Coastal Drilling Company, L.L.C. v. Barry J. Dufrene, in His Capacity as Director of St. Mary Parish Sales and Use Tax Department and Ex-Officio Tax Collector for St. Mary Parish

Supreme Court of Louisiana
FOR IMMEDIATE NEWS RELEASE NEWS RELEASE #015
FROM: CLERK OF SUPREME COURT OF LOUISIANA
The Opinions handed down on the 15th day of March, 2016, are as follows:
BY CLARK, J.:
2015-C -1793 COASTAL DRILLING COMPANY, L.L.C. v. BARRY J. DUFRENE, IN HIS
CAPACITY AS DIRECTOR OF ST. MARY PARISH SALES AND USE TAX
DEPARTMENT AND EX-OFFICIO TAX COLLECTOR FOR ST. MARY PARISH
(Parish of St. Mary)
We reverse the decree of unconstitutionality of LAC 61:I:4403(A)
and (B)(2)render summary judgment in favor of Coastal Drilling.
Accordingly, we order the refund of all taxes paid under protest,
along with interest as allowed by law.
REVERSED AND RENDERED.
KNOLL, J., dissents and assigns reasons.
WEIMER, J., additionally concurs and assigns reasons.
HUGHES, J., dissents with reasons.
03/15/16
SUPREME COURT OF LOUISIANA
NO. 2015-C-1793
COASTAL DRILLING COMPANY, L.L.C.
VERSUS
BARRY J. DUFRENE, IN HIS CAPACITY AS DIRECTOR OF
ST. MARY PARISH SALES AND USE TAX DEPARTMENT AND
EX-OFFICIO TAX COLLECTOR FOR ST. MARY PARISH
ON WRIT OF CERTIORARI TO THE COURT OF APPEAL,
FIRST CIRCUIT, PARISH OF ST. MARY
CLARK, Justice
At issue is whether the materials, machinery, and equipment that became
part of an inland marine drilling barge during its reconstruction following a fire are
exempt from sales and use tax. La. R.S. 47:305.1(A) exempts these materials
when vessels are “built in Louisiana.” The Louisiana Department of Revenue
promulgated LAC 61:I:4403(A) and (B)(2) to clarify that certain reconstruction
projects fall within the scope of the statutory exemption. The lower courts found
the regulation exceeded the scope of the statute and declared it unconstitutional.
We granted this writ application to determine the constitutionality of LAC
61:I:4403(A) and (B)(2), (hereinafter intermittently referred to as “the regulation”)
and to review its application to the facts at issue. For the reasons that follow, we
find the regulation constitutional and applicable to the facts herein. Accordingly,
we reverse the court of appeal’s judgment and render judgment in favor of the
taxpayer.
FACTS AND PROCEDURAL HISTORY
Coastal Drilling Company, L.L.C., (hereinafter referred to as “Coastal
Drilling”), owns an inland marine drilling barge, Rig 21. Rig 21 was in use in St.
Mary Parish when it caught fire. The fire burned for thirteen hours and caused
extensive loss to the vessel. Recovery efforts were conducted, and the vessel was
transferred to a shipyard in Jefferson Parish. Ultimately, Rig 21 was reconstructed
at a price of approximately $11 million. Coastal Drilling paid no sales tax in
Jefferson Parish, pursuant to an exemption enunciated in La. R.S. 47:305.1(A) and
further clarified in LAC 61:I:4403(A) and (B)(2).
Upon completion of the work, the vessel was transported to St. Mary Parish
for resumed use. An audit in St. Mary Parish revealed that Coastal Drilling had not
paid state or local sales tax on the materials, machinery, or equipment purchased in
Jefferson Parish during the restoration of the vessel. Thereafter, the Director of the
St. Mary Parish Sales and Use Tax Department and Ex-Officio Sales and Use Tax
Collector for St. Mary Parish, (hereinafter “the Collector”), issued a use tax
assessment on the items used in the reconstruction of Rig 21. 1 Coastal Drilling
timely paid under protest the use tax, penalties, and interest, in the amount of
$382,928.32. On September 7, 2010, Coastal Drilling filed suit against the
Collector, seeking a refund of the full amount paid under protest.
The Collector answered the suit, alleging the tax exemption provided for in
La. R.S. 47:305.1(A) did not apply to the materials used to reconstruct Rig 21
because such parts were not installed during “original construction.” The Collector
also averred the regulation promulgated by the Department of Revenue, upon
which Coastal Drilling relied, was not applicable to the instant case insofar as Rig
21 was only “damaged” by fire and not “destroyed.” The Collector also filed a
reconventional demand, alleging the regulation was unconstitutional.
