Louisiana – Denial of Exemption for Repairs to an Oil and Gas Rig Vacated

2/25/2013

SALT Report 2184 – The Louisiana Court of Appeals vacated a decision by a Louisiana District Court who had previously rejected a Taxpayer’s sales tax exemption for oil and gas rig materials. The Taxpayer in this case drills oil and gas wells along the Louisiana coast and purchased materials with an exemption certificate to reconstruct an oil rig that was damaged by fire.

In this case, the Taxpayer was audited and it was determined that the Taxpayer did not pay state or local sales tax on the labor and parts that were purchased in connection with the work performed on the rig.  The auditor issued a use tax assessment on the materials used to repair service to the rig. The Taxpayer paid the assessment of $382,928.32 under protest and filed an appeal claiming the exemption in La RS 47:305.1A as clarified by Regulation 4403.

La RS 47:305.1A states that, “the tax imposed by taxing authorities shall not apply to sales of materials equipment and machinery which enter into and become component parts of ships vessels or barges including commercial fishing vessels drilling ships or drilling barges of fifty tons load displacement and over, built in Louisiana…”

Regulation 4403 states that, “to qualify for the exemption under R S 47:305.1A materials machinery and equipment that become component parts of ships vessels or barges of 50 tons load displacement and over built in Louisiana must be added during construction or reconstruction…”

In its decision, the Appeals Court stated that although there is nothing in La RS 47:305.1A that refers to an exemption for the reconstruction of a vessel, Regulation 4403 specifies that the exemption extends to “reconstruction that restores a craft to seaworthiness following its destruction by fire.”

The Court noted that Regulation 4403, enacted by the Department of Revenue, is inconsistent with the Legislature’s intent in La RS47305 1A.  Further, the Court stated that regulations enacted by an agency cannot exceed the authority granted by the Legislature as this could be viewed as an “act in violation of the principle of separation of powers.”

Therefore, the Court of Appeal’s vacated the summary judgment against the Taxpayer and Regulation 4403 is currently under review to determine whether it is unconstitutional.

For Further Information

Court of Appeal of Louisiana, First Circuit – Case Number 2012 CA 0744