Which purchases qualified for Louisiana's construction exemption for vessels of at least 50 tons after the Showboat Star decision?

Plain-English summary

Louisiana's exemption for vessels of at least 50 tons covered the builder's sale of a qualifying vessel and original components permanently incorporated during construction. It did not broadly exempt everything placed aboard the vessel.

An item was a component when it was attached so that removing it would damage the item or the vessel. Items that could simply be unplugged and unbolted did not qualify on that basis.

What did and did not qualify

The Department said the exemption applied to the qualifying vessel structure and permanently installed equipment sold by the builder. It also applied when the vessel owner bought movable property that would become an original component of a qualifying vessel.

Removable gaming machines and related equipment did not become components merely because they were used on a gaming vessel. Property installed to adapt a vessel to a particular function—such as fishing nets—and safety or navigation equipment such as life jackets, fire extinguishers, and lifeboats also did not qualify unless permanently installed as the court described.

Replacement components and vessel repair services were outside the exemption because La. R.S. 47:305.1(A) applied only to components added during construction.

Earlier Department advice

The taxpayers in Showboat Star had received Department advice that treated gaming and other equipment as exempt, but the Department later reversed that position and assessed tax.

The Louisiana Supreme Court concluded that paying correctly owed tax and nonpunitive interest did not establish the required detriment. The ruling also explained that informal Department advice had no force of law, was not binding on the Department or taxpayers, and did not affect an audit.

Common questions

Q: Did bolting equipment to a vessel make it a component part?

A: Not by itself. The court found that bolting gaming machines to prevent them from tipping did not make them permanently installed components.

Q: Could a mixed construction contract be entirely exempt?

A: No. If the contract included the vessel structure plus property that was not a component, tax was due on the portion attributable to the nonqualifying property.

Q: Did replacement components qualify?

A: No. The Department said only original components added during construction qualified under this provision.

Q: Was informal Department advice binding?

A: No. The ruling stated that informal advice did not bind the Department, the public, or the requester and did not affect an audit.

Citations and references

• La. R.S. 47:305.1(A) — exemption for qualifying vessel sales and original construction components
• La. R.S. 47:302(A)(1), 47:321(A)(1), and 47:331(A)(1) — taxes covered by the exemption
• Showboat Star Partnership v. Slaughter, Louisiana Supreme Court No. 00-C-1227 (Apr. 3, 2001)
• Compass Offshore, Inc. v. McNamara, 526 So. 2d 425 (La. App. 4 Cir. 1988)
• Canal Barge Co. v. McNamara, 511 So. 2d 1196 (La. App. 4 Cir. 1987)
• McNamara v. Central Marine Service, Inc., 507 So. 2d 207 (La. 1987)
• LAC 61:III.101 — formal and informal Department guidance

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 01-005

Original ruling text

Revenue Ruling
No. 01- 005, Issued August 21, 2001

Question: Should the Louisiana Department of Revenue reevaluate its
interpretation of R.S. 47:305.1(A) following the Louisiana Supreme Court’s ruling
in Showboat Star Partnership, Showboat of Louisiana, Inc., and Lake
Ponchartrain Showboat Inc. versus Ralph Slaughter?
Answer: On April 3, 2001, the Louisiana Supreme Court issued a decision on the
application of R.S. 47:305.1(A) to purchases for vessels. This law exempts
materials used in constructing vessels with at least 50-ton load displacement from
sales tax. Information about the case and the department’s analysis follow.
Name of Case: Showboat Star Partnership, Showboat of Louisiana, Inc., and
Lake Ponchartrain Showboat Inc. versus Ralph Slaughter, Secretary of the
Department of Revenue and Taxation, State of Louisiana
Court:

Louisiana Supreme Court No. 00-C-1227

Date:

April 3, 2001

Type of Tax:

Sales and Use

Statute at Issue: R.S. 47:305.1(A)
"A. The tax imposed by R.S. 47:302(A)(1), 321(A)(1), and 331(A)(1) shall not
apply to sales of materials, equipment, and machinery which enter into and become
component parts of ships, vessels, or barges, including commercial fishing vessels,
drilling ships, or drilling barges, of fifty tons load displacement and over, built in
Louisiana nor to the gross proceeds from the sale of such ships, vessels, or barges
when sold by the builder thereof."
Facts
The plaintiffs owned and operated a riverboat gaming vessel in New Orleans,
Louisiana. On August 3, 1993, Department of Revenue employees notified the
plaintiffs that the exemption allowed under R.S. 47:305.1(A) applied to purchases
of all original and replacement equipment placed on the vessel for serving their
patrons. This included slot machines, gaming tables, seating, barware, cookware,
cabinets, currency conveyor systems, surveillance equipment, illuminated signs,
and any other expendable tangible personal property used to outfit the vessel for
gaming. In January 1994, the department reversed its position limiting the
exemption to materials used in the construction of the vessel. The department then
audited the owners and issued a substantial assessment because sales tax had not
been paid on purchases of slot machines, roulette tables, cabinets, currency
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conveyor systems, surveillance equipment, illuminated signs, etc. in accordance
with the department’s original advice. The taxpayers paid $278,628.12 under
protest and filed suit against the department for recovery.
Issues Before the Louisiana Supreme Court