Coastal Drilling and the Collector filed cross motions for summary
1 The exemption applies to “sales tax;” however, La. R.S. 47:301(19)(b) provides, in relevant part:
No use tax shall be due to or collected by: . . . Any political subdivision on tangible personal
property used, consumed, distributed, or stored for use or consumption in such political
subdivision if the sale of such property would have been exempted or excluded from sales tax at
the time such property became subject to the taxing jurisdiction of the political subdivision.
2
judgment. The trial court denied Coastal Drilling’s motion and granted the
Collector’s motion, finding the vessel was damaged and not destroyed.
Accordingly, it found the repairs did not qualify as reconstruction, and, thus,
Coastal Drilling was not entitled to the exemption. The issue of constitutionality
was not reached.
Coastal Drilling appealed. The court of appeal vacated the trial court’s
judgment and remanded the matter for the constitutionality of the regulation to be
considered. Coastal Drilling Co., L.L.C. v. Dufresne, 12-0744 (La. App. 1 Cir.
2/18/13) (unpublished opinion).
On remand, cross motions for summary judgment were filed regarding the
constitutionality of the regulation. On March 18, 2014, the trial court found the
regulation exceeded the scope of the exemption provided for in La. R.S. 47:305.1,
thereby violating the separation of powers provision of the Louisiana Constitution
of 1974, art. II, sec. 2. Accordingly, the trial court declared the regulation
unconstitutional and granted the Collector’s motion for summary judgment.
Coastal Drilling appealed. The court of appeal affirmed the declaration of
unconstitutionality, finding the regulation’s inclusion of “reconstruction” was an
impermissible administrative expansion of the statutory use of the word “built.”2
Coastal Drilling Co., L.L.C. v. Dufresne, 14-960 (La. App. 1 Cir. 6/5/15), 174
So.3d 673. Coastal Drilling applied for writs. We granted certiorari to determine
the constitutionality of the regulation and to consider the correctness of the grant of
summary judgment in favor of the Collector. Coastal Drilling Co., L.L.C. v.
Dufresne, 15-1973 (La. 11/20/15), _So.3d_.
2 We note rules and regulations promulgated by an administrative agency or department are not a “law or
ordinance” under La. Const. art. V, sec. 5(D); thus, a trial court’s declaration of their unconstitutionality is not
directly appealable to the Louisiana Supreme Court. See Vicksburg Healthcare, LLC v. State through Dept. of
Health and Hospitals, 10-1248 (La. App. 1 Cir. 3/25/11) 63 So.3d 205; Holthus v. Louisiana State Racing Comm'n,
569 So.2d 547 (La. 1990); and Benelli v. City of New Orleans, 474 So.2d 1293, 1294 (La. 1985).
3
RELEVANT LAW AND ARGUMENTS
La. R.S. 47:305.1(A) provides, in pertinent part:
The tax imposed by taxing authorities 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.
This exemption on component parts used in certain vessels built in Louisiana
was first enacted in 1959. The purpose of the statute was to make the Louisiana
shipbuilding industry competitive with that of other states, where more favorable
tax laws existed in the form of exemptions on construction materials. See Senate
Committee on Revenue and Fiscal Affairs, Minutes of Meeting, May 17, 1982;
see also McNamara v. Central Marine Service, Inc., 507 So.2d 207, 209 (La.
1987). (“The exemption was created to relieve Louisiana shipyards of a
competitive disadvantage with shipyards in neighboring states.”)
In 1987, the Department of Revenue promulgated LAC 61:I:4403, which
provides, in pertinent part:
A. To qualify for exemption under R.S. 47:305.1(A), materials,
machinery, and equipment that become component parts of ships,
vessels, or barges of 50 tons load displacement and over, built in
Louisiana, must be added during construction or reconstruction.
Materials, machinery, and equipment that replace worn components
are not exempt under R.S. 47:305.1(A).
B. Reconstructions qualify for exemption under R.S. 47:305.1(A) if
they:
...
2. restore the craft to seaworthiness following its destruction by
sinking, collision, or fire.
Coastal Drilling argues the fire clearly destroyed the vessel and the
materials, machinery, and equipment added during reconstruction restored the
vessel to seaworthiness. Thus, it contends the reconstruction work plainly qualifies
4
for the exemption from sales and use tax under the regulation. It is Coastal
Drilling’s position that the regulation simply applied the statutory words “built in
Louisiana” to the specific facts of reconstruction following a catastrophic event,
including a fire. It contends the application of a tax statute to a specific fact
situation is precisely within the authority given to the Department of Revenue by
the legislature and that nothing in the regulation contradicts the purpose of the
statute. To the contrary, the regulation furthers the purpose of the statute, as it
serves to put Louisiana on equal footing with other states and keeps extensive
construction work and costly projects in the state.
