Opinion
2015 CA 0010
09-18-2015
LOUISIANA MACHINERY CO., LLC v. CYNTHIA BRIDGES, SECRETARY, LOUISIANA DEPARTMENT OF REVENUE
Andre B. Burvant Jesse R. Adams, III New Orleans, Louisiana Attorneys for Appellant, Louisiana Machinery Co., LLC Antonio Charles Ferachi Florence Bonaccorso-Saenz Brandea P. Averett Monica Doss Baton Rouge, Louisiana Attorneys for Appellee, Secretary of the Department of Revenue, State of Louisiana
NOT DESIGNATED FOR PUBLICATION On Appeal from the 19th Judicial District Court In and for the Parish of East Baton Rouge State of Louisiana
No. C628137, Div. D
The Honorable Janice Clark, Judge Presiding Andre B. Burvant
Jesse R. Adams, III
New Orleans, Louisiana
Attorneys for Appellant,
Louisiana Machinery Co., LLC
Antonio Charles Ferachi
Florence Bonaccorso-Saenz
Brandea P. Averett
Monica Doss
Baton Rouge, Louisiana
Attorneys for Appellee,
Secretary of the Department of
Revenue, State of Louisiana
BEFORE: WHIPPLE, C.J., WELCH, AND DRAKE, JJ. DRAKE, J.
The defendant, Tim Barfield, Jr., as successor to Cynthia Bridges, Secretary, Louisiana Department of Revenue (Department), appeals a judgment of the district court affirming the Louisiana Board of Tax Appeals (Board) permitting an inventory tax credit in the full amount of $2,688,673.00 to plaintiff, Louisiana Machinery Company, LLC (LMC). For the following reasons, we affirm the judgment of the district court.
FACTS AND PROCEDURAL HISTORY
LMC, which sells and services heavy construction equipment, claimed a credit on its income taxes for the year ending December 31, 2002, for ad valorem taxes it paid to various political subdivisions on its inventory. Specifically, LMC requested that the sum of $2,688,673.00 be refunded. The Department audited the corporate tax return of LMC for the year 2002 and determined that some of the property that LMC classified as inventory had been rented or leased to third parties, thereby not qualifying for the tax credit. The Department only permitted a refund of approximately $750,000.00 because it determined that LMC had taken the ad valorem tax credit on rental property as well as inventory.
Following the audit, LMC filed a petition for refund with the Board pursuant to La. R.S. 47:1625, claiming that it had paid to political subdivisions ad valorem taxes on inventory totaling $3,210,913.99 and that it was entitled to an inventory tax credit in the amount of $2,688,673.00. After a hearing, the Board issued a judgment, which contained the following paraphrased findings:
Ms. Susan Harwood, the Certified Public Accountant for LMC, testified that the furniture and fixtures had to be deducted form the total assessed value, so that the inventory credit would only be a percentage of the total assessed value.
(1) LMC has the right the sell Caterpillar construction equipment in Louisiana;
(2) All of the construction equipment that LMC owns is held for resale;
(3) The construction equipment is expensive;
(4) While the construction equipment is being held for sale, some of it is rented;
(5) The equipment is rented to promote sales by giving buyers a chance to try the equipment and allowing a future buyer to accumulate a down payment by renting;
(6) Equipment rented by one customer could be sold to another customer;
(7) LMC listed equipment on its computer for sale even if it had been rented;
(8) More than 99% of the equipment that was rented in 2002 was sold in succeeding years;
(9) Only 6% of LMC's income was from the rental of equipment;
(10) Parts and servicing was a highly profitable segment of LMC's business and was made more profitable with sales of equipment;
(11) Some of the ad valorem tax paid to political subdivisions was form immovable property, furniture, fixtures and non-inventory equipment, which tax is not recoverable under the provisions of La. R.S. 47:6006.
The Board held that based upon La. R.S. 47:6006, 47:1961.1, and LAC 61:V.1701, LMC was entitled to a credit for inventory in the full amount of $2,688,673.00, even for the equipment that had been previously rented. Pursuant to La. R.S. 47:1435, the Department filed a petition for judicial review with the 19th Judicial District Court (JDC). After a hearing, the district court rendered judgment affirming the judgment of the Board. It is from this judgment that the Department appeals.
