In re Willow Bend Ventures, L.L.C.

• Citation: 589 B.R. 276
• Decision Date: 19 June 2018
• Docket Number: CASE NO. 17-11178
• Parties: IN RE: WILLOW BEND VENTURES, L.L.C., Debtor
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Eastern District of Louisiana

589 B.R. 276

IN RE: WILLOW BEND VENTURES, L.L.C., Debtor

CASE NO. 17-11178

United States Bankruptcy Court, E.D. Louisiana.

Signed June 19, 2018

Amanda Burnette George, Office of the U.S. Trustee, Cheryl Mollere Kornick, c/o Liskow & Lewis, New Orleans, LA, Phillip K. Wallace, Mandeville, LA, for Debtor.

SECTION A

MEMORANDUM OPINION

Hon. Elizabeth W. Magner, U.S. Bankruptcy Judge

Willow Bend Ventures, L.L.C. ("Debtor") filed Objections to Proofs of Claim 4 and 5 filed by the Louisiana Department of Revenue ("LDR"). P-53 and 55. Cross Motions for Partial Summary Judgment filed by Debtor and LDR came before the Court on May 29, 2018. P-214 and 216.

I. Summary Judgment Standard

Summary Judgment is proper when no genuine issues of material fact exist, and the moving party is entitled to judgment as a matter of law. Hassan v. Lubbock Independent School District , 55 F.3d 1075, 1079 (5th Cir. 1995) ; F.R.C.P. 56(c) ; F.R.B.P. 7056(c). The Court must view the evidence introduced and all factual inferences in the light most favorable to the party opposing summary judgment. Hightower v. Texas Hospital Ass'n, 65 F.3d 443, 447 (5th Cir. 1995). The movant bears the burden of proving an absence of a genuine issue of material fact. Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). "An issue is material if its resolution could affect the outcome of the action." Weeks Marine, Inc. v. Fireman's Fund Insurance Co. , 340 F.3d 233, 235 (5th Cir. 2003).

II. Undisputed Facts

By stipulation, Debtor and LDR have agreed to the following facts:

Debtor owns and operates a clay pit located in Edgard, Louisiana. P-221, ¶ 3. Debtor's primary business is the sale of dirt, clay, fill, and other aggregate materials to contractors. Id. at ¶ 2. Debtor excavates clay and then processes it to the moisture content prescribed by its customers. Id. at ¶ 4.

Debtor did not file Louisiana sales and use tax returns for the period of January 31, 2009, to June 30, 2012. Id. at ¶ 16. LDR performed audits of Debtor's sales and use tax liability for the tax periods January 31, 2009, through June 30, 2012, and January 1, 2014, through April 30, 2017. (Collectively "Taxable Periods") Id. at ¶ 6.

As a result of the audits, LDR assessed sales and use taxes for the Taxable Periods in the amounts contained in proofs of claim nos. 4 and 5 as amended. Id at ¶ 7, 8, and 9.

On December 30, 2013, LDR filed suit against Debtor in state court for sales and use taxes assessed from January 31, 2009, to June 30, 2012. The suit sought taxes, penalties, and interest in the total amount of $1,109,643.21, plus post-petition interest. P-221, Exh. 9. The suit is still pending.

On May 9, 2017, Debtor filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code, and LDR's state suit against Debtor was stayed.

Proof of claim 4 as amended seeks taxes for the period of January 31, 2014, through March 31, 2017, of $55,047.31; $4,163.96: and $25,179.36 in penalties. See Amended Proof of Claim 4-5, P-221, Exh. 2.

Proof of Claim 5 as amended seeks sales taxes of $760,334.55; interest of $320,851.68; and penalties of $228,114.96. It also requests an unsecured claim of $32,905.12, comprised of use taxes equal to $19,169.09; interest of $7,975.09; and penalties of $5,760.94. P-221, Exh. 3.

Debtor Objected to Claims 4 and 5 as amended. P-53 and 55. The parties filed the instant Cross Motions for Partial Summary Judgment.

After the parties filed their Cross Motions for Summary Judgment, LDR filed Amended Claim 5-3 asserting a claim of $1,077,786.89 and a second, unsecured claim of $316,778.36 or $760,334.55 in taxes; $317,452.34 in interest through April 24, 2018; and $228,125.18 in penalties through April 24, 2018.

III. Law and Analysis

The parties seek partial summary judgment on five (5) disputed legal issues:

1) The standard of construction for La.R.S. 47:301(10)(g) ;

2) The burden of proving application of La. R.S. 47:301(10)(g) ;

3) The inclusion of freight charges in the "sales price" under La. R.S. 47:301(13)(a) ;

4) The burden of proving an illegal tax; and

5) Liability for uncollected sales taxes.

