In International Paper, Inc. vs. Cynthia Bridges, 42, 023 (La. App. 2nd Cir. 4/4/07), 2007 WL 983965 (not designated for publication), the Louisiana Court of Appeal, Second Circuit, reinterpreted the “further processing” provision of the Louisiana sales tax law. Under the further processing provision, tangible personal property purchased for further processing into tangible personal property for sale at retail is not subject to Louisiana sales/use tax. La. R.S. 47:301(10)(c)(i)(aa). Historically, Louisiana law had applied a three part test to the identification of a nontaxable further processing material: (1) The further processing material must be a benefit to the end product; (2) The further processing material must be a recognizable and identifiable component of the end product, and (3) A purpose for purchasing the further processing material must have been for processing into the end product.
The application of this test was considered in Tarver vs. Ormet Corporation, 91-0361 (La. App. 1st Cir. 4/10/092), 597 So.2d 1172, Writ Denied, 92-1376 (La. 9/18/92), 604 So.2d 964). In the Ormet case the Court of Appeal, First Circuit determined that oxygen atoms from caustic soda did provide an identifiable beneficial ingredient to the end product alumina and that one of the purposes for purchasing the caustic soda was to process the oxygen atoms into the end product alumina. Based on this analysis, the First Circuit determined that the caustic soda was a nontaxable further processing material.
In the International Paper case, International Paper contended that three bleaching chemicals-sodium chlorate, oxygen, and hydrogen peroxide-were nontaxable further processing materials.
Contrary to the Ormet decision, in the International Paper case, the Court of Appeal, Second Circuit identifies a four part test for the identification of furthering processing materials: (1) The material itself must be processed into tangible personal property for sale at retail; (2) The material must become a recognizable, integral part of the end product; (3) The presence of the material as a component of the end product must be of benefit to the end product, and (4) The primary purpose for the purchase of the material must be to process it into the end product.
Based upon this test, the court determined that the bleaching chemicals did not meet the further processing standard even though they did provide oxygen atoms as an identifiable beneficial ingredient of the end product paper. The International Paper court relies on Traigle vs. PPG Industries, Inc., 332 So.2d 777 (La. 1976) and Vulcan Foundry, Inc. vs. McNamara, 414 So.2d 1193 (La. 1982) for the “primary purpose” test. In PPG Industries, Inc., the court determined that while constituents of the graphite blades used to make chlorine were present in the end product that the presence was in the nature of a waste material and was not beneficial to the final product. In Vulcan Foundry, Inc., the Louisiana Supreme Court determined that carbon coke used to heat the copula used in the manufacture of iron manhole covers and which contributed some small amount of beneficial carbon to the end products was not a further processing material. The Louisiana Supreme Court found that the coke had been purchased for the purpose of heating scrap iron and that the small amount of carbon in the finished product was incidental.
The International Paper court disagrees with the Ormet decision. In addition to a primary purpose test, apparently, the International Paper court would require the actual further processing material itself (not constituents of the further processing material) to be found in the end product. In this regard, the Court of Appeal, Second Circuit says:
* * *
However, we concluded that the oxygen from the chemicals is not the same thing as the original chemicals generated, and we are not persuaded that because we know the source of the oxygen molecules, the requirement that the original raw material be recognizable and an integral part of the finished product is met. Clearly the oxygen atoms are an integral part of the lignin as a result of the process; however, the oxygen in the lignin is neither sodium chlorate, hydrogen peroxide nor elemental oxygen, but simply atoms of oxygen now bonded to lignin.
The Court of Appeal, Second Circuit has declined to rehear the case but attorneys for International Paper have advised that a writ application will be filed with the Louisiana Supreme Court