Opinion
2015 CA 0926
09-09-2016
QUEST DIAGNOSTICS CLINICAL LABORATORIES, INC. v. T.A. "TIM" BARFIELD, JR., SECRETARY, DEPARTMENT OF REVENUE, STATE OF LOUISIANA; AND THE STATE OF LOUISIANA
Katheryn S. Friel Justin B. Stone New Orleans, LA and John F. Fletcher Jackson, MS Attorneys for Appellant Quest Diagnostics Clinical Laboratories, Inc. Miranda Y. Conner Antonio Ferachi Brandea Averett Debra Morris Brian Dejean Baton Rouge, LA Attorneys for Appellee Secretary of Department of Revenue State of Louisiana
NOT DESIGNATED FOR PUBLICATION On Appeal from the Louisiana Board of Tax Appeals State of Louisiana
No. 2013-8633 Judge Anthony J. Graphia, (ret.), Chairman Cade R. Cole, Vice-chairman; Charles Malone; Cynthia Hooks; and Joe Stevenson Katheryn S. Friel
Justin B. Stone
New Orleans, LA
and
John F. Fletcher
Jackson, MS Attorneys for Appellant
Quest Diagnostics Clinical
Laboratories, Inc. Miranda Y. Conner
Antonio Ferachi
Brandea Averett
Debra Morris
Brian Dejean
Baton Rouge, LA Attorneys for Appellee
Secretary of Department of Revenue
State of Louisiana BEFORE: GUIDRY, HOLDRIDGE, AND CHUTZ, JJ. HOLDRIDGE, J.
Quest Diagnostic Clinical Laboratories, Inc. (Quest), a nonresident corporation appeals a Louisiana Board of Tax Appeals' (Board) judgment dismissing its request for a refund for overpayments of its 2005 and 2006 income taxes. Ultimately, the issue of Quest's entitlement to a refund turns upon whether, for the purposes of apportionment, the income it derived from the diagnostic testing of Louisiana patient specimens performed at its Houston, Texas regional laboratory was attributable to Texas (as Quest contends) or to Louisiana (as the Department of Revenue contends). For the reasons set forth herein, we conclude that such income was attributable to Texas. Therefore, we reverse the judgment of the Board and render judgment in favor of Quest.
Quest Diagnostic Clinical Laboratories, Inc. is a Delaware corporation with its commercial domicile and principle place of business in New Jersey.
Pursuant to La. R.S. 47:1435's amendment by 2014 La. Acts, No. 198, § 1, eff. July 1, 2014, jurisdiction for judicial review of decisions or judgments of the Board is now vested solely with the appellate courts.
While Quest only generally alleged in its petition that the pertinent testing was performed at an out-of-state laboratory, the evidence at the hearing established that this testing was almost exclusively performed at the Houston, Texas regional laboratory. Therefore, while there may have been some exceptions, for the purposes of this opinion, we generally refer to all out-of-state testing as testing performed in Houston, Texas.
FACTUAL AND PROCEDURAL HISTORY
At all times pertinent to this appeal, Quest operated a multistate network of laboratories where it performed medically-prescribed, diagnostic testing services. Quest's network primarily consisted of large "regional laboratories", which were supported by smaller "rapid response laboratories." According to Quest, most of its income was derived from the testing performed at its regional laboratories, where it employed a full staff of medical professionals who utilized "high-tech, sophisticated, and costly instruments and equipment" to perform a wide variety of diagnostic tests. In contrast, the testing performed at its rapid response laboratories was confined to a limited menu of basic tests with a quick turnaround, such as blood typing. Consequently, the particular type of test prescribed by a physician dictated whether a patient's specimen was sent to a regional laboratory or a rapid response laboratory.
Quest's network also includes a limited number of highly-specialized, esoteric laboratories.
Quest generally obtained a patient's specimen in one of three ways. A Quest employee-phlebotomist would either collect the specimen from the patient at the prescribing physician's office or clinic or at one of Quest's independent "Patient Service Centers." Alternatively, an employee of the prescribing physician or clinic would obtain the specimen from the patient and deposit it in a designated lock box for a Quest courier to retrieve. All specimens were then forwarded to the appropriate Quest laboratory for testing. Once the testing was completed, Quest medical personnel analyzed and certified the results, which were relayed to the prescribing physician.
Prior to Hurricane Katrina, Quest operated a regional laboratory in Metairie, Louisiana where it performed most of the diagnostic testing of Louisiana patient specimens. Consequently, when apportioning its income to determine its annual Louisiana income tax obligation, Quest claimed that it historically (and properly) attributed the income it derived from the testing of Louisiana patient specimens to Louisiana (where the testing services were performed). However, in 2005, Quest's business activities in Louisiana changed significantly when its Metairie regional laboratory was destroyed by Hurricane Katrina. Out of necessity, Quest began forwarding Louisiana patient specimens to its regional laboratory in Houston, Texas for testing.
