La. Dep't of Revenue v. Apeck Constr., Inc.

Citation: 238 So. 3d 1045Docket: 2017–738

Court: Louisiana Court of Appeal; February 27, 2018; Louisiana; State Appellate Court

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The trial court determined that the Louisiana Department of Revenue (LDR) did not demonstrate that Apeck Construction, LLC (AC) owed taxes on materials purchased for resale or on freight charges related to aggregate imports. LDR had conducted a sales and use tax audit of AC for the period from January 1, 2007, to December 31, 2009, initially assessing taxes on multiple issues, but only three schedules remained contested: Schedules 2, 5, and 6a. Schedule 2 involved materials for projects with Graybar Electrical Company, where AC invoiced separately for materials and labor, supported by tax exemption certificates from Graybar. The trial court found that these purchases constituted sales for resale, making them non-taxable. Schedule 6a presented similar non-Graybar issues, while Schedule 5 consisted of railroad leasing charges for transporting aggregates, which were also determined non-taxable. The trial court ruled that LDR failed to prove tax liability for these schedules and denied the tax claims. LDR appealed, raising five assignments of error, including the alleged misinterpretation of contract provisions regarding title transfer and the application of equitable estoppel based on reliance on Graybar’s exemption certificates.

The trial court erred in determining that La. R.S. 47:305.50's exception regarding railcar leases excluded the costs incurred by Apeck Aggregate Supply, LLC and Williams Supply, LLC from the taxable sales price, despite these costs being included in total charges for aggregate. Additionally, the court incorrectly ruled that the Department's established definition of 'sales price' in LAC 61:I.4301 was invalid; this definition states that costs incurred by the vendor to deliver a product to market, including freight or shipping, are part of the taxable sales price. 

Assignments of Error Numbers One, Two, and Three concern the Louisiana Department of Revenue's (LDR) claims for use taxes owed by AC for materials consumed in various projects. The LDR assessed taxes on materials used for projects with Graybar, detailed in Schedule 2, and similar issues in Schedule 6a related to purchases not involving Graybar. AC contends that ownership of these materials transferred before installation, qualifying them as sales for resale. AC also claims detrimental reliance on an exemption certificate from Graybar. 

The burden of proof for tax liability lies with the LDR. In reviewing contracts, factual findings are only disturbed under manifest error, while legal interpretations are independently assessed. Contract interpretation should reflect the parties' reasonable intentions, derived from the explicit language of the contract. Clear and unambiguous terms should not be altered, and courts should avoid interpretations that lead to absurd outcomes. Each contract provision must be understood in relation to the entire contract to ensure effectiveness.

LDR claims that the trial court erred by incorporating terms from Graybar's contract with the U.S. Government into the contracts between AC and Graybar concerning property title transfer, asserting that the Government was not a party to those contracts and that its provisions contradicted the agreements between AC and Graybar. LDR further argues that the court mistakenly concluded that title to the tangible personal property transferred from AC to Graybar upon delivery to Fort Polk. Additionally, LDR contends that the trial court incorrectly applied equitable estoppel by ruling that AC reasonably relied on resale and blanket exemption certificates from Graybar, which precluded AC from being assessed use tax for its purchases.

In response to LDR's claim about the incorporation of the Government's contract, it was noted that the contracts between AC and Graybar referenced the DLA Subcontract Agreement with the Government, which was included as an exhibit. The trial court did not replace or incorporate the Government's contract into AC and Graybar's agreement but used its language to assess LDR's burden of proof regarding tax liability. LDR also argues that the AC-Graybar contract indicated ownership remained with AC until installation, based on payment timing; however, there was no explicit language in the contract addressing ownership transfer. Testimony from AC's owner indicated that the custom was to treat these jobs as tax-exempt, with Graybar providing tax-exempt certificates and not charging taxes on proposals.

Delivery tickets were consistently involved in projects, with copies provided to a Government inspector upon delivery. Payments for projects were made on a monthly basis, allowing for partial payments based on the materials delivered, contrary to claims that payment occurred only post-final acceptance. The contract between AC and Graybar does not specify ownership of property after delivery but references a contract with the Government that stipulates risk of loss remains with the contractor until delivery to the carrier or the Government. This indicates that once property was delivered, the risk of loss transferred from AC. The trial court found that LDR did not prove its case against AC, affirming the correctness of its judgment regarding AC's transactions with Graybar, which also made further discussions about AC's reliance on Graybar's exemption certificate unnecessary. 

Regarding Schedule 6a, LDR did not present specific assignments of error, and AC's arguments were minimal, linking issues to Schedule 2. LDR contended that AC failed to counter its testimony about Schedule 6a transactions, claiming that the trial court's decision was erroneous. Testimony from a revenue tax auditor indicated that AC did not pay sales or use tax on certain materials, including concrete sand and hot mix, which were relevant to the transactions under examination.

Mr. Arthur Champ III, assistant tax director for audit review at LDR, corroborated Ms. Kotynia's testimony regarding the lease of a dirt pit, confirming that related items were excluded from Schedule 6a. The remaining items pertained to miscellaneous construction materials from vendors including EARL DOWDEN DIRT PIT, INV: COMMERCIAL BASE TO JOB, TXI, PRAIRIE CONTRACTORS, INC., and M. W TANK CONSTRUCTION CO., none of which had exemption certificates on record. Consequently, the trial court's finding that LDR failed to demonstrate AC owed taxes under Schedule 6a was deemed manifestly erroneous, leading to a reversal of the judgment, except concerning two transactions associated with Graybar.

LDR's two assignments of error challenged the trial court's ruling on freight costs. The first argued legal error in applying La. R.S. 47:305.50, which excluded railcar transportation costs from the taxable sales price invoiced to AC. The second contended that the court incorrectly invalidated LDR’s longstanding definition of 'sales price' as per LA.ADMIN.CODE tit. 61, pt. I. 4301, which includes vendor costs to deliver products to market in the taxable sales price. These assignments of error raise legal questions reviewed de novo, with appellate courts assessing the legal correctness of the lower court's decisions. Tax exemptions are interpreted strictly in favor of the state, whereas exclusions are construed liberally for taxpayers.

Louisiana Revised Statutes 47:305.50(E)(1) exempts rail rolling stock from state and local sales and use tax. The trial court ruled that freight charges are not taxable, and the cost of leasing railcars for transporting aggregate from Texas to AA or Williams Equipment is also not subject to tax. The central issue is whether this leasing cost became taxable when passed to AC. The Louisiana Department of Revenue (LDR) contends that these costs should be considered part of the overhead and thus included in the taxable "sales price," as defined by La.R.S. 47:301(13)(a), which encompasses all amounts associated with tangible personal property sales, excluding specific exemptions. 

LDR's longstanding definition of "sales price" includes costs incurred by the vendor to market the product, which could render freight costs taxable even if billed separately. However, the fourth circuit court in a previous case (Pontchartrain Materials Corp. v. Plaquemines Parish Government) concluded that freight charges do not form part of the taxable sales price, citing the statutory language. The LDR's argument that freight costs constitute overhead is not supported by legislative authority or jurisprudence. The court emphasized that the burden of proof lies with the LDR, which failed to demonstrate that the taxpayer owed any tax. Consequently, the court upheld the trial court's judgment affirming that Apeck Construction, LLC owed no tax on freight, while reversing the judgment regarding Schedule 6a, imposing costs of $3,687.11 against the LDR. The final decision was to affirm in part and reverse in part.