Louisiana Court of Appeals: Limestone Used in the Production of Electricity Does Not Qualify for "Further Processing" Exemption

Nov 14th, 2012

The Louisiana Court of Appeals held that sales of limestone and sand used to produce electricity for resale did not qualify for the "further processing" exemption. Bridges v. Nelson Indus. Steam Co., ___ So.3d ___ Case No. CA-12-477 (La. App. 3d Cir. Nov. 17, 2012).

The taxpayer in this case, Nelson Industrial Steam Company (NISCO), makes electricity using Circulating Fluidized Boiler (CFB) technology which, in turn, relies on petroleum coke for fuel. NISCO purchased and used limestone in the CFB to control the sulfur emissions from the petroleum coke. And, during this process, the limestone turned to ash. NISCO could not make the electricity without the limestone, and NISCO later sold this ash to others. NISCO also purchased and used sand to prevent clogging in its CFB.

NISCO argued that it did not owe tax on its purchases of sand and limestone because it bought them for further processing. The state disagreed. Louisiana exempts from sales tax the purchase of materials for further processing into articles of personal property for sale at retail. This exemption requires three things. First, the materials must be beneficial to the end product. Second, the materials must become recognizable and identifiable components of the end product. Third, the taxpayer must buy the materials with the purpose of including them in the end product.

The court examined NISCO's purchases of limestone and sand to understand its purpose for buying them. NISCO had no option but to use limestone, and the court saw that the sand was also necessary to NISCO's process. In fact, NISCO's stated purpose for buying the limestone and sand was to use them to make electricity. NISCO spent $33 million on limestone, yet it sold the ash for only $5 million. From this, the court reasoned that the NISCO's purpose for buying the limestone and sand was to make electricity, not to reprocess them into ash for resale. Thus, the court concluded that NISCO could not claim the "further processing" exemption for its purchase of limestone and sand.

Because the "further processing" exemption did not apply, NISCO owed tax on its purchases of limestone and sand.