The petition for judicial review was filed on February 6, 2014, at which time La. R.S. 47:1435 provided that review of decisions of the Board was to be brought in the district courts. La. R.S. 47:1435 was amended by 2014 La. Acts, No. 198, § 1, effective July 1, 2014, which amended the statute to give the courts of appeal exclusive jurisdiction to review decisions of the Board.
ERRORS
The Department asserts five assignments of errors, asserting that the Board incorrectly interpreted La. R.S. 47:6006, which provides for the tax credit/exemption, and LAC 61:V.1701, the administrative regulation which defines inventory for purposes of ad valorem taxes.
STANDARD OF REVIEW
Judicial review by the district court of a decision or judgment of the Board shall be rendered upon the record made up before the Board and is limited to facts on the record and questions of law. Crawford v, American National Petroleum Co., 2000-1063 (La. App. 1 Cir. 12/28/01), 805 So. 2d 371, 377. The Board's findings of fact should be accepted where there is substantial evidence in the record to support them and should not be set aside unless they are manifestly erroneous in view of the evidence in the entire record. Id. With regard to questions of law, the judgment of the Board should be affirmed if the Board has correctly applied the law and has adhered to the correct procedural standards. Id.
DISCUSSION
This court must first determine if there is substantial evidence in the record to support the findings of fact or whether they are manifestly erroneous. Robert D. Webb, Jr., the president of LMC, testified that LMC sells and services Caterpillar construction equipment, along with other equipment. Caterpillar is the leading brand worldwide in heavy equipment and the most expensive. LMC also rents equipment. Mr. Webb explained that one of the reasons LMC rents equipment is so customers can afford to buy the equipment later at a lower price than the cost of a new piece of equipment. LMC customers are offered a rental purchase option (RPO) which allows the customer to rent the equipment for a time, build up equity equal to the rental payments, and then purchase the equipment. Mr. Webb also testified that about ninety percent of the time that a customer rents a piece of equipment, that customer ends up buying the equipment. Mr. Webb further explained that LMC rents equipment without a purchase option and that equipment being rented by one customer can be sold to another customer. Mr. Webb testified that the focus of LMC is to sell equipment. LMC only rents the equipment to meet the needs of its customers to reduce the cost of the equipment and allow the customer to purchase the equipment.
David Blish, the chief financial officer of LMC, also testified that LMC rents equipment to reduce the purchase price so that a larger number of customers are able to purchase the equipment. Mr. Blish reiterated that everything at LMC is for sale at any time. He also explained that if a customer was willing to buy a piece of equipment that was being rented by another customer, a salesman would make the arrangements to swap the equipment to effect the sale. Mr. Blish testified that 99.91 percent of LMC's equipment is sold. He further explained that even if a customer rented equipment with a no purchase option (NPO), the customer could buy that equipment, The equipment of LMC was sold as quickly as possible depending on the economic environment. LMC sold ninety percent of its equipment within three years, because its focus is to sell the equipment.
Darrell Samuels, the director of business development of LMC, testified that renting equipment is a marketing tool that helps grow the business by: (1) allowing a contractor just starting out to be able to buy equipment he cannot afford immediately and develop a relationship with LMC; (2) offering equipment at a price customers can afford after it has been rented; and (3) putting more Caterpillar equipment on the road which is then visible to other potential customers. Mr. Samuels explained that offering RPOs allowed the customer to be able to obtain financing from a bank or Caterpillar Financial in order to purchase the equipment. Mr. Samuels also testified that LMC would rather sell its equipment than rent it, since the parts and service for sold equipment is very profitable for LMC.
Brian Madere, the sales accountant for LMC, testified as to the accounting practices of LMC. He thoroughly explained the different accounts used by LMC in the general ledger and a Louisiana ad valorem tax form, titled a LAT 5, which is filed by taxpayers. Mr. Madere testified that Section 1 of the LAT 5 contains equipment inventory, even if that inventory is rented.