The Collector, however, argues the restoration work amounted to “repairs”
rather than “reconstruction;” thus, the exemption as defined by the regulation is not
applicable. (See La. R.S. 47:301(14)(g), which imposes sales tax on the furnishing
of repairs to tangible personal property). The Collector views any work performed
after original construction as a repair. Pursuant to this interpretation, use of any
part of a pre-existing vessel to restore or remedy the vessel’s condition is a taxable
repair, regardless of the expense, nature, or duration of the job. 3
Additionally, the Collector cites to prior jurisprudence for the proposition
that the statutory exemption applies only to purchases made in connection with the
original building of certain new ships, vessels, and barges. 4 Alternatively, and
primarily, it asserts the regulation is unconstitutional as it exceeds the scope of La.
R.S. 47:305.1(A). The Collector contends the regulation is inconsistent with the
statute insofar as the statute makes no mention of “reconstruction,”
“seaworthiness,” or “destruction,” nor does it use a catastrophic event as a trigger
3 In a tangential manner, the Collector contends Coastal Drilling exaggerates the damage, suggesting that even if
the regulation were applicable, the work at issue still does not qualify as reconstruction; rather, the restoration of the
vessel is merely a repair. However, the Collector offers no discernible test as to what would rise to the level of
“reconstruction” in the Collector’s view.
4 See McNamara v. Central Marine Service, Inc., 507 So.2d 207 (La. 1987); Canal Barge Co., Inc. v. McNamara,
511 So.2d 1196 (La. App. 4 Cir. 1987); Compass Offshore, Inc. v. McNamara, 526 So.2d 425 (La. App. 4 Cir.
1988); and R&B Falcon Drilling USA, Inc. v. Secretary, Dept. of Rev., 09-256 (La. App. 1 Cir. 1/11/10), 31 So.3d
1083).
5
for the exemption’s application. In light of this inconsistency, the Collector argues
the Department of Revenue’s regulation amounts to an administratively created
exemption, which exceeds the legislature’s grant of authority and, effectively,
violates the principle of separation of powers. La. Const. art. I, § 2. To this point,
the Collector emphasizes that had the legislature intended to exempt reconstruction
or the replacement of used parts in pre-existing vessels, it very easily could have
done so. Because the legislature did not confer, in clear and plain terms, the
privilege of the exemption to reconstructions, one does not exist.
DISCUSSION
Constitutionality
As stated above, La. R.S. 47:305.1(A) creates a sales tax exemption for
“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 ton load displacement and over built in
Louisiana.” (Emphasis added). The statute was enacted in 1959 by Act No. 51,
with the purpose of making Louisiana competitive in the shipbuilding industry in
light of the favorable tax exemption laws in neighboring gulf-coast states. As
described by the Department of Revenue’s representative, who was employed by
the Department when the regulation was drafted, a widely-publicized shipwreck
occurred in the Mississippi River. The event triggered questions regarding the
applicability of the sales tax exemption to extensive reconstruction of a destroyed
vessel. As a result, the Department of Revenue promulgated LAC 61:I:4403,
which clarifies that the exemption of La. R.S. 47:305.1(A) applies to
reconstruction if such work “restore[s] the craft to seaworthiness following its
destruction by sinking, collision, or fire.” LAC 61:I:4403(B)(2). The regulation
further distinguished the component parts added during “reconstruction” from
those “that replace worn components.” The latter component parts are not exempt.
6
See LAC 61:I:4403(A).
We are tasked with determining the regulation’s constitutionality. 5 A
regulation can be struck down as being unconstitutional only (1) if the regulation
exceeded the authority delegated to the administrative body by the legislature or
(2) it exceeded the scope of the statute under which it was promulgated, as
evidenced by a construction that is contrary to the statute’s purpose. See State v.
Alfonso, 99-1546 (La. 11/23/99), 753 So.2d 156, 160, and Jurisich v. Jenkins, 99-
0076 (La. 10/19/99), 749 So.2d 597, respectively.
In Krielow v. Louisiana Dept. of Agriculture and Forestry, 13-1106 (La.
10/15/13), 125 So.3d 384, we stated “the legislative branch has the authority to
delegate to administrative boards and agencies of the State the power to ascertain
and determine the facts upon which the laws are to be applied and enforced.” Act
No. 51 of 1959 gave express authority to the Collector to “promulgate rules and
regulations designed to carry out the provisions of this section.” Today, that
authority is given to the Department of Revenue via La. R.S. 47:1511. 6 Thus, the
Department of Revenue is authorized to prescribe rules and regulations to further
the purpose of the statute. With express authority granted to the Department of
Revenue to specify particular factual situations to which the statutory exemption
applies, the regulation passes the first obstacle against constitutionality, as it does
not exceed the authority granted by the legislature.
Next, we must turn our attention to the viewpoint of the lower courts and the
Collector that the regulation exceeds the scope of the statute. The interpretation of
5 We note the use tax at issue was assessed by a local government, not the State. However, the Uniform Local
Sales Tax Code, in 2003, made the regulation applicable to local sales and use taxes in addition to state taxes. La.
