Opinion ID: 1114341
Heading Depth: 1
Heading Rank: 4

Heading: The Reprocessing Exclusion

Text: BP contends that refinery gas and coke-on-catalyst are excluded from use tax by La.Rev.Stat. 47:301(10)(c), which limits the definition of retail sale or sale at retail contained in La.Rev.Stat. 47:301(10)(a) as follows: [8] (c) The term sale at retail does not include sale of materials for further processing into articles of tangible personal property for sale at retail.... [9] The reprocessing exclusion was designed to eliminate the tax on the sale of a material purchased for further processing into finished products and to place the tax on the ultimate consumer of the finished product processed from the raw material. Arguing that the decision in Vulcan Refinery, Inc. v. McNamara, 414 So.2d 1193 (La.1982), [10] makes this an all-or-nothing exclusion based on the primary purpose of the purchase, BP asserts that it purchased crude oil for the primary purpose of further processing the raw material into finished products (such as gasoline) for retail sale. BP therefore argues that the reprocessing exclusion applies not only to the sale of crude oil, but also to the use of refinery gas and coke-on-catalyst which are parts of the raw material that remain after the refining. When BP purchases crude oil as the raw material for the refinery, the event is exempt from sales tax because the crude oil is purchased for reprocessing into objects for sale at retail, such as gasoline and diesel oil. If a small portion of the crude oil were used by BP for some purpose in the refining process other than reprocessing into products for sale at retail, that portion of the crude oil arguably would not be taxable under the all-or-nothing theory urged by BP. However, it is not necessary to decide that question, because refinery gas and coke-on-catalyst are not part of the crude oil, but rather are by-products of the refining of crude oil into finished products. BP misdirects its focus on the use of the crude oil and not on the sale or use of the products and by-products of the refining of the crude oil. The focus must be on the use of the personal property sought to be excluded from taxation, rather than on the raw material which produces the personal property as a by-product of the refining process. Although the crude oil was purchased for further processing into articles of tangible personal property for sale at retail, the use of the by-products of the processing is the event sought to be taxed in this case. [11] The refinery gas and coke-on-catalyst, once separated from the raw material, were not further processed into an end product for sale at retail. They were simply used in the processing of additional raw materials into finished products. The reprocessing exclusion was designed to place the tax on the ultimate consumer, and BP was the ultimate consumer of the refinery gas and the coke-on-catalyst. BP is seeking to avoid tax on the use of a by-product from the refining of crude oil, a by-product which BP ultimately consumed, while the ultimate consumer of the gasoline and other products of the refining of crude oil will pay sales tax on the purchase of those products. The by-products, moreover, did not become a recognizable and beneficial part of any finished product. See Traigle v. PPG Industries, Inc., 332 So.2d 777 (La.1976). We conclude that the reprocessing exclusion does not apply to BP's use of a by-product of the refining process which BP ultimately consumed as an energy source, any more than it would apply if BP purchased another energy source for the same use or if BP used one of its refined petroleum products for the same purpose that it uses refinery gas and coke-on-catalyst. [12] Accordingly, we affirm the portion of the judgment of the trial court which denied BP the reprocessing exemption.