Pedro Weems, an auditor for the Department, testified that he performed an audit for the year 2002 on the corporate tax return of LMC. Mr. Weems determined that LMC paid a total of $3,210,913.00 in property tax on inventory for 2002. He then ascertained the amount of the property tax paid that was eligible for an inventory tax credit after classifying the equipment of LMC as either "rent" or "non-rented." Mr. Weems decided that based upon the account description of LMC's general ledger, only 30.31 percent of equipment was held for sale at the end of the year 2002. Mr. Weems made no additional investigation as to why a piece of equipment was placed into a certain account in the general ledger. Mr. Weems testified that he assumed that equipment in any rental account, whether RPO or NPO, could only be rented and never held for sale. It was his belief that equipment in various rental accounts was not held for sale. When the audit was conducted, Mr. Weems did not question LMC as to whether any of the equipment in the rental accounts had been sold.
Conrad Comeaux, the Lafayette Parish Tax Assessor, testified on behalf of the Department as to the LAT 5. He testified that he would not expect rental equipment to be listed in Section 1, the inventory section, on the LAT 5. Mr. Comeaux did admit that the regulations and statutes define what is inventory. Furthermore, he admitted that used equipment that is sold is considered inventory.
Charlene Blanchard, an audit reviewer for the Department, testified that she issued a refund to LMC for the year 2002 in the amount of approximately $750,000.00, not the $2,688,673.00 claimed by LMC. Ms. Blanchard explained that the Department did not consider rental property to be awaiting sale, and thereby, could not qualify as "inventory."
Because a trier of fact is free to believe in whole or part the testimony of any witness, the Board did not err in believing LMC's witnesses' version of its accounting business practices. See Scoggins v. Frederick, 1998-1814 (La. App. 1 Cir. 9/24/99), 744 So. 2d 676, 687, writ denied, 1999-3557 (La. 3/17/00), 756 So. 2d 1141. After reviewing the entirety of the record, this court cannot say that the findings listed in the judgment of the Board and affirmed by the district court are manifestly erroneous. See International Paper, Inc. v. Bridges, 2007-1151 (La. 1/6/08), 972 So. 2d 1121, 1127; see also, Crawford, 805 So. 2d at 377.
This court must now determine if the Board correctly applied the law. Louisiana Revised Statute 47:6006(A) provides that "[t]here shall be allowed a credit against any Louisiana income or corporation franchise tax for ad valorem taxes paid to political subdivisions on inventory held by manufacturers, distributors, and retailers ..." A "retailer" is defined in La. R.S. 47:6006(C) as "a person engaged in the sale of products to the ultimate consumer." "Inventory" is not defined by La. R.S. 47:6006. However, La. R.S. 47:1961.1, found in the ad valorem tax statutes, provides:
For the purpose of the classification of property subject to ad valorem taxation and the determination of the applicable percentage of fair market value in determining assessed valuation, the term "inventories of manufacturers or merchants" shall mean all goods held in inventory as raw materials, goods-in-process, or finished goods whether held by manufacturers, wholesalers, distributors, or retailers. (Emphasis added.)Therefore, all goods held in inventory as finished goods by retailers are considered inventory, without any other restrictions, under the ad valorem tax statutes. The Louisiana Tax Commission has defined "inventory" in its Rules and Regulations for the purpose of ad valorem taxes in LAC 61:V.1701, which provides, in pertinent part:
A. Definition of Inventory. The term inventory is defined as the aggregate of those items of tangible personal property which are:
1. held for sale in the ordinary course of business;
2. are currently in the process of production for subsequent sale;
3. are ultimately to be consumed in the production of the goods or services to be available for sale; or
4. are utilized in marketing or distribution activities.
B. The term inventory embraces the following:
1. goods awaiting sale—goods or commodities awaiting sale which include, but, are not limited to: the merchandise of a retail or wholesale concern; the finished goods of a manufacturer; commodities from farms, mines and quarries; goods which are used or trade-in merchandise and by-products of a manufacturer;
The Department claims that the Board applied the incorrect burden of proof in interpreting the tax credit allowed by La. R.S. 47:6006. The Department also claims that LMC did not satisfy its burden to clearly, unequivocally and affirmatively establish that it was entitled to a tax credit for the year 2002. Whether a party has discharged its burden of proof is a factual determination that will not be disturbed on review in the absence of manifest error. Slocum v. Northlake Driveline, 2012-1572 (La. App. 1 Cir. 4/26/13), 117 So. 3d 171, 181, writ denied, 2013-1192 (La. 9/13/13), 120 So. 3d 698. This court has already determined that the findings of the Board as set forth in its judgment are not manifestly erroneous. Consequently, the underlying determination that LMC carried its burden of proof is also not manifestly erroneous.