R.S. 47:337.2. Thus, the issue is squarely before us.
6 La. R.S. 47:1511 provides:
In addition to specific authority granted to the secretary elsewhere, the secretary is authorized to
prescribe rules and regulations to carry out the purposes of this Title and the purposes of any other
statutes or provisions included under the secretary's authority. These rules and regulations shall be
promulgated pursuant to the provisions of the Administrative Procedure Act and will have the full
force and effect of law.
7
the words “built in Louisiana” is at the heart of this legal battle. This court in
Traigle v. PPG Industries, Inc., 332 So.2d 777, 782 (La. 1976), explained that “an
administrative construction cannot have weight where it is contrary to or
inconsistent with the statute.” Thus, we must re-visit the intent of the legislature in
enacting the statute and determine whether the regulation furthers or frustrates that
purpose.
A review of the record reveals that neither party disputes that La. R.S.
47:305.1(A) was the result of a legislative desire to remove the commercial
disadvantage to Louisiana shipbuilders that neighboring states’ more favorable tax
laws created. The legislature enacted a sales tax exemption on certain materials
used in shipbuilding to keep high-cost construction jobs in Louisiana. This
purpose is highlighted by the legislature’s use of a size restriction on the vessel
(“of fifty ton load displacement and over”) and a geographic restriction on the
construction (“built in Louisiana”). Id. Accordingly, it is clear the legislative
intent behind the statute was to ensure that large, expensive shipbuilding projects
stayed in the state and did not follow the more attractive exemption laws made
available to buyers by other states. We see no express intent to limit the exemption
to new or original construction or to require that the parts must be new or unused.
We turn now to the regulation, which clarifies that the exemption applies to
materials used in reconstruction. The regulation sets forth a three-part test for
reconstruction: (1) the vessel was restored to seaworthiness (2) after being
destroyed (3) by sinking, collision, or fire. LAC 61:I:4403(B)(2). This test
envisions extensive, restorative work and the regulation itself disqualifies the mere
replacement of worn parts. The Department of Revenue’s representative testified
“[r]econstruction would be basically the - - - the equivalent of an acquisition of a
new thing where the vessel was so extensively damaged by sinking, collision, or
fire that it - - that was the commercially best alternative . . .” He makes the
8
analogy to an automobile that is considered “totaled” by an insurance company
when the cost of repair is significant enough to classify the damage as a total loss
and to justify the acquisition of a new vehicle. The representative distinguishes the
automobile industry from the shipbuilding one, where the cost of scrapping a
multi-million dollar vessel and starting from scratch is not feasible from an
economic standpoint. He states, “I think some of us in the department, perhaps,
began to realize that maritime property is - - is perhaps restored in ways that other
types of property would not be restored for whatever reasons, you know. . . . we
kind of understood that ships sometimes are maintained to a greater extent and
restored to a greater extent than other kinds of property.”
We find that the clearly discernible test set forth in the regulation makes it
clear that only major reconstruction that takes a non-functioning vessel back to the
status of seaworthy is exempt. The exemption does not cover repairs, replacement
of worn parts, restorative work done in the absence of a catastrophic event, or work
done to vessels that was ancillary to restoring the boat to seaworthiness. Ships are
of such a unique character that, following a catastrophic event, restoration of a
destroyed vessel to full functionality is equivalent to original construction or new
acquisition. The fact that an owner, for obvious economic reasons, chooses to
incorporate a pre-existing component of the vessel, such as the hull, into the
reconstructed vessel, or restore as much as the destroyed vessel as possible, does
not preclude a finding that reconstruction is a part of the shipbuilding industry that
the legislature wished to keep in Louisiana. These jobs are expensive ones that a
prudent ship owner would otherwise outsource to another state with more
beneficial tax laws. Such a result would be contrary to the overall purpose of the
legislation. The regulation, then, only makes the exemption applicable to the same
large construction projects contemplated by the legislature when it chose the
tonnage requirements and the words “built in Louisiana” in the underlying statute.
9
Accordingly, we find no inconsistency between the regulation and the statutory
purpose.
As added support, we take note of the contemporaneous construction
principle, which gives “substantial and often decisive weight” to an agency’s long-
standing interpretation. Traigle, 332 So.2d at 782. This regulation has been in
existence since 1987; such a time-endured construction by an agency “may
reasonably be presumed to be in accord with the legislative intent.” Id.Also in Traigle, this court noted the existence of other principles of statutory
construction, which were incidentally relied upon by both parties in the instant case
and the court of appeal. However, we found legislative intent to be the paramount
consideration:
Other principles of statutory construction are also urged as
applicable, such as: Where there is reasonable doubt as to the meaning
of a tax statute, the doubt is ordinarily resolved, in the absence of
other guide to the legislative intent, in favor of the taxpayer. See
United Gas Corporation v. Fontenot, 241 La. 564, 129 So.2d 776(1961); 3 Sutherland, Statutory Construction, Section 66.01 (4th
(Sands) ed., 1974). Too, it is suggested that, in the present case, this
principle is qualified by the further principle that claims of exemption
from a tax otherwise to apply are strictly construed against the person
claiming the exemption. See Roberts v. City of Baton Rouge, 236 La.