In 2006, Quest rebuilt its Metairie laboratory. However, the new Metairie laboratory was not reopened as a full-service regional laboratory, as before Katrina; instead, it was reopened as a rapid response laboratory, capable of performing only a limited number of basic tests. Consequently, a large number of Louisiana patient specimens continued to be forwarded to the Houston regional laboratory for testing.
While undergoing a subsequent audit, Quest discovered that it had overpaid its Louisiana income taxes for the tax periods ending on December 31, 2005 and December 31, 2006. According to Quest, when apportioning its income, it had erroneously continued to attribute all of the income derived from its post-Katrina diagnostic testing of Louisiana patient specimens to Louisiana, when, in fact, a substantial amount of that testing had been performed in Texas. Therefore, Quest filed amended Louisiana corporate income tax returns for the years 2005 and 2006, seeking refunds of $118,476.00 and $73,214.00, respectively (collectively "refund request" or "refund"). In its amended returns, Quest attributed to Louisiana all of the income it had derived from the testing services performed at both the "old" and "new" Metairie laboratories. However, with respect to the income it derived from the testing of Louisiana patient specimens performed at its Houston regional laboratory, Quest now attributed only a portion of that income to Louisiana --to account for the specimen collection services it performed in Louisiana relative to those tests-- and attributed the remainder to Texas, where the diagnostic testing of those specimens was performed. It is this latter income, attributed to Texas that is in dispute ("disputed income").
Specifically, the portion of income Quest attributed to Louisiana for the specimen collection services included the cost of phlebotomy services plus a 5% markup.
The Department of Revenue (Department) effectively denied Quest's refund request by failing to take any action on its amended returns. Quest then appealed to the Board, filing a petition for refund alleging it had overpaid its 2005 and 2006 income tax obligations in error. See La. R.S. 47:1625. According to Quest, it had failed to adjust its internal income sourcing methods to address the changes in its business following Hurricane Katrina, and therefore, when apportioning its income in its original tax returns, it had erroneously attributed to Louisiana income that it should have attributed to Texas. The Department disputed Quest's right to a refund asserting that Quest had properly apportioned its income in its original tax returns.
See also La. R.S. 47:1621(B)(3) and 1624(A). In the alternative, Quest asserted a claim against the state pursuant to La. R.S. 47:1481. This alternative claim was ultimately denied by the Board; however, the Board's ruling on this claim is not subject to appeal, see La. R.S. 47:1486, and thus, is not at issue.
Both parties agreed that Quest's entitlement to a refund was controlled by Louisiana's apportionment formula statute, La. R.S. 47:287.95. It was undisputed that Quest, a unitary, multistate business, was required to apportion a percentage of its income to Louisiana utilizing the appropriate formula in La. R.S. 47:287.95 in order to determine its annual Louisiana corporate income tax liability. See La. R.S. 47:287.94(B). Louisiana Revised Statute 47:287.95 sets forth specific formulas to determine the appropriate apportionment percentage "for air, pipeline, other transportation businesses, and certain service enterprises," as well as a general formula "for manufacturing, merchandising[,] and any other business for which a formula is not specifically prescribed." 61 LAC Pt I, § 1134.
During the tax years at issue, Louisiana imposed a corporate income tax on Louisiana net income which is net income earned within or derived from sources within the state of Louisiana. See Bridges, Sec'y of Dep't of Revenue, State v. Geoffrey, Inc., 2007-1063 (La.App. 1 Cir. 2/8/08), 984 So.2d 115, 120, writ denied, 2008-0547 (La. 4/25/08), 978 So.2d 370. Louisiana net income consisted of net allocable income as determined by La. R.S. 47: 287.93 and net apportionable income as determined by La. R.S. 47:287.94. With respect to the latter, La. R.S. 47:287.94 provided two methods for computing the amount of net apportionable income from Louisiana sources: the apportionment method and the separate accounting method. See 61 LAC Pt I, § 1132(A)(2). At issue in Quest's refund claim was the apportionment method. Under this method, net apportionable income is computed by multiplying the total net apportionable income by the Louisiana apportionment percent as determined pursuant to La. R.S. 47:287.95. See La. R.S. 47:287.94(B).
Similar to most other states' apportionment formulas, the various formulas in La. R.S. 47:287.95 involve ratios based on three factors -- payroll, revenue, and property. In simple terms, the payroll factor is the ratio of the taxpayer's in-state payroll to its payroll everywhere; the property factor is the ratio of the taxpayer's in-state property to its property everywhere; and, the revenue factor is the ratio of taxpayer's in-state revenues to its revenues everywhere. See John A. Swain, Reforming the State Corporate Income Tax: A Market State Approach to the Sourcing of Service Receipts, 83 Tul. L. Rev. 285, 288, 292 (2008). The formulary factors are intended to generally reflect the activity of a business within the state. Id.
The "revenue" factor, see 61 LAC Pt I, § 1134(D), is generally referred to elsewhere as the "sales" factor or "receipts" factor. Louisiana includes in this factor other income in addition to sales. Michael J. Mcintyre et. al., Designing a Combined Reporting Regime for a State Corporate Income Tax: A Case Study of Louisiana, 61 La. L. Rev. 699, 729 (2001).
