Opinion ID: 1671871
Heading Depth: 2
Heading Rank: 2

Heading: Coke-on-catalyst

Text: We also held in BP Oil I that the reprocessing exclusion found in La. R.S. 47:301(10)(c) [7] did not apply to refinery gas and coke-on-catalyst because they were not part of the crude oil, but were rather by-products of the refining of crude oil which BP ultimately consumed as an energy source. BP Oil I, supra at 1330. We further held that coke-on-catalyst, when used for boiler fuel, was exempt from local use tax under La. R.S. 47:305D(1)(h) and remanded the valuation of the coke-on-catalyst to the trial court. Id. at 1331. On rehearing, we amended our judgment on original hearing to hold that the valuation method used by the Plaquemines Parish Government was invalid [8] and to direct the trial court on remand to value the coke-on-catalyst in accordance with La.Rev.Stat. 47:306-318. [9] Id. at 1338. Accordingly, precedent establishes that the use of coke-on-catalyst is a taxable event, not subject to the reprocessing exclusion and that it is exempt under the energy sources exemption. Because the energy sources exemption is suspended, the issue in these consolidated cases is the taxable value of coke-on-catalyst, an issue that was not decided in BP Oil I. [10] La. R.S. 47:302A provides that use taxes can be imposed on the use of tangible personal property based on a percentage of the cost price of the property. Cost price is defined by statute as follows: Cost price means the actual cost of the articles of tangible personal property [11] without any deductions therefrom on account of the cost of materials used, labor, or service cost, except those service costs for installing the articles of tangible personal property if such cost is separately billed to the customer at the time of installation, transportation charges, or any other expenses whatsoever, or the reasonable market value of the tangible personal property at the time it becomes susceptible to the use tax, whichever is less. La. R.S. 47:301(3)(a) (emphasis added). After BP Oil I, the Department for the first time began to attempt to collect use taxes on coke-on-catalyst. However, realizing the difficulties of calculating the cost price of this item which was not bought or sold but was instead a by-product of crude oil which was then used as an energy source, the Department issued Sales Tax Administration No. 70.17, effective September 6, 1994, which provided in pertinent part: Because of the complexities involved in calculating all of the cost components that must be included in the cost price of each use of coke-on-catalyst, the department will allow the taxable cost price of coke-on-catalyst to be determined by the use of the formula provided by R.S. 47:305(D)(1)(h) which is used in determining the taxable value of refinery gas. Under that formula, the taxable value of refinery gas for each calendar year shall be 52 cents per thousand cubic feet (MCF), multiplied by a fraction, .... Because an MCF of refinery gas has been determined to have a value approximately four times greater than the value of a ton of coke-on-catalyst, the value of coke-on-catalyst will be one-fourth of the amount determined under the refinery gas formula. The Department has since changed its position and in the these two consolidated cases claims that coke-on-catalyst is to be taxed at the same value as natural gas based on the Department's Regulation 4301, which provides that [t]he reasonable market value of tangible personal property is the amount a willing seller would receive from a willing buyer in an arms-length transaction of similar property at or near the location of the property being valued.  The Department presented evidence that both coke-on-catalyst and natural gas provide heat to the reactor in the catalytic cracking unit. The Department claims that this makes natural gas similar property at or near the location of the property being valued. Star and BP claim that Regulation 4301 is invalid under La. R.S. 47:1510 [12] as it is inconsistent with La. R.S. 47:301(3)(a), which defines cost price according to the reasonable market value of the actual tangible personal property at the time it becomes susceptible to the use tax, not similar property. Star and BP claim that coke-on-catalyst has no reasonable market value, and that in any event, it is not at all similar to natural gas. The catalytic cracker is designed to consume the coke-on-catalyst within minutes of its production and burning the coke off the catalyst is the only economically feasible method of separating the coke from the catalyst, therefore there is no third-party market for coke-on-catalyst. The Department claims that a use tax is nonetheless owed by a manufacturer who produces and consumes its own product in Louisiana. This is based on La. R.S. 47:301(4) which defines a dealer to include every person who manufactures or produces tangible personal property for sale at retail, for use, or consumption, or distribution, or for storage to be used or consumed in this state.... The Department Regulation explaining dealer, LAC 61:61:4301.4, para. 3 provides: Rev. Stat. 47:301(4) includes a dealer every person who manufactures or produces tangible personal property for sale at retail, use, consumption, distribution or for storage to be used or consumed in this state. Thus, the firm which manufactures or produces a product used or consumed by it in the conduct of its business becomes a dealer for sales and use tax purposes, even though none of that particular product is offered for sale. We agree with the Department's argument that no third-party sale is necessary to determine cost price under the statute. As we held in BP Oil I, [i]f BP had taken a refined product that it otherwise would have sold and used the product as fuel in the refining process, then the use of that product certainly would have been taxable. We see no reason for different treatment of BP's use of a refinery by-product as fuel in the refining process. BP Oil I, supra at 1330-1331, n. 12. However, the statute does require that the property have a reasonable market value and the Department produced no evidence of the reasonable market value of coke-on-catalyst. In addition, in BP Oil I, we rejected using the cost price of the raw material, crude oil, for use tax purposes, which would be greater than a reasonable market value of zero in any event. To the extent that the tax regulation attempts to tax tangible personal property based on the value of similar property, that regulation is inconsistent with La. R.S. 47:301 and thus invalid under La. R.S. 47:1511. Furthermore, use tax and sales tax are complimentary in that property sold or used must be subject to a uniform tax burden. See Pensacola Const. Co. v. McNamara, 558 So.2d 231 (La.1990). If the coke-on-catalyst could be sold, it would be taxed based on its sales price, not the sales price of natural gas. As stated by the court of appeal in Star, [i]n order to tax Star Enterprises' use of coke-on-catalyst the legislature must enact additional legislation. Coke-on-catalyst is beyond the reach of market value taxation because it has no market value. Star, supra at p. 16, ___ So.2d ___. Instead of enacting additional legislation to tax coke-on-catalyst, the legislature enacted La. R.S. 47:301(18)(d)(ii) by Act 29 of the 1996 Regular Session which excludes coke-on-catalyst from use taxes. If the coke-on-catalyst is actually sold to another person, it is to be taxed according to a method provided in La. R.S. 47:301(13)(d). Accordingly, we affirm the court of appeal's holding in Star that coke-on-catalyst is not subject to use taxes because it has no reasonable market value. We likewise reverse the court of appeal's holding in BP, which has since been overruled by the court of appeal in Star [13] , that coke-on-catalyst be taxed at the same value as natural gas.