521, 108 So.2d 111 (1959) and decisions therein cited; 3 Sutherland,
Statutory Construction, Section 66.09 (4th (Sands) ed. 1974).
Nevertheless, the aim of all of these principles of interpretation
is to ascertain the legislative intent as to the question at issue.
Id.As evidenced above, we find a broad legislative intent to include, within the
purview of the exemption, reconstruction efforts that are the commercial
equivalent to original or new construction. We see nothing in the plain language of
the statute that restricts the reading to a more narrow definition. Accordingly, we
reverse the finding of unconstitutionality and declare LAC 61:I:4403(A) and (B)(2)
valid inasmuch as it does not exceed the authority granted to the agency by the
legislature, nor does it exceed the scope of La. R.S. 47:305.1.
10
Application
Having found the regulation constitutionally valid, we turn now to its
application to the facts. 7 The Collector repeatedly makes the argument that there is
simply no such thing as “reconstruction.” In its view, there are only two
conceivable categories of construction: original construction and repairs, the
former being exempt from sales tax, and the latter being taxable. We necessarily
reject this logic in finding the regulation, which defines “reconstruction,”
constitutional. Thus, the only issue before us with regard to applicability of the
regulation is whether the facts surrounding the reconstruction of Rig 21 meet the
test set forth in LAC 61:I:4403(B)(2), which, again, grants an exemption to
materials used in reconstructions if the reconstruction “restore[s] the craft to
seaworthiness following its destruction by sinking, collision, or fire.”
The catastrophic event requirement is readily satisfied; indeed, no one
disputes the occurrence of the fire. The other two components of the definition,
however, are disputed. The Collector makes much of the ambiguity of the term
“seaworthiness,” arguing its roots in maritime personal injury law have no bearing
in a tax case. However, we find the term to have its general maritime meaning, “fit
for its intended purpose.” (See Foster v. Destin Trading Co., 96-0803 (La.
5/30/97), 700 So.2d 199, 209, “[t]he test for determining unseaworthiness is one of
reasonable fitness. The vessel, its equipment, and appurtenances need not be
perfect, but all must be reasonably fit for their intended purpose.”) This common
understanding of the term was echoed by the representative for the Department of
Revenue, who opined: “I suppose it would be the maritime equivalent of road-
7 We find the interpretation of “reconstruction” found in LAC 61:I:4403 to be a legal question, afforded de novo
review. State v. Louisiana Land and Exploration Co., 12-0884, p. 8 (La. 1/30/13), 110 So.3d 1038, 1044. Thus, we
see no need for remand to consider the regulation’s application to the facts. To the extent it could be argued there
exists a factual question of whether the work done is non-taxable “reconstruction” or taxable “repairs,” we expressly
note that we are basing our decision on a fully developed record after arguments from both parties. The Louisiana
Constitution explicitly extends the jurisdiction of appellate courts in civil cases to review the facts as well as law and
allows judgments to be rendered on the merits without the formality of a remand. Gonzales v. Xerox Corp., 320
So.2d 163, 165 (La. 1975). As further support, we are tasked with reviewing a grant of summary judgment in favor
of the Collector. Summary judgments are reviewed de novo. Schroeder v. Board of Supervisors of La. State Univ.,
591 So.2d 342, 345 (La. 1991). Thus, no deference is owed to any factual findings made below.
11
worthiness with respect - - with respect to a road vehicle, you know, where it’s
able to be used on waterways to - - for - - [its intended purpose].” 8 This is a
reasonable test for helping to distinguish between “repairs” and “reconstruction.”
If the refurbishment was done to restore the vessel to its intended purpose after a
catastrophic event rendered it incapable of performing its intended purpose, the
exemption applies.
The Collector also argued Rig 21 was not “destroyed” but was merely
damaged. The Collector appears to advance two alternative grounds to support this
argument. First, it contends “destruction” requires an elimination of the thing. We
find this contention to be an illogical one. If the regulation required abolition of
the vessel, there would be nothing to “reconstruct.” A ship owner would have to
start anew with original construction of a vessel, which, indisputably, comes within
the statutory understanding of “built.” There would have been no need to
promulgate the regulation if only original construction was intended. Thus, this
argument has no merit.
The second argument the Collector advances is that, even if the regulation
envisioned something less than total obliteration, the loss Rig 21 suffered as a
result of the fire did not rise to the level of “destruction.” The Collector does not,
however, offer a standard by which to judge this moving target and rejects, as
vague, the standard of “unseaworthiness.”