While the Department and Quest agreed that La. R.S. 47:287.95 was controlling, they disagreed as to its proper interpretation and application. Specifically, they disputed: (1) whether Quest was required to apportion its income under the specific formula set forth in La. R.S. 47:287.95(D) or the general formula in La. R.S. 47:287.95 (F); and, (2) whether the disputed income was to be attributed to Louisiana in the numerator of the appropriate formula's revenue factor ratio.
With respect to the first issue, Quest maintained that it was a service business in which the use of property was not a substantial income-producing factor. Therefore, Quest contended that it was required to apportion its income using the two-factor formula (payroll and revenue) in La. R.S. 47:287.95(D), which provides:
Service enterprises. The Louisiana apportionment percent of any taxpayer whose net apportionable income is derived primarily from a service business in which the use of property is not a substantial income-producing factor shall be the arithmetical average of two ratios, as follows:
(1) The ratio of the amount paid by the taxpayer for salaries, wages, and other compensation for personal services rendered in Louisiana to the total amount paid by the taxpayer for salaries, wages, and other compensation for personal services in connection with the production of the net apportionable income.
(2) The ratio of the gross apportionable income of the taxpayer from Louisiana sources to the total gross apportionable income of the taxpayer.
For the purposes of this Subsection, the gross apportionable income from Louisiana sources shall include the revenue from services performed in this state, and any other gross income derived entirely from sources within this state. [Emphasis added.]
Conversely, the Department argued that Quest's use of property, particularly its "high-tech, sophisticated, and costly [testing] instruments and equipment," was a substantial income-producing factor in its business, thereby precluding Quest from apportioning its income under La. R.S. 47:287.95(D). According to the Department, none of the specific formulas in La. R.S. 37:287.95(A)-(D) applied to Quest, and therefore, by default, it was required to apportion its income utilizing the general, three-factor formula (property, payroll, and revenue) set forth in La. R.S. 47:287.95(F).
With respect to the second issue, Quest asserted that under the clear and unambiguous language of La. R.S. 47:287.95(D), only income derived "from services performed in this state" could be sourced to Louisiana in the revenue ratio. Because the pertinent diagnostic testing services were performed in Texas, and not Louisiana, Quest argued the disputed income was clearly not attributable to Louisiana. Alternatively, Quest maintained that even if it was required to apportion its income under the general formula in Subsection (F), (which applies to service businesses in which the use of property is a substantial income-producing factor), the disputed income would still be attributable to Texas and not Louisiana. According to Quest, for the purposes of Subsection (F), the disputed income derived from its testing services was "other gross apportionable income." However, unlike Subsection (B), Subsection (F) contains no provision specifying how to determine what "gross apportionable income" was "attributable to this state," nor does it contain any provision indicating that it should somehow be sourced differently than the "gross apportionable income" derived from services in Subsection (D). Indeed, Quest pointed out that the only statutory or regulatory provision addressing the sourcing of general services (services which do not fall within an industry-specific formula) was Subsection (D), and thus, it was obviously the intent of the legislature that it would apply to general services apportioned under Subsection (F) as well as Subsection (D). Hence, Quest argued that under either Subsection, the disputed income was not attributable to Louisiana.
This general statement is admittedly an over-simplification. We acknowledge that Quest's testing services included its specimen collection services performed in Louisiana; however, as previously noted, Quest attributed the corresponding income for those services to Louisiana in its amended returns. The disputed income at issue pertains to the income ascribed to the various testing services performed at the Houston regional laboratory (i.e., the performance of the pertinent diagnostic test, the interpretation and certification of the test results, and the relaying of the test results to the prescribing physician.)
Because the Department has stipulated to the amount of Quest's refund if the disputed income is determined to be attributable to Texas as opposed to Louisiana, the propriety of Quest's "pro rata" methodology is not before us, and we express no opinion in this regard.
The last sentence of (F)(5) provides: "All other classes of gross apportionable income shall be prorated within or without this state on the basis of such ratio or ratios, prescribed by the secretary, as may be reasonably applicable to the type of business involved." However, the Department does not allege or argue that the secretary has prescribed a ratio for general service businesses in which the use of property is a substantial income-producing factor.
The Department, after abandoning some of its initial arguments, ultimately took the position that Quest's "income derived from the testing done out[side] of Louisiana [was] taxable to Louisiana under [Sub]section (D) or [Sub]section (F)." The Department contended that under Subsection (F), the disputed income was not "other gross apportionable income" as alleged by Quest but instead qualified as "net sales made in the regular course of business," making it attributable to Louisiana. For the purposes of Subsection (D), the Department claimed that although the services were performed in Texas, the disputed income was nonetheless attributable to Louisiana because it constituted "other gross income derived entirely from sources within this state," because Quest's paying customers (its "sources of income") were in Louisiana.
By agreement of the parties, the Department was allowed to submit a post-hearing memorandum.