We must now determine if the statutory interpretation of La. R.S. 47:6006 by the Board is correct. The proper application and interpretation of a statute or article involves a question of law. McKenzie v. Imperial Fire and Cas. Ins. Co., 2012-1648 (La. App. 1 Cir. 7/30/13), 122 So. 3d 42, 46, writ denied, 2013-2066 (La. 12/6/13), 129 So. 3d 534. Legislative intent is the fundamental question in all cases of statutory interpretation. Crawford v. Duhon, 2001-0193 (La. App. 4 Cir. 11/7/01), 799 So. 2d 1273, 1276. In interpreting the taxation statutes, we begin from the well-settled premise that taxing statutes must be strictly construed against the taxing authority. Where a tax statute is susceptible of more than one reasonable interpretation, the construction favorable to the taxpayer is adopted. However, exemptions from taxation are strictly construed and must be clearly, unequivocally and affirmatively established. Southlake Dev. Co. v. Secretary of Dep't of Revenue & Taxation for State of Louisiana, 1998-2158 (La. App. 1 Cir. 11/5/99), 745 So. 2d 203, 206, writ denied, 1999-3405 (La. 2/4/00), 754 So. 2d 235. This case involves a claim by LMC for an inventory tax credit. Irrespective of whether it is termed an exemption, deduction or credit, the taxpayer is relieved of a tax burden and there is no distinction. Id.
The Department argues that LMC is not a "retailer" when it leases equipment, because LMC is not engaged in a "sale." The Department also claims that "inventory" for purposes of the tax credit contained in La. R.S. 47:6006 only applies to items sold, not those previously rented or leased. The Department bases its argument on its assertion that the equipment must either be held for sale or be rental/lease equipment.
The Department claims that La. R.S. 47:6006 only applies to goods sold, that LMC was not a "retailer" when it rented or leased equipment, and that LMC's rented or leased items did not qualify as "inventory." The Department relies upon Theriot v. Midland Risk Ins. Co., 1995-2895 (La. 5/20/97), 694 So. 2d 184, 186, in claiming that "when the legislature specifically enumerates a series of things, the legislature's omission of other items, which could have been easily included in the statute is deemed intentional." The Department asserts that La. R.S. 47:6006 does not specifically permit a tax credit for leased or rented items.
The Department attempts to define all goods as those rented or to be sold, without taking into consideration that goods can be rented, in the ordinary course of business, in an attempt to sell those goods. The facts of the present case are that all of the equipment held by LMC was for sale. The renting of equipment prior to the sale was simply a marketing tool to sell more equipment. The record is replete with testimony that LMC held all its equipment for sale at any time; that almost all of the equipment rented was in an attempt to make a sale; that the renting of equipment aided in finding new customers to sell to; and that the renting of equipment helped with the marketing of its equipment.
In making its argument that LMC is not a "retailer" for any of the equipment rented and that some of the equipment held by LMC was not "inventory", the Department relied on LMC's general ledger reports. The Department attempted to define all equipment as either "rent equipment" or "non-rented equipment." There was no investigation by the Department into the ordinary course of business of LMC. Mr. Blish testified that not all of the property classified by Mr. Weems as "rent equipment" was rented at the time of the general ledger report. Once equipment was rented, even for a day, it was moved into a rental account. Equipment could be classified in a rental account if it was being rented, available for rent, or had been rented in the past. Therefore, some of the equipment that the Department deemed to be "rental" equipment was in LMC's possession as of the inventory tax reporting date. There is no evidence in the record that the Department took into consideration LMC's ordinary course of business. Instead, the Department made its decision to refuse the refund on its erroneous conclusion that equipment it determined was "rental," based on LMC's general ledger accounts, could not be held for sale.