We interpret the word “destruction” in context with the whole regulation.
(“When the words of a law are ambiguous, their meaning must be sought by
examining the context in which they occur and the text of the law as a whole.” La.
Civ.Code art. 12.) “Destruction” contemplates the condition the vessel is in after a
sinking, collision, or fire. Additionally, the regulatory definition of
“reconstruction” requires that the catastrophic event render the craft unseaworthy
8 The bracketed words were supplied by counsel, but the representative agreed with the statement.
12
and that the restorative work result in the craft’s seaworthiness. Thus, the context
surrounding the word “destruction” evidences a clear intent to include a vessel’s
refurbishing when it has been so extensively impaired from a very specific event
(fire, sinking, or collision), that it no longer can operate for its intended purpose.
We find this to be a clearly articulated test and a reasonable one suited for meeting
the legislative goal of relieving shipbuilders of the heavy tax burden of competing
with other states for large jobs that are commercially and industrially equivalent to
new construction.
Armed with an understanding of what the regulatory definition of
“reconstruction” is, we consider the extent of the damages to Rig 21 occasioned by
the fire. The fire burned for 13 hours and caused the fuel and oil tanks to explode.
The record contains evidence of damage to and/or destruction of, among other
things, the entire triple-deck superstructure, the motor control center, generator
engines, electrical system, wiring, lighting system, air conditioning, fuel and oil
tanks, isolation transformers, mud tanks and pumps, sewage system, compressed
air, hydraulic deck crane, living quarters, and alarm system. Rig 21 lost all ballast
capabilities and could no longer float without assistance received during the
recovery effort. Captain Guy Plaisance, an accredited marine surveyor, stated in
his affidavit:
As a direct result of the fire of June 11, 2005, Rig 21 was
rendered completely incapable of navigation . . . of transporting its
crew . . . of moving any property . . . of drilling for oil and gas. . . .
Rig 21 was rendered unseaworthy, unsuitable for its designed, built
and intended purpose and unable to withstand conditions usually met
in the service for which it was intended.
The Collector puts much emphasis on the fact that the vessel could indeed
float because it was towed to the Jefferson Parish shipyard. However, expert
testimony explained that “prior to the fire, it had ballast capabilities of putting
certain waters or transferring fluids within the compartments; and it could not do
13
that on its own again.” The Collector relies on its own interpretation of 203
photographs introduced into evidence to suggest the damage claimed by Coastal
Drilling was “exaggerated.” Further, it offers the conclusory statement that “with
emergency power the well was plugged, the derrick was lowered, and the barge
was towed to a shipyard for repairs that cost . . . less than half of the rig’s original
price.” The Collector admits that it did not inspect the vessel prior to or after the
fire. No record evidence suggests the auditor was given any specific instructions
to determine whether the work done qualified as a “repair” or “reconstruction.”
Accordingly, there was no evidence to refute the extent of the damage
claimed and substantiated by Coastal Drilling. Rather, the Collector relied upon
the notion that any work performed that was not original construction must be a
repair. Without addressing this circular argument again, we find no genuine issue
of material fact remains as to whether the work done to render Rig 21 seaworthy
again after its destruction by fire meets the definition of “reconstruction” pursuant
to LAC 61:I:4403(B)(2). We performed a careful deconstruction of the term’s
definition and thoroughly reviewed the record to determine the term’s applicability
to the facts at issue. We conclude the materials, equipment, and machinery which
entered into and became component parts of Rig 21 after its reconstruction
following the fire fit squarely within the statutory exemption of La. R.S. 47:305.1,
as defined by the constitutionally valid regulation of LAC 61:I:4403(A) and (B)(2).
To the extent the Collector asserts we are bound by the jurisprudence that
holds the statutory exemption is limited to “newly-built vessels,” we disagree with
the proposition for which the Collector claims those cases stand. Namely, the
Collector relies on Central Marine Service, Inc., supra and the subsequent cases
that cite it: Canal Barge Co., Inc., supra.; Compass Offshore, Inc., supra; and R &
B Falcon Drilling USA, Inc., supra. However, Central Marine, a case that pre-
dates the regulation at issue, simply posed the question of whether repairs and
14
replacement parts were exempt. This court answered the question in the negative
and specifically did not address whether the “major refurbishing of an older vessel
or hull” is exempt, noting, nonetheless, that such a position is “a reasonable one.”
Central Marine, 507 So.2d at 210, n.8. Canal Barge and Compass Offshore
similarly involved repairs and not reconstruction. In the final case, R & B Falcon
Drilling, the court recognized the regulation but found it did not apply because the
required triggering event of sinking, collision, or fire was not present.
Accordingly, we find the facts of the instant case are distinguishable from those
argued as supporting case law by the Collector. Moreover, had the instant analysis
been applied in those cases, the same results would have been reached.