Quest countered arguing that, to the extent that the Department was interpreting La. R.S. 47:287.95 to require that income derived from services performed in Texas be sourced to Louisiana, it was improperly attempting to "[l]egislate" a new "market-based sourcing" rule in Louisiana. Generally speaking, states have historically sourced service income based upon where the income-producing activity was performed. However, recently, some states have enacted legislation to source such income based upon where the taxpayer's market is located or where the benefit of the service is received. Quest pointed out that the Louisiana Legislature had not yet enacted such laws.
During the 2016 Second Extraordinary Session, the legislature amended La. R.S. 47:287.95 to provide for market-based sourcing of service income commencing with the 2016 tax year.
The Board conducted a hearing on March 11, 2015. Only one witness, Michael Augello, testified. Mr. Augello, Quest's Manager of Corporate Tax, testified regarding the facts resulting in Quest's erroneous overpayment of its 2005 and 2006 Louisiana income taxes. He explained that Quest had not adjusted its internal accounting system to address the changes in its business activities following Hurricane Katrina. Several exhibits, including Quest's amended and original tax returns, as well as other documents, were admitted into evidence.
At the hearing, the Department conceded that if the disputed income was attributable to Texas, and not Louisiana, then Quest was entitled to the refund, and it stipulated to the correctness of the refund amount.
Afterward, the Board took the matter under advisement. On May 13, 2015, the Board signed a judgment ruling in favor of the Department and against Quest. Incorporated within the Board's judgment were written reasons for judgment. Although both parties had argued that the proper interpretation of La. R.S. 47:287.95(D) and (F) would produce a consistent result regardless of which was applicable, the Board concluded otherwise. According to the Board, if Quest was required to apportion its income under Subsection (D), then it was entitled to a refund; however, if it was required to apportion under Subsection (F), it was not.
Ultimately, the Board concluded that Quest's use of property was a substantial income-producing factor in its testing services, and, thus, Quest was precluded from apportioning its income under Subsection (D). The Board found that, by default, Quest was required to apportion its income pursuant to the general formula in Subsection (F) and consequently, was not entitled to a refund. Thus, the Board determined, at least implicitly, that Subsection (F) required the disputed income to be attributed to Louisiana. This appeal by Quest followed.
The Department answered Quest's appeal. As argued in its brief, the Department does not seek the modification, revision, or reversal of the Board's judgment dismissing Quest's refund claim. Rather, it seeks only to have this court correct a portion of what was essentially the Board's written reasons for judgment. See La. R.S. 47:1410. It is well-settled that appeals are taken from judgments, not reasons for judgment. Moreno v. Entergy Corp., 2012-0097 (La.12/4/12), 105 So.3d 40, 52. Therefore, challenges pertaining solely to reasons for judgment do not constitute the proper basis for an appeal. See Utley-James of Louisiana, Inc. v. State, Div. of Admin., Dep't of Facility Planning and Control, 1994-2504 (La.App. 1 Cir. 10/6/95), 671 So.2d 473, 474 n.2. Even so, the issue raised by the Department in its answer is rendered moot by our disposition of Quest's appeal.
STANDARD OF REVIEW
Our review of a decision of the Board is rendered on the record made before the Board and is limited to facts on the record and questions of law. Marathon Pipe Line Co. v. Crawford, 2000-2753 (La.App. 1 Cir. 2/15/02), 808 So.2d 873, 877, writ denied, 2002-0804 (La. 6/7/02), 818 So.2d 774. See also La. R.S. 47:1434(C)(3) and 47:1435(C). The Board's factual findings 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. With regard to questions of law, the judgment of the Board should be affirmed if it has correctly applied the law and adhered to the proper procedural standards. See Marathon, 808 So.2d at 877. However, if the Board's judgment is not in accordance with law, it may be reversed or modified, with or without remanding the case. See La. R.S. 47:1435(C); R & B Falcon Drilling USA, Inc. v. Secretary, Dep't of Revenue, 2009-0256 (La.App. 1 Cir. 1/11/10), 31 So.3d 1083, 1085.
DISCUSSION
Factual Finding
In its appeal, Quest first challenges the Board's factual determination that the use of property was a "substantial income-producing factor" in its diagnostic testing services, thereby precluding it from apportioning its income under La. R.S. 47:287.95(D). Therefore, we must determine whether the record supports the Board's factual finding. Based on the record before us, and the ordinary meaning of the word "substantial," we cannot say that the Board was manifestly erroneous in concluding that Quest's use of property was a "substantial income-producing factor" in its business.
On appeal, Quest listed eight assignments of error presenting two legal issues. In its brief, the Department contends that Quest failed to separately brief its eighth assignment of error wherein it alleged that the Board erred in dismissing its refund claim. As a result, the Department contends that Quest's entire appeal should be deemed to be abandoned. However, we respectfully disagree. In its petition to the Board, throughout the Board proceedings, and in its brief to this court, Quest has consistently asserted that it is entitled to a refund due to its mistaken overpayment of its 2005 and 2006 income taxes due to its error in attributing the disputed income to Louisiana. See La. R.S. 47: 1621(B)(3). Moreover, the Department has conceded that if the disputed income is not attributable to Louisiana, then Quest is entitled to the amount of refund it seeks. The whole of Quest's brief addresses the various legal arguments establishing the validity of its refund claim, specifically, that an erroneous overpayment was made based on its sourcing error. It would be redundant and unhelpful to require Quest to then repeat all of the same arguments in a separate and technically-distinct "assignment of error."
