Opinion ID: 1728912
Heading Depth: 1
Heading Rank: 3

Heading: Component Parts Exemption

Text: The sole dispute is whether the items of gaming equipment, acquired by plaintiffs to outfit the vessel for riverboat gaming operations, qualifies as component parts of the vessel under La.Rev.Stat. 47:305.1A. This statute provides an exemption from sales tax for sales of materials, equipment, and machinery which enter into and become component parts of ships, vessels, or barges. (emphasis added). The statute, however, does not define component parts. Because component parts are not defined in the exemption statute, plaintiffs contend that the courts should apply La. Civ.Code art. 11, which mandates that words should be given their generally prevailing meaning. Plaintiffs argue that, in the absence of a statutory definition, component parts of vessels should be defined by reference to the codal definition of a component part of a building or other structure set forth in La.Civ.Code art. 466. Article 466, pertaining to component parts of immovables, arguably is susceptible of application to some movables by analogy. See 2 A.N. Yiannopoulos, Louisiana Civil Law Treatise: Property § 32 (1991). Article 466 provides: Things permanently attached to a building or other construction, such as plumbing, heating, cooling, electrical or other installations, are its component parts. Things are considered permanently attached if they cannot be removed without substantial damage to themselves or to the immovable to which they are attached. (emphasis added). The judicial interpretations of Article 466 have not been consistent, but the courts generally have applied a societal expectations analysis. [4] In the present case, plaintiffs, invoking the societal expectations analysis, argue that the gaming equipment, like the chandeliers in Equibank (discussed in footnote 4), is something one would reasonably expect to see when they enter a gaming riverboat. Relying on that analysis, plaintiffs argue that the ability to remove the slot machines without damage to them or the vessel is irrelevant. [5] Even under the societal expectation analysis, plaintiffs' argument is flawed. The pertinent sales tax exemption was designed to protect the shipyard industry, not the gaming industry. [6] When the analysis is properly focused on the shipyard industry, the relevant inquiry is not whether society expects to see gaming equipment when it enters a riverboat operated for gaming purposes, but whether society expects to see such equipment when it enters a vessel. [7] Significantly, the shipyard construction contract involving the vessel at issue did not mention gaming equipment. Moreover, gaming equipment is customarily moved around the vessel to keep customer interest. Finally, under the customs and practices of the shipyard industry developed in this record, shipbuilding contracts do not include such equipment. [8] We therefore conclude that the average prudent business entity buying a vessel would not expect, in the absence of specific contractual provisions to the contrary, gaming equipment to be permanently attached to the vessel when the buyer took possession. See Coulter v. Texaco, Inc., 117 F.3d 909, 916 (5th Cir.1997)(using this type of analysis to conclude drilling rig was not component part of platform). The trial court in the present case expressed similar reasons, stating: [T]he statute was enacted to aid the ship building industry in Louisiana and not put it at a disadvantage with regard to neighboring states and thereby exempt sales tax on vessels and component parts to those vessels. Obviously, at the time that statute was enacted, the gaming industry was not even envisioned by the Legislature.... But I find that slot machines, the stands, the roulette wheels, the signs, and the surveillance system are not component parts of the vessel. It is not what this statute was intended to protect. Moreover, as to the permanent attachment standard of the second paragraph of Article 466, the Department's expert marine surveyor identified four reasons why the gaming equipment would not qualify for the exemption: The gaming equipment is not a part of a traditional shipyard contract. It's not part of any of the contracts that I have reviewed for gaming vessels. Secondly, it'sthe equipment is not required for the navigation of the vessel. Thirdly, it's not permanently installed. And fourth, it can be and is regularly moved, rearranged, changed. (emphasis added). [9] The expert noted that the slot machines are bolted down for security reasonsto prevent them from easily tilting over when the vessel is moving. The slot machines, however, are not permanently installed, and are connected to the electrical system in the same way one plugs a lamp at home into an electrical outlet. Removing the slot machines involves merely unplugging the power cord, undoing three or four bolts, and lifting the machine. Finally, he observed that the slot machines can be and are regularly moved to maintain customer interest. As to the cabinets on which the slot machines are placed, the expert noted the primary purpose of the cabinet was to get the slot machines off the floor to patron level, with a secondary purpose to provide a means to bolt the slot machines to the vessel and to allow for rearrangement of the machines. Tax exemptions, being an exceptional privilege, must be expressly and clearly conferred in plain terms, and accordingly are strictly construed against the taxpayer. McNamara v. Central Marine Serv., Inc., 507 So.2d 207, 208 (La.1987). This rule of strict construction, coupled with the policy reasons behind the exemption at issue, lead us to conclude that the trial court did not err in concluding that plaintiffs failed to meet their burden of establishing the slot machines, cabinets, and roulette wheels were not component parts. The slot machines were not permanently installed, i.e., their removal would not result in damage to the vessel or to the equipment itself, and they in fact were rearranged often. The machines could be removed simply by unplugging and unbolting them. Thus, we find no merit to plaintiffs' argument that these items constitute component parts. As to the remaining items, we remand to the trial court for a determination as to whether the signs and surveillance systems constitute component parts when individually analyzed and thus fall within the exemption, an issue the lower courts did not fully analyze. [10]