The Department argues that nothing in La. R.S. 47:6006 allows a tax credit to be taken on goods which are rented or leased. In Crawford, 799 So. 2d at 1277, the court held that the failure of La. R.S. 47:6006 to limit entitlement to the tax credit to any particular person or group required that the statute be interpreted to allow the party actually paying the tax to claim the credit, even if that party did not remit the tax to the political system. Nothing in the statute limits the credit only to those taxpayers who wrote the payment check tendered to the tax collector. Id.
Similarly, nothing in the statute limits the credit only to those goods which have only been sold without being rented first. The Department would have this court read into the statute words which are not present. When the terms of the statute are clear and unambiguous, a court is not at liberty to insert words into a legislative expression. Gamble v. Calcasieu Parish Sch. Bd., 139 So. 2d 39, 42-43 (La. App. 3 Cir. 1962); see Badeaux v. Cook, 537 So. 2d 725, 727 (La. App. 5 Cir. 1988); Alexander v. Allstate Ins. Co., 493 So. 2d 677 (La. App. 2 Cir. 1986). This court cannot insert the bolded words into the definition of "retailer" contained in La. R.S. 47:6006 to read "a person engaged in the sale of products to the ultimate consumer, but only if not rented first," as the Department would have this court do. This court also cannot insert the bolded words into the definition of "inventory," as provided by LAC 61.V:1701(A)(1), "held for sale in the ordinary course of business, unless rented first." Based upon the record, LMC is engaged in the sale of products to the ultimate consumer and, therefore, is a "retailer." We find that the equipment being held by LMC was held for sale in the ordinary course of its business, even if it had previously been rented, and, therefore, was "inventory."
The Louisiana Supreme Court has refused to allow the Department to add restrictions to tax statutes which are not present. In International Paper Co., Inc., the supreme court determined that for purposes of the "further processing exclusion" in the sales and use tax statute, raw materials must be purchased with the purpose of inclusion in the end product, but that this did not necessarily have to be the "primary" purpose for the purchase of raw materials. 972 So. 2d at 1133; La. R.S. 47:301(10)(c)(i)(aa). The Department was not allowed to insert "primary" into the statute in order for taxpayers to qualify for the exemption.
Although not directly on point, we find the case Easy T.V. & Appliance Rental of Louisiana, Inc. v. Secretary of Dep't of Revenue & Taxation, 556 So. 2d 100, 101-02 (La. App. 4 Cir.), writ denied, 559 So. 2d 1375 (La. 1990), to be instructive where the court addressed whether rent-to-own transactions were considered sales under the sales/use tax statute, La. R.S. 47:302, or whether the taxpayer was entitled to an advance tax credit for wholesalers on inventory obtained within the state under La. R.S. 47:306(B), repealed by 2007 La. Acts, No. 393 §3, effective January 1, 2009. The Department argued that the lease-purchase agreements were rental agreements, rather than sales. The taxpayer contended that the inventory was purchased for resale and was not subject to a use tax, and that it was a dealer and was entitled to a credit. The court recognized that the general purpose of the Louisiana tax statute is to impose the sales/use tax upon the transaction by which the ultimate consumer receives the particular item. Easy T.V. & Appliance, 556 So. 2d at 102. Therefore, if an item was purchased for resale by a dealer, then no tax was owed under La. R.S. 47:302. The court noted that in rent-to-own transactions, it is generally the intent of both parties that ownership will be transferred. Easy did not intend to have an item returned for re-rental, but intended to transfer title to the first customer who could meet all the payments. However, the customer had the right to discontinue his payments by returning the item to Easy. After reviewing the definitions of "sale" and "retail sale," the court determined that the rent-to-own transactions were "sales." Thus, Easy was considered a dealer, so it was not liable for use taxes and was entitled to the advanced tax credit for dealers.
Louisiana generally recognizes the substance of a transaction over the form. Louisiana Power & Light Co. v. Parish Sch. Bd. of Parish of St. Charles, 597 So. 2d 578, 588 (La. App. 5 Cir.), writ denied, 604 So. 2d 1316 (La. 1992). In Louisiana Power & Light Co., the relevant issue was whether "quarterly payments of principal and interest stemming for a financing transaction structured in the form of a sale/lease back [were] subject to the parochial lease tax." 597 So. 2d at 581. The court held that a financing arrangement that was simply arranged to appear as a lease was a sale and not within the leasing tax scheme.