Black's Law Dictionary 1656 (10 ed. 2014) defines "substantial" as "important, essential, material, of real worth and importance" or "considerable in amount or value, large in volume or number." The record reflects that Quest operated an extensive network of laboratories, including regional laboratories and rapid response laboratories, as well as "Patient Service Centers" located throughout the country. Furthermore, Quest asserted that at its regional laboratories, its employees used "high-tech, sophisticated, and costly instruments and equipment" in order to perform its diagnostic testing services. According to Mr. Auguello, Quest could not perform its automated testing services without these resources, thus they were obviously "important" and "essential."
Moreover, the documentary evidence, particularly Quest's amended income tax returns, indicates that this property was "considerable in amount or value." According to Schedule M of its amended 2005 tax return, Quest indicated that all of its tangible property was used in the production of its net apportionable income and indicated a property ratio denominator of $372,817,208.00. See La. R.S. 47:287.95(F)(1)(a). Furthermore, Schedule Q of its 2005 amended return reflected a Louisiana property ratio of 1.12%, which was exactly the same as its Louisiana revenue ratio. Similarly, in Schedule M of its 2006 amended return, Quest again indicated that all of its tangible property was used in the production of its net apportionable income and reported a property ratio denominator of $420,734,804.00. More significantly, Schedule Q of its 2006 amended return showed a Louisiana property ratio of 1.76%, which appreciably exceeded its Louisiana payroll ratio of 1.26% and its Louisiana revenue ratio of .39%.
Finally, we think it worthy of note that, in spite of Quest's strident and repeated assertion that it was entitled to apportion its income under the two-factor formula (payroll and revenue) in La. R.S. 47:287.95(D), in both its 2005 and 2006 original and amended tax returns, it nonetheless used Subsection (F)'s general, three-factor formula (property, payroll, and revenue) to determine the apportionment percentage for calculating its Louisiana income.
Accordingly, we find no error in the Board's factual finding that the use of property was a substantial income-producing factor in Quest's testing services. We likewise find no error in the Board's conclusion that Quest was precluded from apportioning its income using the formula in Subsection (D) and instead was required to apportion its income under the general formula in Subsection (F). Question of Law/Statutory Interpretation
Quest next argues that even if the Board correctly determined that it must apportion its income under La. R.S. 47:287.95(F), it legally erred insofar as it concluded that Subsection (F) required Quest to attribute or "source" the disputed income to Louisiana as opposed to Texas. Accordingly, we must determine whether the Board's application and interpretation of La. R.S. 47:287.95(F) was legally correct. The proper application and interpretation of a statute presents a question of law which we review de novo, without according any deference to the legal conclusion of the Board. Harrah's Bossier City Inv. Co., LLC v. Bridges, 2009-1916 (La. 5/11/10), 41 So.3d 438, 445; Cleco Evangeline, LLC v. Louisiana Tax Comm'n, 2001-2162 (La. 4/3/02), 813 So.2d 351, 353.
Implicit in the Board's judgment was its determination that Subsection (F) required the disputed income to be attributed to Louisiana.
In all cases of statutory construction or interpretation, legislative intent is the fundamental question. O'Hara v. Globus Med., Inc., 2014-1436 (La.App. 1 Cir. 8/12/15), 181 So.3d 69, 84, writ denied, 2015-1944 (La. 11/30/15), 182 So.3d 939. As our supreme court explained in M.J. Farms, Ltd. v. Exxon Mobil Corp., 2007-2371 (La.7/1/08), 998 So.2d 16, 26-27, amended on reh'g (9/19/08) (internal citations and quotation marks omitted):
The function of statutory interpretation and the construction given to legislative acts rests with the judicial branch of the government. The rules of statutory construction are designed to ascertain and enforce the intent of the Legislature. Legislation is the solemn expression of legislative will and, thus, the interpretation of legislation is primarily the search for the legislative intent. We have often noted the paramount consideration in statutory interpretation is ascertainment of the legislative intent and the reason or reasons which prompted the Legislature to enact the law.
The starting point in the interpretation of any statute is the language of the statute itself. When 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. However, when the language of the law is susceptible of different meanings, it must be interpreted as having the meaning that best conforms to the purpose of the law. Moreover, when the words of a law are ambiguous, their meaning must be sought by examining the context in which they occur and the text of the law as a whole.
It is also well established that the Legislature is presumed to enact each statute with deliberation and with full knowledge of all
existing laws on the same subject. Thus, legislative language will be interpreted on the assumption the Legislature was aware of existing statutes, well established principles of statutory construction and with knowledge of the effect of their acts and a purpose in view. It is equally well settled under our rules of statutory construction, where it is possible, courts have a duty in the interpretation of a statute to adopt a construction which harmonizes and reconciles it with other provisions dealing with the same subject matter.
