taxpayer-manufacturers.  It provides an excellent explanation of applicable legal principles relating generally to interpretation of the further processing exclusion and a comprehensive explanation of the three-prong jurisprudential test for application of the exclusion.  In response to the NISCO decision, and before it became final, the Legislature passed an Act amending the further processing exclusion.[2]  The purpose of this writing is to (i) provide some general information regarding applicable rules of law to be gleaned from the NISCO decision; and (ii) identify questions arising from the recent legislative amendment to the law.

THE SUPREME COURT DECISION

The further processing provision applies to byproducts.

The NISCO decision is the first in which the Supreme Court directly addresses the question of whether the further processing exclusion from tax applies to purchases of materials that are further processed into a byproduct of a manufacturing process.  The Supreme Court held that it does.  Noting that the exclusion applies to “tangible personal property,” and the sales tax regulation interpreting the exclusion provides that whether materials are further processed or simply used in the processing activity will depend entirely upon an analysis of the “end product,” the court reasoned that it found nothing in the law that requires the “end product” be the enterprise’s primary product, explaining:

“The plain language of the statute makes the exclusion applicable to articles of tangible personal property.  There simply is no distinction between primary products and secondary products. . . . At the end of the day, the ash [NISCO’s byproduct] is produced and sold . . . making it an ‘article of tangible personal property for sale at retail.’”[3]

The NISCO decision applies and interprets the long-established three-pronged test for application of the exclusion.

The Court applied the jurisprudentially-established three-pronged test for application of the further processing exclusion as it related to NISCO’s ash byproduct:  The test is:

(1) the raw materials become recognizable and identifiable components of the end products;

(2) the raw materials are beneficial to the end products; and

(3) the raw materials are materials for further processing, and as such, are purchased with the purpose of inclusion in the end products.[4]

In applying the test the Court clarifies and reinforces aspects of the application of the test that all taxpayers would be well-served to keep in mind.   Those clarifications include:

(1)       The further processing provision constitutes an “exclusion” not an “exemption” from tax, and as such, must be liberally construed in favor of the taxpayer;[5]

(2)       When the material purchased is processed into less than all of the end products produced, the analysis involves only consideration of the end product(s) into which the material is further processed, without regard to other end products.[6]

(3)       In order to satisfy the “benefit” prong of the test it is not necessary to conduct tests to determine the qualities of the material purchased or its beneficial impact on the end product.  It is sufficient that elemental components of the material purchased become integral components of the molecular makeup of the end product.  That “integration” is in and of itself of some benefit to the end product.[7]

(4)       The “purpose” prong of the test does not involve a primary purpose test; and the “purpose” test involves a “manufacturing purpose” inquiry, not a “business purpose” or “economic purpose” inquiry.  Only the manufacturing process and the physical and chemical components and the materials involved in the process are germane to the “purpose” test.[8]

(5)       There is no legal basis for an “apportionment” approach to the further processing exclusion, whether based upon the percentage of the material or some assigned value of the components that actually end up in the end product, and any such approach is impractical in application.[9]

The New Law

The 2016 Legislative amendment, effective June 23, 2016, amends the law to provide that “[t]he term ‘sale at retail’ does  not include sale of materials for further processing into articles of tangible personal property for sale at retail when all of the criteria in Subsubitem (I) of this Section are met.[10]  Those criteria consist of a re-statement of the three-pronged test:  (1) the raw materials become a recognizable and identifiable component of the end product; (2) the raw materials are beneficial to the end product; and (3) the raw materials are material for further process, and as such are purchased for the purpose of inclusion into the end product.

The amendment goes further, however, and adds a “Subitem II” to the definition of “sale at retail.”  This addition represents new law and provides, in short, that “[i]f the materials are further processed into a byproduct for sale, such purchases of materials shall not be deemed to be sales for further processing and shall be taxable.”  The term “byproduct” is defined to mean “any incidental product that is sold for a sales price less than the cost of the materials.”

QUESTIONS CREATED BY THE NEW LAW

Did the Legislature intend to overrule the NISCO decision?

