Mallard Bay Drilling, Inc. v. Kennedy

• Decision Date: 29 November 2005
• Docket Number: No. 2004-C-1089.,2004-C-1089.
• Citation: 914 So.2d 533
• Parties: MALLARD BAY DRILLING, INC. v. John Neely KENNEDY, Secretary of Department of Revenue, State of Louisiana.
• Court: Louisiana Supreme Court

Page 533

914 So.2d 533

MALLARD BAY DRILLING, INC. v. John Neely KENNEDY, Secretary of Department of Revenue, State of Louisiana.

No. 2004-C-1089.

Supreme Court of Louisiana.

June 29, 2005.

Rehearing Denied November 29, 2005.

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Charles C. Foti, Jr., Attorney General, Geneva Landrum, Assistant Attorney General, Frederick Mulhearn, Assistant Attorney General, Emily W. Toler, Assistant Attorney General, Alva Smith, Assistant Attorney General, Counsel for Applicant.

Stephen Hawley Myers, LLC, Stephen H. Myers, Lafayette, LA, Richard H. Morgan, Counsel for Respondent.

Andrew A. Lemmon, Hahnville, LA, Counsel for St. Charles Parish School Board (Amicus Curiae).

Patrick Michael Amedee, Metairie, LA, Counsel for Lafourche Parish School Board (Amicus Curiae).

Robert R. Rainer, Baton Rouge, LA, Counsel for Iberia Parish School Board through Sales and Use Tax Department, Lafayette Parish School Board through Sales Tax Division, Pointe Coupee Parish

Police Jury through Sales and Tax Department, St. Mary Parish Council through Sales and Use Tax Department, and West Baton Rouge Parish Revenue Department (Amicus Curiae).

KIMBALL, Justice.

This case involves the procedural issue of whether the legislature's enactment of Act No. 40 of 2002, which amended La. R.S. 47:305.1 and purported to explain and clarify its original intent notwithstanding this court's contrary interpretation in Archer Daniels Midland Co. v. Parish School Bd. of Parish of St. Charles, 01-0511 (La.11/28/01), 802 So.2d 1270, can be applied retroactively. Finding that retroactive application of the Act is in violation of the principles of separation of power, we hold that the Act can be applied prospectively only. This case also involves issues relating to the imposition of sales taxes on diesel fuel sold, delivered, and consumed in Louisiana by drilling barges in the course of their offshore drilling activities. For the reasons that follow, we conclude that the taxpayer is not entitled to the sales tax exemption provided by La. R.S. 47:305.1(B), which provides a tax exemption under certain circumstances to owners or operators of ships or vessels operating exclusively in foreign or interstate coastwise commerce, because it is not the owner or operator of a "ship or vessel." Furthermore, we conclude the imposition of the taxes at issue is not prohibited by La. R.S. 47:305(E) because the sales taxes were levied on fuel consumed in the state. Finally, we conclude that the imposition of the sales taxes does not unconstitutionally burden the Commerce Clause of the U.S. Constitution.

Facts and Procedural History

Mallard Bay Drilling, Inc. (hereinafter "Mallard") is engaged in the business of drilling oil and gas wells along the Gulf Coast. Essentially, Mallard has drilling barges¹ for hire wherever the job is to be performed. Mallard's barges stay at the drilling location until a platform and production equipment can be set in place. The barges do not power themselves from place to place, but instead are towed and put in place by tugboats.

In the course of its business operations from January 1, 1993, through December 31, 1995, Mallard purchased diesel fuel to power its drilling barges while they were employed in drilling operations. This diesel fuel was purchased by Mallard, delivered to the drilling location by barge, offloaded onto Mallard's drilling barge, and consumed there in the process of its drilling operations. Mallard was charged, and subsequently paid, sales taxes on its purchases of this diesel fuel.

In June 1996, Mallard filed a Claim for Refund of Taxes Paid with the Sales Tax Division of the Department of Revenue (hereinafter "DOR") in which it requested a refund in the amount of $238,442.08 for the tax period January 1, 1993, through December 31, 1995. Mallard stated the following reason for the claim: "Tax paid on purchases of diesel fuel used for production of motive power on Mallard Bay Drilling's drilling barges as per attached schedules." After reviewing the refund claim, the DOR denied Mallard's request, concluding that "the diesel fuel used was for vessels that were operated in state waters."