Finally, we note that taxing statutes are to be interpreted liberally in favor of the taxpayer and against the taxing authority. See Goudchaux/Maison Blanche, Inc. v. Broussard, 590 So.2d 1159, 1161 (La.1991). If the statute can reasonably be interpreted more than one way, the interpretation less onerous to the taxpayer is to be adopted. Entergy Louisiana, Inc. v. Kennedy, 2003-0166 (La.App. 1 Cir.7/2/03), 859 So.2d 74, 78, writ denied, 2003-2201 (La.11/14/03), 858 So.2d 430. The words defining a thing to be taxed should not be extended beyond their clear import. Cleco Evangeline, LLC, 813 So.2d at 355. Absent evidence to the contrary, the language of the statute itself must clearly and unambiguously express the intent to apply to the property in question. Id.
Applying these principles of statutory construction, we find that Subsection (F) does not clearly and unambiguously express an intent to attribute income derived from general services performed in another state to Louisiana. Specifically, La. R.S. 47:287.95(F) provides, in pertinent part:
(1) Manufacturing, merchandising, and other business. Except as provided in this Subsection, the Louisiana apportionment percent of any taxpayer whose net apportionable income is derived primarily from the business of transportation by pipeline or from any business not included in Subsections A through E of this Section shall be the arithmetical average of three ratios, as follows:
(a) The ratio of the value of the immovable and corporeal movable property owned by the taxpayer and located in Louisiana to the value of all immovable and corporeal movable property owned by the taxpayer and used in the production of the net apportionable income.
(b) The ratio of the amount paid by the taxpayer for salaries, wages, and other compensation for personal services rendered in this state to
the total amount paid by the taxpayer for salaries, wages, and other compensation for personal services in connection with the production of net apportionable income.
(c) The ratio of net sales made in the regular course of business and other gross apportionable income attributable to this state to the total net sales made in the regular course of business and other gross apportionable income of the taxpayer.
(2)
* * * * *
(c) The term "business of manufacturing or merchandising" shall only include a taxpayer whose net apportionable income is derived primarily from the manufacture, production, or sale of tangible personal property.
* * * * *
(3) For the purpose of this Subsection, sales attributable to this state shall be all sales where the goods, merchandise, or property is received in this state by the purchaser. [Emphasis added.]
Thus, the revenue ratio consists of "net sales made in the regular course of business" ("net sales") and "gross apportionable income attributable to this state." The Department argues that the disputed income qualifies as "net sales" and must be attributed to Louisiana, presumably on the basis of Subsection (F)(3). However, we find the Department's argument to be specious at best.
It is undisputed that Quest derives its income from performing diagnostic testing services. Thus, both parties agree that Quest is a service business and not a manufacturer or merchandiser. As such, the income it derives from performing services does not constitute "net sales." "Net sales," as used in Subsection (F), clearly refers to sales of tangible items ("goods, merchandise, or property"), not intangibles such as the performance of services.
Black's Law Dictionary 1432 (10 ed. 2014) defines "product" as "something that is distributed commercially for use or consumption and that is usually (1) tangible personal property, (2) the result of fabrication or processing, and (3) an item that has passed through a chain of commercial distribution before ultimate use or consumption." It further defines "goods" as "tangible or movable personal property" and defines "merchandise" as "a movable object involved in trade" and further notes that this definition generally excludes intangibles. In contrast, "service" is defined as "the performance of some useful act or series of acts for the benefit of another usually for a fee" and is an "intangible commodity" "in the form of human effort, such as labor, skill, or advice." Black's Law Dictionary at 808, 1136, and 1578.
Support for this conclusion can be found in the statute's accompanying regulation. According to 61 LAC Pt I, § 1134(D)(3)(a):
Sales made in the regular course of business include all sales of goods, merchandise or product of the business or businesses of the taxpayer. They do not include the sale of property acquired for use in the production of income. Where a taxpayer under a contract performs essentially a management or supervision function and receives a reimbursement of his costs plus a stipulated amount, the amounts received as reimbursed costs are not sales although the contract so designates them. The stipulated amount constitutes other gross apportionable income and shall be attributed to the state where the contract was performed. [Emphasis added.]
Thus, we agree with Quest that the disputed income qualifies as "gross apportionable income" and not "net sales" as the Department argues. Indeed, throughout the entirety of La. R.S. 47:287.95, as well as the Department's accompanying regulation, 61 LAC Pt I, § 1134, the income derived from any and all services, (general or industry-specific), is consistently termed "gross apportionable income." Conversely, "net sales made in the regular course of business" is used only in reference to the sales of tangible, corporeal property, and obviously refers to sales made by merchandisers and manufacturers, not service providers such as Quest. Even the Department's own tax return forms make an express distinction between "net sales of merchandise" and "charges for services." See CIFT 620, Schedule Q; see and compare 61 LAC Pt I, § 1134(D).