1. Does gaming equipment installed on vessels qualify for exemption under R.S.
   47:305.1(A) as “component parts” of vessels?
2. Can taxpayers assert detrimental reliance or judicial estoppel when they have
   claimed a tax exemption based upon the department’s original statement that the
   exemption was valid, if the department changes its position after the purchase and
   disallows the exemption?
   Decision of the Court
3. The Supreme Court agreed with the lower courts that slot machines, the
   cabinets on which the slot machines were placed, the roulette wheels, etc. were not
   component parts of the gaming vessels. Removing these items could be done by
   simply unplugging and unbolting them and would not damage the vessel or the
   equipment. Therefore, the gaming devices had not become permanently installed
   components of the vessel.
4. The court also disagreed with the taxpayers’ “societal expectation” argument
   that the machines were part of the vessel because one would reasonably expect to
   see gaming equipment on a gaming riverboat. The court ruled that the appropriate
   question is whether society expects to see gaming equipment when it enters any
   vessel, not if it expects to see gaming equipment when it enters a gaming riverboat.
   The court concluded that in the absence of specific contractual provisions to the
   contrary, the average prudent business entity does not expect gaming equipment to
   be permanently attached when buying a vessel. However, the court remanded the
   case to the trial court to determine if the signs and surveillance systems on the
   vessel were component parts.
5. The Supreme Court reviewed the four-factor test cited by the Louisiana First
   Circuit Court of Appeal in determining whether the legal and jurisprudential
   requirements for an “equitable estoppel or detrimental reliance” defense against a
   government agency are met:
   •

the receipt of unequivocal advice from an unusually authoritative source;

•

reasonable reliance on that advice by the person receiving it;

• extreme harm to the person receiving the advice from having relied on that
advice; and

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• gross injustice to the person relying on the advice in the absence of judicial
estoppel.
The trial court, the Court of Appeal, and the Louisiana Supreme Court all ruled
that taxes were due on the disputed purchases. They agreed that paying the sales
tax because the department reversed its original position was not a detriment to the
taxpayers. However, the two lower courts also concluded that the interest payable
on the tax did harm the taxpayers, the tax and interest are always due (or not due)
together, and one could not be collected without the other. Since the two courts
saw the interest as harm to the taxpayer, they ordered the refund to the taxpayer of
the tax and the interest that had been remitted under protest.
The Supreme Court obtained a different result regarding the plaintiff’s detrimental
reliance in the Showboat Star case. It agreed with the lower courts that payment of
the sales tax, due to the department’s change of position, was not detrimental.
However, it disagreed with the lower courts on whether payment of the interest
created an extreme harm to the taxpayers. The Louisiana Supreme Court adopted
the reasoning of the Arizona Supreme Court in Valencia Energy Co. v. Arizona
Dept. of Revenue [191 Ariz. 565, 959 P.2d 1256 (1998)]. The Arizona Supreme
Court stated at 1268-69:
“No detriment is incurred when the party’s only injury is that it must pay taxes
legitimately owed under the correct interpretation of the law. Nor will liability for
non-punitive interest on the tax legitimately due constitute detrimental reliance.
Non-punitive interest is, after all, nothing more than compensation for the use of
money. The taxpayer had the benefit of using the funds before paying the tax
claim and, in the legal sense, suffers no loss by reason of paying interest on the
money it retained in its possession.”

The High Court concluded that the plaintiffs failed to prove a detriment from their
reliance on the department’s advice. Since the issue of detrimental reliance and
judicial estoppel were inapplicable, it chose to not rule, or to pretermit, on the
department’s argument that the doctrine of detrimental reliance cannot be invoked
against the government. No extreme harm had come to the taxpayers from the
department’ s change of position concerning the taxability of the gaming
equipment and other property at issue.
Department’s Position
The department acquiesces with the Louisiana Supreme Court. The exemption
provided by R.S. 47:305.1(A) will be allowed for:

1. The sale of a vessel of 50 tons or more load displacement when sold by the
   builder. The exemption is limited to the vessel structure and equipment that is
   permanently installed to it. If a contract for the sale or construction of a vessel
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includes the structure and additional items that are not component parts of the
vessel, sales or use tax is due on the portion attributable to the property that
does not qualify as component parts.