A. The Standard of Construction for La. R.S. 47:301(10)(g)

The proper construction of La. R.S. 47:301(10)(g) depends in large part on whether the provision is an exemption or exclusion. The Louisiana Supreme Court in Bridges v. Nelson Industrial Steam Co. , 2015-1439 (La. 5/3/16), 190 So.3d 276, explained the difference:

According to the leading Louisiana sales tax treatise, a "tax exemption is a provision that exempts from tax a transaction that would, in the absence of the exemption, otherwise be subject to tax. That is, there has been a statutory decision not to tax a certain transaction that is clearly within the ambit and authority of the taxing statutes to tax." Bruce J. Oreck, Louisiana Sales & Use Taxation (2d ed. 1996), § 3.1. An exclusion, on the other hand, "relates to a transaction that is not taxable because it falls outside the scope of the statute giving rise to the tax, ab inito . Transactions excluded from the tax are those which, by the language of the statutes, are defined as beyond the reach of the tax." Id. Oreck's definitions have been widely adopted by Louisiana courts....

Tax exemptions are strictly construed in favor of the State and "must be clearly and unequivocally and affirmatively established" by the taxpayer. Vulcan Foundry, Inc. v. McNamara , 414 So.2d 1193, 1197 (La. 1982). Exclusions, on the other hand, are "construed liberally in favor of the taxpayers and against the taxing authority." Wyesco of Louisiana L.L.C. v. East Feliciana Parish School Board , 2000-1322, p 5 (La.App. 1 Cir. 9/28/01), 809 So.2d 401, 404, citing Tarver v. World Ship Supply, Inc. , 615 So.2d 423, 426 (La.App. 4 Cir. 1993), writ denied , 616 So.2d 672 (La. 1993).

Id. at 280 (quoting Harrah's Bossier City Inv. Co., LLC v. Bridges , 2009-1916, pp. 9-10 (La. 5/11/10), 41 So.3d 438, 446 ).

LDR argues that because Louisiana could have taxed these transactions, their elimination under subsection 10(g) is an exemption from taxation. Debtor argues that the provision excludes the transactions.

Based on existing jurisprudence, the State might have taxed the transactions in question. However, it clearly elected to forebear from this option. By narrowly defining "retail sale," the State excluded sales of movables intended for resale to the United States government. The transaction was removed from taxation ab initio because the tax is only imposed on retail sales. For this reason, the Court finds that the provisions of La. R.S. 47:301(10)(g) are exclusions to be construed liberally in favor of Debtor.

LDR cites as authority for its position Bridges v. Cepolk Corp. , 2013-01051 (La.App. 3 Cir. 2/12/14), 153 So.3d 1137. In Cepolk , a heating and air conditioning contractor for the United States military ("Cepolk") installed heating and air conditioning systems at Fort Polk and continued to maintain those systems after installation. Cepolk claimed that equipment and materials used in the maintenance of the systems were not subject to taxation because they was purchased with the intent to resell to the United States. LDR argued that the contract was for construction and the materials or equipment were not for resale but instead consumed in connection with the services and labor provided. Ultimately, the Circuit Court agreed, finding that the taxpayer was a contractor and the tangible property it used in connection with its services was not acquired for resale but consumed as part of its construction services. In its opinion, the Court referred to La. R.S. 47:301(10)(g) as an "exemption" from taxation.

The Cepolk decision turned on Cepolk's status either as a contractor under La. R.S. 47:301(10)(a)(i) or a dealer under La. R.S. 47:314. If Cepolk was a contractor, the movables used in the services it provided were consumed rather than sold.¹ If it were a dealer the movables might be subject to resale. Only if Cepolk were a dealer, would 47:301(10)(g) apply. Because the Court found Cepolk was a contractor consuming movables in connection with its services, the application of La. R.S. 47:301(10)(g) ceased to be relevant to the decision. Therefore, any references to La. R.S. 47:301(10)(g)'s character as an exemption versus exclusion cannot be considered part of the Court's holding nor are they persuasive.

In Odebrecht Construction Inc. v. Department of Revenue , 2015-0013 (La.App. 1 Cir. 9/18/15), 182 So.3d 132, a case factually close to the one at hand, the First Circuit reviewed an appeal from the Louisiana Board of Tax Appeal. The case involved a subcontractor for the Corps of Engineers ("Corps"). The subcontractor claimed that purchases of clay were excluded from sales tax under La. R.S. 47:301(10)(g). There was no question that the purchases involved movables and that title to them passed to the Corps on delivery by the taxpayer. The question before the Court was whether or not the subsection was an exemption or exclusion. The Board of Tax Appeal held:

[Section] 301(10) involves the definition of a retail sale and paragraph (g) specifically defines a category of transactions that are not included within the definition of "sale at retail." This paragraph operates as [an] exclusion not as a tax exemption. Since the subsection at issue is an ‘exclusion’ and not a tax exemption, therefore any question about the applicability of the exclusion must be resolved in favor of the Taxpayer.

Id. at 136.

The First Circuit agreed finding:

La. R.S. 47:301(10)(g) expressly defines a category of transaction that are not included within the definition of a "sale at retail," i.e. the sale of moveable property intended for future sale to the United States government with title to such property is transferred to the United States government prior to the incorporation of that property into a final product. The Department's argument that Section 47:301(10)(g) is an exemption cannot be reconciled

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