This interpretation is consistent with the long-standing tradition of states using a "market" or "destination" rule for sourcing income from the sale of tangibles but not for services; however, as previously noted, this has recently begun to change. Pursuant to 2016 La. 2nd Ex. Sess. Acts 8, the Louisiana Legislature amended La. R.S. 47:287.95, to provide for market-based sourcing of income from services for taxable periods beginning on or after January 1, 2016. Although not determinative, we note that the new legislation is in accord with our interpretation as it distinguishes between the "sales of tangible personal property" (addressed by Subsection (F)(3)) and the "sale of a service" (which is addressed in newly-enacted Subsection (L)).
Even assuming, for the sake of argument, that the disputed income could be reasonably construed as "net sales," we note that the reasonable interpretation less onerous to the taxpayer must be applied. Therefore, we find that the income Quest derived from its testing services is "gross apportionable income," and not "net sales made in the regular course of business." Consequently, Quest's revenue factor in La. R.S. 47:287.95(F)(1)(c) would be the ratio of its "gross apportionable income attributable to this state" to its total gross apportionable income.
This brings us to the heart of the parties' dispute, which is whether the disputed income is "gross apportionable income attributable to this state." We note that La. R.S. 47:287.95(F) lacks any express instruction for determining what gross apportionable income derived from general services is "attributable to this state." The only relevant provision is found in the last sentence in La. R.S. 47:287.95(F)(5), which reads:
All other classes of gross apportionable income shall be prorated within or without this state on the basis of such ratio or ratios, prescribed by the secretary, as may be reasonably applicable to the type of business involved.However, Quest points out, and the Department does not dispute, that the secretary has not prescribed a rule specifically for businesses such as Quest, whose income is derived primarily from a general service business in which the use of property is a substantial income-producing factor. At best, Subsection (F) is ambiguous with respect to the sourcing of such income.
The only statutory or regulatory provision addressing the sourcing of income derived from general services is found in Subsection (D). Because all laws pertaining to the same subject matter must be interpreted in pari materia, or in reference to each other, Dunn v. City of Kenner, 2015-1175 (La. 1/27/16), 187 So.3d 404, 410, in interpreting Subsection (F), we must necessarily look to Subsection (D). In doing so, we remain mindful that Subsections (D) and (F) must be interpreted together in a manner that is logical and consistent with the presumed fair purpose and intent of the legislature in enacting them. See Slaughter v. Louisiana State Employees' Ret. Sys., 2015-0324 (La.10/14/15), 180 So.3d 279, 283.
As previously noted, La. R.S. 47:287.95(F) sets forth the general, three-factor, apportionment formula (property, payroll, and revenue) to be used by manufacturers, merchandisers, and all other businesses, including service businesses such as Quest, for which no specific formula has been prescribed in Subsections (A)-(D). Excepted from this general formula are service businesses in which the "use of property is not a substantial income-producing factor." (Emphasis added.) La. R.S. 47:287.95(D). Those businesses apportion their income under the two-factor formula (payroll and revenue) set forth in Subsection (D). Thus, the only discernable distinction the legislature made regarding how general service businesses apportion their income -whether by using the three-factor formula in Subsection (F) or the two-factor formula in Subsection (D)-pertains solely to property, or more precisely, the extent property is used in producing income and, as a result, the inclusion or exclusion of the property factor from the apportionment formula.
It is readily apparent that the intent of the legislature in enacting Subsection (D) was merely to remove the property factor from the apportionment formula for those service businesses whose use of property did not substantially contribute to the generation of their income. That the legislature would do this makes perfect sense. While the United States Supreme Court has recognized that the general "three-factor formula" provides "a rough, practical approximation of the distribution of ... a corporation's sources of income," Gen. Motors Corp. v. District of Columbia, 380 U.S. 553, 561, 85 S.Ct. 1156, 1161, 14 L.Ed.2d 68 (1965), it has also held that the "factor or factors used in [an] apportionment formula must actually reflect a reasonable sense of how income is generated." Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 169, 103 S.Ct. 2933, 2942, 77 L.Ed.2d 545 (1983). Therefore, only factors that help generate the pre-apportionment income should enter into an apportionment formula. See Michael J. Mcintyre et. al., Designing a Combined Reporting Regime for a State Corporate Income Tax: A Case Study of Louisiana, 61 La. L. Rev. 699, 730 (2001). See also 61 LAC Pt I, § 1134 (A), (B)(1).
There is absolutely no indication that the legislature intended service businesses to attribute or "source" their income differently for the purposes of the revenue factor, depending on whether or not their formula included a property factor. Indeed, we can conceive of no plausible reason why the sourcing of income for the revenue factor in Subsection (F) would be different from that in Subsection (D). Consequently, we conclude that a service business apportioning its income under Subsection (F) must determine its "gross income attributable to this state" for the numerator of its revenue factor ratio in (1)(c), by sourcing its service income in the same manner as a service business apportioning its income under Subsection (D).