The first question that arises is whether the clarifications to the three-prong jurisprudential test that are set forth in the NISCO decision may be applied under the amended law’s verbatim codification of the three-prong jurisprudential test.  It is a well-accepted rule of statutory construction that those who enact statutory provisions are presumed to act deliberately and with full knowledge of existing laws on the same subject, with awareness of court cases and well-established principles of statutory construction, with knowledge of the effect of their acts and a purpose in view; and that when the Legislature changes the wording of a statute, it is presumed to have intended a change in the law. [11]  Thus, legislative language will be interpreted based upon assumption that the Legislature was aware of judicial decisions interpreting those statutes, including among others, the NISCO decision.[12]  Because the amended law adopts the three-prong judicial test verbatim, we believe a strong argument may be made that there is no legislative intent to vary from the Supreme Court’s interpretations of that test, except to the extent the language of the amended law expressly varies from the Supreme Court’s prior interpretations.  The Legislature has never hesitated to expressly state its intent to legislatively overrule a Louisiana Supreme Court decision, when that is indeed its intent.  Here, no express statement of such intent was made, and we do not believe that the Louisiana Supreme Court will infer intent to overrule any aspect of the NISCO decision, except to the extent the language of the amendment is inconsistent with the court’s interpretation in NISCO.

What constitutes a “byproduct” for purposes of the new law?

In cases where a product is sold for a sales price less than the cost of its materials, questions will likely arise as to whether the product is an “incidental product.”  Because the term “incidental product” is not statutorily defined by the legislature, we must give the words their commonly-accepted meaning.  The word “incidental” means “being likely to ensue as a chance or minor consequence,” or “occurring merely by chance or without intention or calculation.”[13]  Many products sold for a sales price less than the cost of their materials are intentionally manufactured and sold.  They are not manufactured by accident; and they are not the result of chance.  Instead, a conscious decision is made to choose a process design that will in fact create certain byproducts, with the intention to sell all the products of the process – both “primary products” and “byproducts,” with an overall profit motive.  While any particular byproduct may be of minor consequence economically speaking, when viewed in a vacuum, it may not be of economic “minor consequence” to the overall finances of the taxpayer; or it may not be of minor consequence in terms of volumes manufactured and sold, or investment made to develop, manufacture, market and sell the byproduct.  In our opinion, the Legislature’s amendment – a clear intent to vary from the NISCO decision’s holding that the further processing exclusion applies to all end products – merely creates more uncertainty, resulting in many more sales and use tax disputes and consequent litigation.  The taxing authorities will undoubtedly argue that the intent of the amendment was to create a rule to be applied when a byproduct, viewed in a vacuum, is not profitable; but that is not what the Legislature said.  The Legislature adopted a rule to be applied to “incidental products,” without defining that term.  Thus, we believe a proper interpretation requires that a determination must first be made regarding whether the byproduct is an “incidental product;” and only if it is an incidental product, does the second part of the “test” – whether it is sold for a sales price less than the cost of its material – apply.

May the new law be applied retroactively?

Taxpayers may expect the taxing authorities to impose the new law going forward.  Serious questions arise, however, regarding the applicability of the new law to taxes already reported and paid, or incurred, before the new law became effective.

The new law expressly provides that it “shall not be applicable to any existing claim for refund filed or assessment of additional taxes due issued prior to the effective date of this Act for any tax period prior to July 1, 2016, which is not barred by prescription.”  If a taxpayer’s claim or dispute with the taxing authority falls within the language of this provision, the new law should not be applied by the taxing authorities.  It is not clear what is meant by the terminology “claim for refund filed.”  Does it mean the submission of a refund request or claim with the taxing authority, or a suit for refund, or both?  Likewise, it is not clear what is meant by “assessment of additional taxes due issued” – does it include notices of intent to assess (“proposed assessments”), notices of assessment (“final assessments”), petitions for redetermination of assessments, or suits to collect tax, or all four.  We recommend that taxpayers apply the most liberal interpretation of the language unless and until guidance is provided by regulation or judicial decision.

