Case Name: VULCAN FOUNDRY, INC. v. Shirley McNAMARA, Secretary of the Department of Revenue and Taxation, State of Louisiana
Court: Louisiana Supreme Court
Jurisdiction: Louisiana
Decision Date: 1981-11-16
Citations: 414 So. 2d 1193
Docket Number: No. 80-C-1824
Parties: VULCAN FOUNDRY, INC. v. Shirley McNAMARA, Secretary of the Department of Revenue and Taxation, State of Louisiana.
Judges: WATSON, J., concurs in the result.
Reporter: Southern Reporter, Second Series
Volume: 414
Pages: 1193–1199

Head Matter:
VULCAN FOUNDRY, INC. v. Shirley McNAMARA, Secretary of the Department of Revenue and Taxation, State of Louisiana.
No. 80-C-1824.
Supreme Court of Louisiana.
Nov. 16, 1981.
On Rehearing May 17, 1982.
Rehearing Denied June 18, 1982.
Riley F. Boudreaux, Jr., Lutcher, for defendant-applicant.
G. William Jarman and R. Gordon Kean, Jr. of Sanders, Downing, Kean & Cazedes-sus, Baton Rouge, for plaintiff-respondent.

Opinion:
LEMMON, Justice.
The issue in this litigation is whether coke purchased by Vulcan Foundry, Inc. for use in manufacturing manhole covers and rims is exempt from sales and use tax.
Vulcan paid under protest an assessment for sales and use tax, contesting that portion of the assessment based on purchases of coke. Contending that these purchases were exempt from taxation either under R.S. 47:301(10) or 305(4), Vulcan filed this action. The trial court rendered judgment in favor of Vulcan, finding both exemptions applicable. The court of appeal affirmed, without reaching the issue as to the second exemption. 387 So.2d 1318 (La.App.).
We granted certiorari to review that judgment. 392 So.2d 693 (La.).
I.
The product standards for the manhole covers and rims manufactured at Vulcan's Louisiana plant require a minimum percentage of carbon content, depending upon the thickness of the particular product. Because scrap iron, the basic raw material used in the manufacturing process, does not have sufficient carbon content initially and then loses some carbon in the process, carbon must be added during the process to attain the required carbon content in the final product.
Vulcan uses coke (which is 90% carbon) both as fuel for heating and melting the scrap iron and as a source of carbon for raising the carbon content of the final product. In the process Vulcan preheats coke and places a five-foot layer in a cylindrical heating structure called a cupola. Scrap iron and unheated coke are then charged into the cupola in layers on top of the preheated coke. When the iron melts, it permeates the layer of red hot coke. The impurities are then separated from the iron, and the melted iron is poured into forms.
Although natural gas or electrical furnaces could be used, Vulcan uses coke in its process, not only because coke is an efficient fuel, but also because coke provides the additional benefit of adding carbon content to the finished product. The ratio of coke to iron in each batch is regulated, depending upon the quality of the scrap iron, in order to achieve the desired carbon content.
II.
Vulcan contends that its purchases of coke are exempt from sales or use tax because (1) the coke makes up part of the finished product and thus under R.S. 47:301(10) constitutes a material purchased "for further processing into articles of tangible personal property", and (2) the coke constitutes fuel within the contemplation of R.S. 47:305(4).
Difficult questions are frequently presented in cases involving the applicability of the sales and use tax to materials which are used in the manufacturing process and which become a component or ingredient of the ultimate product. See 9 Tax L.Rev. 435 (1954); 30 A.L.R.2d 1439 (1953). In Traigle v. PPG Industries, Inc., 332 So.2d 777 (La.1976), this court held that graphite blades, which are used (and consumed) in the electrolytic production of chlorine and which appear in the manufactured product only as a useless waste material (which could be removed if economically feasible), were not purchased for processing "into" the manufactured product. The court observed that the graphite was not a recognizable integral part or a component part of the ultimate product and held that the graphite was taxable to the manufacturer as the ultimate consumer of that material.
The present case involves even more difficult questions, since carbon from the coke used in the process was an integral and necessary, although minute, component of the manufactured product. We pretermit decision on these important legal and policy questions because we conclude the coke was exempt as coal used as a boiler fuel within the contemplation of R.S. 47:305(4).
When the current sales and use tax laws were enacted by Acts 1948, No. 9, Section 5(d) provided an exemption for gasoline, steam, water and electrical power or energy. Acts 1973, Ex.Sess. No. 13 added "fuel oil and coal when used for boiler fuel" as exemptions under R.S. 47:305(4), perhaps in a legislative attempt, in line with the trend of the times, to encourage conversion to fuel oil and coal and to conserve natural gas.
We first conclude that coke is coal, although the Department of Revenue and Taxation, urging strict statutory construction o£ exemptions, contends coke is only a derivative of coal. The evidence shows that coke is the residue of coal after volatile materials have been expelled by destructive distillation. Coke is therefore simply a more efficient form of coal for use as a fuel and should be included within the statutory exemption, if the coke is used as a boiler fuel.
Boiler fuel is not defined in the statute or in Webster's Third New International Dictionary (1971). Since the term is peculiar to industrial plant operations, it is reasonable to view legislative use of the term as applicable to any fuel used to supply energy in an industrial plant.
The Department apparently agreed with this view when it published on August 1, 1974 its Official Regulations interpreting the 1973 amendment to R.S. 47:305 as follows:
"Fuel oil or coal are exempt from sales tax when they are to be used as a power source in an industrial plant or as a substitute for natural gas being used as a fuel."
In the manufacturing process used by Vulcan, all of the coke that is burned is used to heat and melt the scrap iron (although some of the coke incidentally allows carbon pickup by the molten metal). The coke is therefore a fuel or combustible substance which in its entirety is used to provide heat energy in the manufacturing process of an industrial plant.
We accordingly conclude that the Legislature in its 1973 amendment to R.S. 47:305(4) intended to exempt from sales and use tax any coal which is used by the taxpayer as an energy source in an industrial plant or as a substitute fuel for natural gas and that the coke used by Vulcan in its manufacturing process qualifies for that exemption. The judgment is affirmed.
WATSON, J., concurs in the result.
DIXON, C. J., and CALOGERO, J., dissent and assign reasons.
DENNIS, J., dissents with reasons.
. Most of the carbon pickup is achieved when the molten metal passes through the coke layer.
. If natural gas or electrical furnaces were used, the manufacturer would have to add expensive carbon briquettes to the melted iron to achieve the required carbon content.
. The usual scheme of sales/use tax statutes is to tax only the ultimate consumer.
. R.S. 47:305 lists a number of specific exemptions from sale and use tax. Subsection 4, at the time of the sales at issue (1974-1977) in this litigation, exempted:
"The sale at retail, the use, the consumption, the distribution and the storage to be used or consumed in this state of the following tangible personal property.... Gasoline; steam; water (not including mineral water or carbonated water or any water put up in bottles, jugs, or containers all of which are not exempted); electric power or energy; . natural gas; and fuel oil and coal when used for boiler fuel_" (Emphasis supplied.)
. By Acts 1980, No. 159, the Legislature now exempts "all energy sources when used for boiler fuel."
. While the Department's expert chemist testified that coke is not a "power source" in Vulcan's operations, he conceded that heat from the coke is the "energy source" and quibbled only with the loose use of the word "power", when no power (defined as the time rate at which work is done) is actually involved in the process.