Pursuant to Subsection (D), a service business' "gross apportionable income from Louisiana sources shall include the revenue from services performed in this state , and any other gross income derived entirely from sources within this state." La. R.S. 47:287.95(D). (Emphasis added.) The first clause of this provision clearly does not look to the location of the taxpayer's market or customers; instead, the source of the income is the state where the income-producing service is performed. Therefore, Subsection (D) imposes a "location-of-performance" sourcing rule, as opposed to a "market-based" sourcing rule for determining the numerator of its revenue factor ratio. Accordingly, we find that under Subsection D, only income from services performed in Louisiana is to be attributed to Louisiana. Interpreting Subsection (F) in a consistent manner, as we must, we conclude that only income from services performed in Louisiana is "attributable to this state" for purposes of the revenue factor ratio in La. R.S. 47:287.95(F)(1)(c). In this case, the disputed income was derived from services performed in Texas, therefore it was attributable to Texas.
Pursuant to 2016 La. 2nd Ex. Sess. Acts 8, the legislature has now amended La. R.S. 47:287.95, to provide for market-based sourcing of services for taxable periods beginning on or after January 1, 2016. --------
The Department argues that the disputed income should be attributed to Louisiana under Subsection (D) (and by extension, Subsection (F)) based upon the second clause of the noted provision. Specifically, the Department contends that the income Quest derived from the testing services performed in Texas constitutes "other gross income derived entirely from sources [i.e., customers] within [Louisiana]." This argument lacks merit for a number of reasons.
We have already noted that the "source" of the income for the purposes of the apportionment formula has been legislatively defined as the "location of performance" of the income-producing activity and not the location of the taxpayer's customers.
Secondly, (even setting aside technical sourcing rules) there is simply no single source of a business's income, as the Department seems to suggest. Indeed, if there were, there would be no need to resort to an apportionment formula in the first place. See Container Corp., 463 U.S. at 181, 103 S.Ct. at 2948-49; Mobil Oil Corp. v. Comm'r of Taxes of Vermont, 445 U.S. 425, 438, 100 S.Ct. 1223, 1232, 63 L.Ed.2d 510 (1980). While a business's customers are certainly one of the sources of its income, there are many others, including the performance of the income-producing services.
Thirdly, we have already determined the disputed income was derived from Texas sources under the first clause of the provision. To find, under the second clause, that that the disputed income is "derived entirely from sources within this state" would either render the provision internally inconsistent or require us to ignore the word "entirely."
Lastly, and most significantly, the Department's proposed interpretation of La. R.S. 47:287.95(D) would arguably render it unconstitutional. The Commerce Clause forbids the States to levy taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation. See Container Corp., 463 U.S. at 170-171, 103 S.Ct. 2933; Armco Inc. v. Hardesty, 467 U.S. 638, 644, 104 S.Ct. 2620, 81 L.Ed.2d 540 (1984).
In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), the United States Supreme Court established a four prong test to assess the validity of state taxes under the Commerce Clause. Under the Complete Auto test, a state tax will be upheld so long as the tax (1) is applied to activity with a substantial nexus with the taxing state, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the state. Complete Auto, 430 U.S. at 279, 97 S.Ct. at 1079.
To determine whether the fair-apportionment and non-discrimination prongs of the Complete Auto test have been satisfied, the United State Supreme Court has applied the internal consistency test. See Comptroller of Treasury of Maryland v. Wynne, ___ U.S. ___, ___, 135 S.Ct. 1787, 1802, 191 L.Ed.2d 813 (2015); Container Corp. 463 US at 169. This test looks to the structure of the tax at issue to determine whether its identical application by every other state would place interstate commerce at a disadvantage as compared with commerce intrastate. See Wynn, ___ U.S. at ___, 135 S.Ct. at 1802.
At a minimum, we find the Department's proposed interpretation, which would essentially have Subsection (D) set forth both a "location-of-performance" sourcing rule and a "market-based" sourcing rule, clearly fails the internal consistency test. Therefore, it must be rejected. See State v. Fleury, 2001-0871 (La. 10/16/01), 799 So.2d 468, 472; Moore v. Roemer, 567 So.2d 75, 78 (La.1990) (noting the court is bound to construe a statute so as to preserve its constitutionality when it is reasonable to do so).
In sum, we find that the Board correctly determined that Quest was required to apportion its income under the general formula in La. R.S. 47:287.95(F). However, we find that the Board legally erred in interpreting La. R.S. 47:287.95(F) to require that income derived from services performed in Texas be sourced to Louisiana. Instead, we find that Quest properly attributed the disputed income to Texas in its 2005 and 2006 amended income tax returns. Based on the Department's stipulation before the Board, a remand is unnecessary in this matter, and we enter judgment in favor of Quest on its refund request.
CONCLUSION
For all of the foregoing reasons, we reverse the Board's judgment dismissing Quest's refund appeal. We hereby render judgment in favor of Quest Clinical Diagnostic Laboratory, Inc. and against the Department of Revenue awarding Quest a refund of $73,214.00 for the tax period ending December 31, 2005, and an income tax refund of $118,476.00 for the tax period ending December 31, 2006, plus statutory interest. Appeal costs, in the amount of $2,239.00, are assessed to Timothy Barfield, in his capacity as Secretary of the Louisiana Department of Revenue.
REVERSED AND RENDERED.