2. Purchases, by the vessel owner, of movable property that will be
   incorporated into and become an original component of a vessel of 50 tons or
   more load displacement.
   Component parts of a vessel are items attached in such a way that removing them
   would damage the items or the vessel from which they are removed. This does not
   include property installed on a vessel to modify it for a specific function (e.g.,
   fishing nets aboard a fishing vessel). Also, equipment necessary to meet
   government safety or navigation standards (e.g., life jackets, fire extinguishers, life
   boats, etc.) will not be exempt. Unless equipment is permanently installed onto the
   vessel structure as discussed by the Louisiana Supreme Court in Showboat Star, it
   will not be considered a component part eligible for exemption under R.S.
   47:305.1(A). The Court determined that the bolting of gaming machines to keep
   them from tilting over when vessels are moving does not constitute the permanent
   installation of that property as components of vessels.
   Also, the exemption under R.S. 47:305.1(A) only applies to components added
   during the construction of vessels. Replacement components and vessel repair
   services are not eligible for exemption under the statute. This issue was decided by
   Louisiana courts in Compass Offshore, Inc. v. McNamara, (App. 4 Cir. 1988, 526
   So.2d 425), Canal Barge Co. Inc. v. McNamara, App. 4 Cir. 1987, 511 So.2d
   1196), and McNamara v. Central Marine Service, Inc. (Sup.1987, 507 So.2d
   207).
   Purchases of original property to be placed aboard eligible vessels must be
   considered individually to determine whether they qualify as components are
   eligible for exemption under R.S. 47:305.1(A). Buyers can seek private letter
   rulings from the department if, after reviewing the statutes, rules, jurisprudence,
   and declaratory rulings on the matter, they are still uncertain about the exemption
   eligibility of their purchases.
   When Is Department Advice Binding and When Is It Not?
   In Showboat Star, the Supreme Court assessed the department’s change of position
   subsequent to providing informal advice to the litigating taxpayers. Fortunately,
   such situations are rare. Through formal and informal communication with its
   employees, the department strives to provide to taxpayers with information that has
   a sound basis in law, formal administrative rule, and jurisprudence.

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On February 20, 2001, the Department of Revenue promulgated Louisiana
Administrative Code 61:III.101, which describes the agency’s procedures for
providing tax advice or other information.

1. “Rules” are promulgated through the Louisiana Administrative Procedure
   Act (R.S. 49:950 et seq.). R.S. 47:1511 authorizes the Secretary of Revenue to
   promulgate, make, and publish reasonable rules and regulations related to the
   taxes that the department administers. The rules must be consistent with the
   Constitution and laws of the state. They have the force and effect of law.
2. “Private Letter Rulings” (PLR) are declaratory rulings defined within LAC
   61:III.101.C.2.a. A “PLR” provides guidance to a specific taxpayer at the
   taxpayer's request. It is a written statement that applies the principles of law to a
   specific set of facts or tax situation. It does not have the force and effect of law,
   and is not binding on the person who requested it or on any other taxpayer. The
   PLR is binding on the department for the taxpayer to whom the PLR is
   addressed provided the facts presented were truthful and complete and the
   transaction was carried out as described. It retains authority of the department's
   position unless a subsequent declaratory ruling, rule, court case, or statute
   supersedes it.
3. A “Revenue Ruling” is a declaratory ruling from the department written to
   provide guidance to the public and Department of Revenue employees. It is
   issued under Section 61:III.101.C.2.b of the Louisiana Administrative Code and
   applies principles of law to a specific set of facts. A Revenue Ruling does not
   have the force and effect of law and is not binding on the public. It is a
   statement of the department's position and is binding on the department until
   superseded or modified by a subsequent change in statute, regulation,
   declaratory ruling, or court decision. Temporary Revenue Rulings may be
   released on emerging issues when a quick response is critical. If the final
   Revenue Ruling produces a result different from the Temporary Revenue
   Ruling, the department will honor the one more favorable to the taxpayer for
   transactions that occurred after the Temporary Ruling was issued and before the
   final Revenue Ruling.
4. A “Statement of Acquiescence or Nonacquiescence” (SA/SNA) is another
   type of declaratory ruling intended to provide guidance to the public and to
   department employees. An “SA/SNA” is a written statement to announce the
   department’s acceptance or rejection of a specific court or administrative
   decision. If a decision covers several disputed issues, the SA/SNA may apply
   to one or more issues, as specified. An SA/SNA is not binding on the public,

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but is binding on the department unless superseded by a later SA/SNA,
declaratory ruling, rule, statute, or court case.

5. A “Revenue Information Bulletin” (RIB) is an informal statement issued to
   publicize general information needed to comply with the laws administered by
   the department. A “RIB” will typically include information about filing
   deadlines, department office hours, website features, and statistical information.
   It will not be used for declaratory rulings, interpretations of law, or procedural
   guidance. A RIB does not have the force and effect of law and is not binding on
   the public or the department.
6. The department will also provide “informal advice” to taxpayers. Informal
   advice may be provided to an individual taxpayer directly in person or by
   telephone, through e-mail, or in a letter. It can also be provided to the general
   public through newsletters, pamphlets, and publications. Although the
   department strives to assure the quality of informal advice it provides, informal
   advice does not have the force of law and is not binding on the department, the
   public, or the person who asked for the advice. Informal advice will not affect
   an audit.

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