We agree with the findings of the Board that the present facts support the conclusion that LMC was attempting to sell all of its equipment and only used rental or lease agreements to promote its sales.
The Department takes the position that the Board incorrectly relied upon the definition of "inventory" contained in LAC 61.V:1701 and argues that the regulation only applies for imposing ad valorem taxes, not for determining what is exempted from those taxes. This court has previously relied upon LAC 61.V:1701 to define "inventory" for purposes of the ad valorem tax exemption. In Southlake Development Co., v. Secretary of Dep't of Revenue and Taxation, State of Louisiana, 1998-2158 (La. App. 1 Cir. 11/5/99), 745 So. 2d 203, 207, writ denied, 1999-3405 (La. 2/4/00), 754 So. 2d 235, this court stated, "[w]e must determine whether 'inventory,' for purposes of the ad valorem tax exemption, includes real estate." (Emphasis added.) This court noted that La. R.S 47:6006 did not define "inventory" and relied upon LAC 61.V:1701. See La. R.S. 47:1511, which authorizes the promulgation of reasonable rules and regulations which have the full force and effect of law. This court declines to overrule our previous ruling, which the Department would have us do. We also reject the Department's argument that LAC 61.V:1701 exceeds or is inconsistent with the legislature's grant of authority.
The Department argues that the Board ignored the cases it cited from other states, which it claims should have been persuasive. The sources of law are legislation and custom. La. C.C. art. 1; Reinhardt v. Barger, 2007-2363 (La. App. 1 Cir. 4/29/09), 15 So. 3d 122, 131, writ denied, 2009-1786 (La. 11/20/09), 25 So. 3d 811. Legislation is the superior source of law in Louisiana. La. C.C. art. 1, Revision Comments—1987, comments (a) and (c); Reinhardt, 15 So. 3d at 131. Legislation is a solemn expression of legislative will. La. C.C. art. 2; Reinhardt, 15 So. 3d at 131. Louisiana Civil Code article 9 provides that "[w]hen a law is clear and unambiguous and its application does not lead to absurd consequences, the law shall be applied as written and no further interpretation may be made in search of the intent of the legislature." Willis-Knighton Med. Ctr. v. Caddo Shreveport Sales & Use Tax Com'n, 2004-0473 (La. 4/1/05), 903 So. 2d 1071, 1085. There is no need to look to jurisprudence from other states as the law in this matter is clear and unambiguous.
Even if this court were to rely on out-of-state jurisprudence, we find that the cases cited by the Department are distinguishable from the present facts. The court in Olson Equipment Co. v. City of Minneapolis, 285 Minn. 146, 147-48, 171 N.W.2d 717, 718 (1969), stated that the property tax laws in Minnesota contained no definition of inventory and that the word was "unclarified by reference to or dependence upon other tax provisions." Furthermore, in that case, the lessee was entitled to consent before the taxpayer/lessor of construction equipment terminated the lease. Id. at 148. Tyler Equipment Corporation v. Town of Wallingford, 561 A.2d 936 (Conn. 1989), noted that the applicable statute exempted "goods of any wholesale and retail business from property tax" but that the property tax law provided no definition of "goods." Id. at 170-171. In Appeal of R.W. Moore Equipment Co., Inc., 443 S.E.2d 734, 736, the tax assessor determined that "rental property" did not qualify as inventory based upon the factual showing that the equipment was "primarily" used for rental purposes. The word "primarily" is not present in the statute at issue in the present case, and the facts do not support a finding that any "rental" equipment was "primarily being rented." Finally, Kansas Enterprises, Inc. v. Frantz, 269 Kan. 436, 6 P.3d 857 (Kan. 2000), relied upon specific statutory provisions and legislative history-unique to Kansas law that addressed the intervening use of inventory and the rental of inventory. --------
CONCLUSION
For the foregoing reasons, the judgment of the district court is affirmed. Costs of the appeal are assessed to plaintiff, Secretary of the Department of Revenue, State of Louisiana in the amount of $4,662.00.