There will undoubtedly be cases in which no claim for refund has been filed or assessment issued before the effective date of the act, but involving tax periods prior to July 1, 2016.  In such cases, we believe a strong argument may be made that retroactive application of the new law to pre-amendment tax periods is unconstitutional.  The Legislature stated in the Act that it “is intended to clarify and be interpretive of the original intent and application of” the further processing exclusion, and that “[t]herefore, the provisions of this Act shall be retroactive and applicable to all refund claims submitted or assessments of additional tax due which are filed on or after the effective date of this Act.”  Despite this statement by the legislature, we believe that the amendment to the law is not merely clarifying and interpretive.  We believe the changes are substantive in nature.  Generally, substantive laws may be applied prospectively only.  And despite express legislative intent to the contrary, it is uniquely the province of the courts to determine if an Act is substantive, or merely clarifying and interpretive.  And, if the law is substantive, it will not be applied retroactively by the courts because to do so impinges upon the authority of the judiciary in violation of the constitutional doctrine of separation of powers and divests taxpayers of substantive rights and causes of action that accrued and vested in the taxpayer before the effective date of the Act, such that imposition of the new law would constitute a denial of due process.[14]

Was the amendment to the law constitutionally enacted?

In the case of an attempt by a taxing authority to apply the new law retroactively to pre-amendment tax periods, or in the case of a purely prospective application of the new law to post-amendment tax periods, a question still exists regarding the constitutionality of the law’s enactment.  The Louisiana Constitution provides that enactments levying a new tax or increasing an existing tax require a two-thirds vote of both houses of the Legislature to become law.[15]  Here, the Act at issue did not have a two-thirds vote of the House of Representatives.  A viable legal argument exists that because the law amends definitions in a manner that makes previously non-taxable transactions taxable, it constitutes either a “new tax” or an “increase in an existing tax,” thus requiring a two-thirds vote of both houses of the Legislature. [16]  Unless and until this issue is resolved in the courts, a taxpayer would be wise to seek legal counsel and consider its options before voluntarily paying tax on materials purchased for further processing into a byproduct.

__________________________________________________________

[1] La. R.S. 47:301(10)(c)(i)(aa), before amendment effective June 23, 2016; see La. Act No. 3 (2nd Extra. Sess. 2016) (“Act 3 of 2016”).

[2] Act 3 of 2016, supra.

[3] NISCO, pp. 8-9, 190 So.3d at 282.

[4] Id. at pp. 7-8, 190 So.3d at 281, quoting International Paper, Inc. v. Bridges, 2007-1151, p. 19 (La. 1/16/08), 972 So.2d 1121, 1134.

[5] Id. at pp. 5-6, 190 So.3d at 280-281.

[6] Id. at pp. 7-9, 190 So.3d at 281-282.

[7] Id. at pp. 9-10, 190 So.3d at 282-283.

[8] Id. at pp. 4, 10-13, 190 So.3d at 279, 283-285/

[9] Id. at pp. 13-15, 190 So.3d at 285-286.

[10] Act 3 of 2016, supra (emphasis added)

[11] Borel v. Young, 2007-0419, pp. 8-9 (La. 11/2/07), 989 So.2d 42, 48 (emphasis added).

[12] State v. Campbell, 2003-3035, pp. 8-9 (La. 7/6/04), 877 So.2d 112, 118.

[13] Merriam-Webster’s Collegiate Dictionary (11th ed. 2012) (emphasis added).

[14] See e.g. Mallard Bay Drilling, Inc. v. Kennedy, 2004-1089 (La. 6/29/05), 914 So.2d 533); Unwired Telecom Corp. v. Parish of Calcasieu, 2003-0732 (La. 1/19/05), 903 So.2d 392; and Bourgeois v. A.P. Green Indus., Inc., 2000-1528 (La. 4/3/01), 783 So.2d 1251; La. Const. Art. II, §§1-2; La. Const. art. I, §2; U.S. Const. Amend. XIV, §1.

[15] La. Const. Art. VII, §2.

[16] See e.g. Dow Hydrocarbons & Resources v. Kennedy, 1996-2471 (La. 5/20/97), 694 So.2d 215.