CONCLUSION
We reverse the decree of unconstitutionality of LAC 61:I:4403(A) and
(B)(2) and render summary judgment in favor of Coastal Drilling. Accordingly,
we order the refund of all taxes paid under protest, along with interest as allowed
by law.
REVERSED AND RENDERED.
15
03/15/16
SUPREME COURT OF LOUISIANA
NO. 2015-C-1793
COASTAL DRILLING COMPANY, L.L.C.
VERSUS
BARRY J. DUFRENE, IN HIS CAPACITY AS DIRECTOR OF
ST. MARY PARISH SALES AND USE TAX DEPARTMENT AND
EX-OFFICIO TAX COLLECTOR FOR ST. MARY PARISH
ON WRIT OF CERTIORARI TO THE COURT OF APPEAL,
FIRST CIRCUIT, PARISH OF ST. MARY
KNOLL, J., dissents.
With all due respect, I dissent from the majority opinion, finding its holding
a gross departure by this Court from our jurisprudence as well as from the tax
exemption law at issue. The First Circuit Court of Appeal opinion authored by
Judge Guidry correctly interpreted the tax law at issue, and there is very little this
dissent can add except to echo the Court of Appeal opinion with more emphasis on
the critical points the majority opinion fails to recognize.
Significantly, the majority opinion fails to apply any analysis to its
conclusions and makes quantum leaps in reversing the well-considered opinions of
the lower courts. The majority opinion’s centerpiece is the “intent” of the
Legislature. While I recognize the intent of the Legislature is an important factor in
considering the interpretation of a statute, our function of interpreting legislative
intent cannot equate to legislating from the bench. Tax exemptions belong
exclusively to the legislative branch of government—not to the judiciary, even
under the guise of interpreting the “intent” of the Legislature.
The majority opinion fails to mention that tax exemptions are interpreted
against the taxpayer and in favor of the State. 1 The application of this doctrine is
1 Nowhere does the majority acknowledge and analyze this important doctrine.
crucial and fatal to the plaintiff’s argument. The majority opinion interprets the
exemption just the opposite. In my view this is an aberration of statutory
interpretation.
The issue of LAC 61.I:4403’s constitutionality must be examined in light of the
well-established rule of statutory construction that tax exemptions are “strictly
construed in favor of the State and ‘must be clearly and unequivocally and
affirmatively established by the taxpayer.’” 2 Here, the exemption at issue provides:
The tax imposed by taxing authorities 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.
La. R.S. § 47:305.1(A) (emphasis added).
Having examined the Legislative history and relevant jurisprudence, I find
nothing which evidences intent on the part of the Legislature to encompass vessel
reconstruction within the term “built in Louisiana.” Rather, I find the Department
of Revenue’s expansion of this exemption to include reconstruction goes beyond
mere clarification of the statute, exceeds the executive branch’s authority, and
impinges upon the Legislature’s lawmaking function. As Judge Guidry, writing for
the First Circuit, correctly noted:
The legislature could have expanded the exemption to vessels that
were rebuilt or reconstructed, but instead, it expressly limited the
exemption to vessels that are built or constructed. Moreover, it is not
constitutionally permissible for the Louisiana Department of Revenue,
as a part of the executive branch of government to administratively
expand a statutory exemption nor for the courts, as part of the judicial
branch, to interpret the exemption in such a way as to judicially
legislate expansion of the exemption beyond that expressly and
clearly conferred in plain terms by the legislature.
Coastal Drilling Co., L.L.C. v. Dufrene, 2014-0960 (La.App. 1 Cir. 6/5/15), 174
2 Harrah’s Bossier City Investment Co., LLC v. Bridges, 2009-1916 (La. 5/11/10), 41 So.3d 438, 446, quoting
Vulcan Foundry, Inc. v. McNamara, 414 So.2d 1193, 1197 (La. 1982); see also, Showboat Star Partnership v.
Slaughter, 00-1227 (La. 4/3/01), 789 So.2d 554; McNamara v. Central Marine Service, Inc., 87-0030 (La. 5/18/87),
507 So.2d 207.
2
So.3d 673, 678.
Although the Department of Revenue has authority to promulgate
regulations to clarify the application of tax exemptions, this authority does not
extend to broadening the scope of tax exemptions. The power to tax is vested in the
Legislature and may not be surrendered except as provided in the Louisiana
Constitution. La. Const. Art. 7 § 1(A). The Louisiana Constitution expressly states
“[e]xcept as otherwise provided by this constitution, no one of these branches
[legislative, executive, or judicial], nor any person holding office in one of them,
shall exercise power belonging to either of the others,” and the Constitution makes
no allowance for the executive branch to expand tax exemptions created by the
Legislature. La Const. Art. 2 § 3. The plaintiff correctly notes Louisiana may be at
a competitive disadvantage due to neighboring states’ inclusion of vessel repairs in
their sales tax exemption statutes; 3 however, it is not the purview of the executive
or judicial branches to correct any such competitive disadvantage. Rather, it is the
Legislature’s function to weigh such policy considerations and to add more
expansive language to the exemption if it so chooses.