AFFIRMED. Welch, J., dissenting.
I respectfully dissent. I find that the inventory tax credit provided under La. R.S. 47:6006 does not include rental equipment.
The issuance of the inventory tax credit promotes the presence and participation of manufacturers, distributors and retailers in the Louisiana economy. See La. R.S. 47:6006. In the absence of the inventory tax credit, manufacturers, distributors and retailers would be taxed by local assessors on goods and commodities awaiting fabrication, distribution or sale; thereby, inhibiting profitability. The inventory tax credit purports to remedy this situation by mandating that the state issue a refund to taxpayers for those taxes paid on inventory.
The legislative source of the inventory tax credit, La. R.S. 47:6006(A), provides in pertinent part "[t]here shall be allowed a credit against any Louisiana income or corporation franchise tax for ad valorem taxes paid to political subdivisions on inventory held by manufacturers, distributors, and retailers ...." [Emphasis Added] I find the use of the word "held" in La. R.S. 47:6006(A) instructive as it comports with the notion that inventory, when it is being held awaiting manufacture, distribution or sale to the ultimate consumer, is a non-revenue generating asset.
The method of valuing inventory for purposes of ad valorem taxes further supports the conclusion that inventory tax credit is intended to be applied to goods and commodities which are being held versus items which are being leased for use. Under La. R.S. 47:1961 inventory is assessed for ad valorem taxes at cost or purchase price, plus the carrying charges associated with delivery, and the average value of the item as determined during the year proceeding the calendar year in which the assessment is made. The inventory tax credit allows the taxpayer a refund of 100% of the inventory's assessed value. La. R.S. 47:6006(D)(5). Importantly, the valuation of inventory for assessment purposes does not factor in depreciation.
Allowing a lessor of tangible personal property to claim an inventory tax credit on said leased property creates an unintended financial windfall, which does not comport with the purpose of the statute. Here, LMC, as a lessor, generated revenue off its equipment while it was being "held" as inventory. It is undisputed that LMC's rental of equipment resulted in a reduction in the value of the equipment via depreciation due to time and use. Yet, the classification of the leased equipment as inventory on LMC's LAT 5 and its related assessment in accordance with La. R.S. 47:1961, results in a refund valuation higher than the true depreciated value of the equipment. Therefore, in addition to the rentals received, LMC also recovers any losses to the value of the equipment by depreciation due to use. I find this type of "double dipping" is not encompassed within the scope of La. R.S. 47:6006. The purpose of the statute appears to be the promotion of certain business activities by retailers, distributors and manufacturers; however, it cannot be said to include the recovery of depreciation losses incurred by lessors of revenue producing tangible personal property.
Further, I do not believe the inventory tax credit is intended to allow lessors of revenue generating tangible personal property to effectively dodge the obligation of paying ad valorem tax on their income generating personal property. In fact, LAC 61:V. §2102 provides a distinct valuation method for assessing the value of leased equipment and provides that such personal property may be assessed by either cost, income or market approach depending on which approach is most representative of fair market value. This distinct valuation method expressly provided for rental equipment suggests that the legislature did not intend for rental equipment to be included in the category of inventory entitled to the inventory tax credit. Such a finding is supported by the testimony of the tax assessors at the hearing on this matter, who confirmed that they would not expect to find rental equipment listed as inventory on the LAT 5 due to the differing methods of valuation applicable to leased equipment versus inventory.
Representatives for LMC testified that all of its leased equipment was for sale, and that almost all of the leased equipment was eventually sold. Of course, a true lease purchase situation may require a different result; however, the record lacks evidence to establish the number or percentage of true lease purchase agreements versus straight leases entered into by LMC.
Notably, recent legislative amendments to La. R.S. 47:6006 (2015 La. Acts, No. 415, eff. January 1, 2016) clarify the legislative intent as to the meaning of the term inventory. The amended version of La. R.S. 47:6006 confirms retail inventory is "tangible personal property ... held exclusively for sale in the ordinary course of business." [Emphasis Added]
For the reasons stated above, I do not agree that the rental equipment at issue herein qualifies as inventory for purposes of entitlement to the inventory tax credit.