Subsequently, Mallard filed with the Board of Tax Appeals (hereinafter "the Board") a Petition for Redetermination of Sales and Use Tax Assessment protesting the denial of its refund claim. In its petition, Mallard asserted it was entitled to the exemption from sales and use taxes provided in La. R.S. 47:305.1(B), which grants an exemption from certain taxes levied on materials and supplies purchased by the owners or operators of ships or vessels operating exclusively in foreign or interstate coastwise commerce, where such materials and supplies are loaded upon the ship or vessel for use or consumption in the maintenance and operations thereof. A hearing was held before the Board on November 14, 2000, after which the Board denied Mallard's request for a refund, stating in part:

The factual situation as the Board has determined, after listening to the evidence, is that we have diesel fuel that was delivered in the State of Louisiana to the taxpayer's drilling barges, drilling rigs. The Board finds that it was not only delivered in Louisiana, it was consumed in Louisiana and was a Louisiana sale.

The Board also rejected Mallard's contention that the imposition of taxes would impermissibly burden interstate commerce, concluding that the drilling barges consumed the fuel when they were either in Louisiana or within the three-mile limit.

Following the Board's ruling, Mallard filed a petition to review the Board's decision in the district court. On August 26, 2003, the district court issued a judgment granting the refund requested by Mallard. In reaching its decision, the district court concluded that Mallard's intrastate activities qualified as interstate commerce, and the imposition of the tax would unduly burden interstate commerce. Accordingly, the district court awarded Mallard a refund in the amount of $238,442.08.

Subsequently, the DOR appealed, and the court of appeal affirmed the judgment of the district court. Mallard Bay Drilling, Inc. v. Kennedy, 03-1495 (La.App. 3 Cir. 3/31/04), 869 So.2d 954. The court of appeal reasoned that under the definition of "foreign or interstate coastwise commerce" provided by La. R.S. 47:305.1, as amended in 2002, Mallard's actions satisfied the requirements for the exemption, despite the fact that its barges did not always cross state borders. In explaining its conclusion, the court of appeal stated:

The actions taken by Mallard Bay are part of a stream of commerce terminating outside the borders of Louisiana. Mallard Bay's vessels are towed from place to place to drill for oil. The vessels also act as a temporary platform to secure the oil or gas produced once drilling operations are completed. Once the well site is secure, the vessels are moved off to a different location, with the oil shipped to refineries, primarily in Louisiana and Texas. Once refined, the oil and gas continues in interstate commerce to be consumed virtually anywhere. The flow of gas [oil] from the wellhead to the ultimate consumer is nothing other than interstate commerce.

Id., 03-1495 at p. 4, 869 So.2d at 957 (citation omitted). Based on this reasoning, the court of appeal found no error in the district court's opinion and, consequently, affirmed its judgment.

Upon the application of the DOR, this court issued an order granting certiorari to consider the correctness of the court of appeal's judgment. Mallard Bay Drilling, Inc. v. Kennedy, 04-1089 (La.9/3/04), 882 So.2d 544.

Discussion

Pursuant to statutory authority, the state imposes a tax upon the sale at retail, the use, the consumption, the distribution and the storage for use or consumption in this state, of each item or article of tangible personal property. La. R.S. 47:302(A). Diesel fuel is "tangible personal property" as defined by tax law. La. R.S. 47:301(16)(a). The legislature has provided several exclusions and exemptions from sales taxes that would otherwise be due under the law. At issue in this case is the exemption provided by La. R.S. 47:305.1(B). At the time Mallard purchased the diesel fuel at issue, La. R.S. 47:305.1(B) provided in pertinent part:

The taxes imposed by R.S. 47:302 and R.S. 47:321[²] shall not apply to materials and supplies purchased by the owners or operators of ships or vessels operating exclusively in foreign or interstate coastwise commerce, where such materials and supplies are loaded upon the ship or vessel for use or consumption in the maintenance and operation thereof. . . .

In November 2001, while the instant matter was pending in the district court, this court rendered an opinion in Archer Daniels Midland Co. v. Parish School Bd. of Parish of St. Charles, 01-0511 (La.11/28/01), 802 So.2d 1270, wherein we interpreted the phrase "exclusively in foreign or interstate coastwise commerce" as used in the exemption at issue. In that case, tugboat operators filed suit to recover parish sales taxes paid on fuel purchased and used to operate their tugboats. The tugboats were used to break up tows of river barges and to shift the barges to a fleeting area along the Mississippi River for safekeeping until the barges were ready to be unloaded. Once the barges were ready for unloading, the tugboats shifted the barge from the fleeting area to the unloading area. After the barges were unloaded, the tugboats again shifted the barges back to the fleeting area until they were picked up for transport back up river. The parties in the case stipulated that the tugboats never left the waters of St. Charles Parish while performing these fleeting and shifting services.

Because the parish ordinance granting the exemption at issue was modeled on La. R.S. 47:305.1(B) and incorporated the interpretation of the state sales tax exemption, this court was required to interpret La. R.S. 47:305.1(B)...