Kean Miller partner Linda S. Akchin represented Graphic Packaging International in its initial trial and appeal.
Since 1948, Louisiana’s General Sales Tax Law has provided an incentive to the manufacturing industry in the form of an exclusion from tax for materials purchased for further processing into tangible personal property for sale at retail. Undoubtedly, this exclusion has contributed to the influx of manufacturing into the state, thus creating more jobs and more state and local taxes. A recent decision of the Second Circuit Court of Appeal, Graphic Packaging International, Inc. v. Lewis, No. 50,371-CA (La. App. 2 Cir. 2/3/16) (the “GPI case”), reveals that despite the state and local taxing authorities’ attempts to narrow the scope of the exclusion, the courts are giving the provision the full breadth originally intended by the Legislature.
After 1948, over time, a three-prong test for determination of whether a purchase qualified for the further processing exclusion was derived from the administrative regulation interpreting the statute, and Supreme Court jurisprudence. It was established that the material must be (1) a recognizable and identifiable component of the end product; (2) of benefit to the end product; and (3) purchased for the purpose of reprocessing into the end product. For decades, the state and local taxing authorities have attempted to narrow the application of the exclusion by imposing a “primary purpose” test, requiring that the material be purchased for the primary purpose of reprocessing into the end product. Those attempts have been universally unsuccessful, however, when applied to “dual purpose” materials, i.e. materials that are purchased for more than one purpose – for aiding in the manufacturing process, and also for reprocessing into the end product.
In International Paper, Inc. v. Bridges, 2007-1151 (La. 1/16/08), 972 So.2d 1121 (“IP”), the Louisiana Supreme Court finally had an opportunity to address the application of the further processing exclusion to dual purpose materials. In IP the Court reaffirmed and clarified the three prong test, and flatly rejected the notion that the law even suggests a “primary purpose” requirement for application of the exclusion. Id. at 1133. Under IP, the three prong test, correctly stated is that the further processing exclusion applies if the purchased material: (1) is a recognizable and identifiable component of the end product; however the chemical or physical composition of the material need not remain the same after its incorporation into the final product; (2) is of some benefit to the end product; and (3) is purchased for the purpose, but not necessarily the primary purpose, of inclusion in the end product (clarifying language in bold) (the “IP test”).
In the GPI case, the Second Circuit upheld a trial court finding that GPI’s purchases of sodium hydroxide (caustic soda), sodium hydrosulfide and emulsified sulfur (“Makeup Chemicals”) were excluded from tax under the further processing exclusion. The Makeup Chemicals were used to process wood chips into “pulp” that was further processed on machines into GPI’s paper products, but the sulfur and sodium components of the Makeup Chemicals were also further processed into the end products. The sodium and sulfur components of the materials were recognizable and identifiable in GPI’s end products and provided benefits such as mass, conductivity, strength and sizing (water repellence). The taxing authority argued that the trial court erred because the makeup chemicals were not purchased for the purpose of imparting those benefits into the end product, but rather for processing purposes – an argument that GPI maintained was a disguised “primary purpose” test. The Second Circuit rejected the taxing authority’s argument, reasoning that the “benefit” and “purpose” prongs of the test are separate inquiries, and that under the “benefit prong” of test, “the pertinent inquiry is whether the chemicals were purchased for the purpose of incorporation or inclusion into the end product, not whether they were purchased for the purpose of achieving some specific benefit in the end product.” The Court found that “the [taxing authority] is improperly conflating the benefit and purpose prongs, perhaps in an effort to circumvent the rejection of the “primary purpose” test” by the Supreme Court in IP.
The GPI case serves as an example of the proper approach to determining applicability of the further processing exclusion. It instructs that courts should follow the straightforward three-prong test of IP unerringly, and should reject arguments that serve to morph the “purpose” prong of the test into anything other than a straightforward “purpose of inclusion” inquiry, without regard to whether that purpose is the “primary purpose” for purchasing the material.
 See LAC 61:I.4301(10); Traigle v. PPG Industries, Inc., 332 So.2d 777 (La.1976); and Vulcan Foundry, Inc. v. McNamara, 414 So.2d 1193 (La. 1983).
 See See e.g. Tarver v. Ormet, 597 So.2d 1174, 1175-1176 (La. App. 1 Cir. 1992) (purchases of caustic soda (processing aid), not taxable where oxygen atoms from caustic soda were a critical component of the dimensional crystal lattices that make up the aluminum and aluminum hydroxide end products); Exxon Corp. v. Schofield, 583 So.2d 1195, 1198 (La. App. 1 Cir. 1991) (purchases of initiators and chain transfer agents (processing aids) not taxable where they were chemically linked to, and essential components of, the complex polymer chains that comprised the polyethylene end product); Falco Lime, Inc. v. Kennedy, 1999-189 (La. App. 5 Cir. 7/27/99), 739 So.2d 953, 955-956 (purchases of quicklime (“a processing chemical”) not taxable where oxygen atoms supplied by the quicklime were necessary for the conversion of trichloropropane (“TCP”) and dichlorohydrin (“DCH”) to epichlorohydrin (“ECH”), and were an essential component of the ECH); and L.A. Frey & Sons v. Lafayette Parish School Board, 262 So.2d 132, 137 (La. App. 3 Cir. 1972) (sawdust burned to produce heat to cure meat not taxable because it also provided beneficial smoke flavor to meat).