The majority relies on Traigle v. PPG Industries Inc., 332 So.2d 777, 782
(La. 1976) in support of giving “substantial and often decisive weight” to the
administrative construction in the present case, noting the regulation at issue has
been in existence since 1987. However, the full quotation of the Court in Traigle
states “where the statute is ambiguous (as, most favorably to the taxpayer, this
statutory definition may be) a long settled contemporaneous construction by
those charged with administering the statute is given substantial and often decisive
weight in its interpretation.” Id (emphasis added). This principle of law does not
3 For example, the Texas and Mississippi statutes cited by the plaintiff explicitly exempt materials purchased for
vessel repair from taxation. Tex. Tax Code § 151.329 (exemptions include “materials and labor used in repairing,
renovating, or converting a ship or vessel that is of eight or more tons displacement…”); Miss. Code Ann. § 27-65-
101 (tax does not apply to “[s]ales of raw materials…to a manufacturer for use directly in manufacturing or
processing a product for sale or rental or repairing or reconditioning vessels or barges of fifty (50) tons load
displacement and over”).
3
apply to the current case for two reasons. First, La. R.S. § 47:305.1(A)’s use of the
term “built in Louisiana” is not ambiguous; instead it is a plain language reference
to construction, not reconstruction, of vessels. Second, because the statutory
provision at issue is an exemption which must be strictly construed in favor of the
State, the phrase “built in Louisiana” may not be applied “most favorably to the
taxpayer.” Thus, deference to administrative construction is not necessary or
appropriate in this case.
Furthermore, the Traigle court also acknowledged that “an administrative
construction cannot have weight where it is contrary to or inconsistent with the
statute.” Traigle, 332 So.2d at 782. Notwithstanding the undisputed legislative
purpose of attracting and keeping large shipbuilding projects in Louisiana, the
Legislature has chosen to limit the application of this exemption to only those
vessels “built in Louisiana,” without any reference to vessels reconstructions,
major overhauls, restoration of seaworthiness, or any other activity which falls
short of constructing a new vessel. Therefore, I find LAC 61.I:4403’s expansion of
the exemption to include vessel reconstruction to be both inconsistent with the
statute and impermissible in light of the rule requiring strict construction of
exemptions in favor of the State. Such an expansion requires positive law and
cannot be accomplished through administrative interpretation.
Clearly, LAC 61.I:4403 violates separation of powers and was correctly
deemed unconstitutional by the lower courts. As the plaintiff has failed to carry its
heaving burden of showing the strictly-construed statutory tax exemption is
applicable in this case, I find the lower courts correctly found in favor of the tax
collector, and I would affirm their judgments.
4
03/15/16
SUPREME COURT OF LOUISIANA
NO. 2015-C-1793
COASTAL DRILLING COMPANY
VERSUS
BARRY J. DUFRENE, IN HIS CAPACITY AS DIRECTOR OF ST.
MARY PARISH SALES AND USE TAX DEPARTMENT AND
EX-OFFICIO TAX COLLECTOR FOR ST. MARY PARISH
ON WRIT OF CERTIORARI TO THE COURT OF APPEAL,
FIRST CIRCUIT, PARISH OF ST. MARY
WEIMER, J., additionally concurring.
Coastal Louisiana, with its myriad waterways, has a history of being a
national leader in shipbuilding. Louisiana shipyards have produced vessels that ply
waters worldwide. In an effort to aide the competitive vitality of this industry, the
Louisiana Legislature enacted a statute to encourage these mobile vessels to be
“built in Louisiana.” See La. R.S. 47:305.1(A). Although the arguments of the
parties focused on the meaning of the word “built,” of equal importance is the fact
that this economically significant and massive project was completed “in
Louisiana.” I agree with the opinion that the regulation is fully compliant with the
letter and spirit of this legislation and is, thus, constitutional.
03/15/16
SUPREME COURT OF LOUISIANA
NO. 2015-C-1793
COASTAL DRILLING COMPANY, L.L.C.
VERSUS
BARRY J. DUFRENE, IN HIS CAPACITY AS DIRECTOR OF
ST. MARY PARISH SALES AND USE TAX DEPARTMENT AND
EX-OFFICIO TAX COLLECTOR FOR ST. MARY PARISH
ON WRIT OF CERTIORARI TO THE COURT OF APPEAL,
FIRST CIRCUIT, PARISH OF ST. MARY
Hughes, J., dissenting.
“Built” does not mean rebuilt or reconstruction. Damage is not
“destruction.” The effect of the regulation exceeds the statute. Therefore I
respectfully dissent.