On September 8, 2022, the Louisiana Board of Tax Appeals (“Board”) granted a taxpayer’s motion for summary judgment in a case involving whether the taxpayer qualified as a manufacturer for purposes of Louisiana’s apportionment provisions. Cervey LLC, f/k/a New – Tech Computer Systems LLC v. Secretary of Department of Revenue, Louisiana, La. BTA Docket No. 12272D (Sept. 8, 2022).
The taxpayer’s business consisted primarily of three types of software: (1) software for maintaining health records at a long-term care facility; (2) inventory management software for a governmental drug pricing program; and (3) pharmacy benefit manager software. The taxpayer provided its software mainly through the internet, in many cases through subscriptions.
The Department of Revenue (“Department”) took the position that the taxpayer did not qualify as a manufacturer, arguing that the software was not “tangible personal property.”
The Board, following the Louisiana Supreme Court’s decision in South Central Bell Telephone Co. v. Barthelemy, concluded that for Louisiana tax purposes, software is tangible personal property (whether delivered electronically or otherwise).
The Board concluded that software is tangible personal property because it is physically perceptible in several ways, including: (1) it has instructions that can be read by a computer; (2) it produces graphic results that can display to a human user; (3) it results in a computer performing perceptible operations. Furthermore, the Court in South Central Bell concluded that the method of delivery of the software was not relevant to the conclusion that it is tangible personal property.
The Department also argued that the taxpayer was not a manufacturer because it did not transform raw materials that are tangible personal property into a finished product that is tangible personal property. However, the Board concluded that electrons in a base file are raw materials and are transformed into a final product. Louisiana law also requires that the taxpayer uses “machinery and equipment” for its activities to qualify as manufacturing. “Machinery and equipment” is defined to include computers and software that are part of the manufacturing process. Therefore, the Board concluded that the taxpayer was engaged in manufacturing.
As traditional manufacturing processes have continued to evolve with the advent of automation and digitization, this case is particularly interesting as it affirms that modern-day manufacturing is still, in fact, manufacturing. We have observed many states attempting to narrowly construe “tangible” in the income tax context (disallowing various credits and incentives) while, at the same time, pushing the envelope in the transaction tax context (extending taxability to many electronically available or digital items). Many credits and incentives made available to manufacturers were meant to encourage investment in the state. Nevertheless, states aggressively pursue taxpayers that automate or modernize their manufacturing processes when their level of investment in the state remains the same.
The Board’s conclusion is encouraging and hopefully other states take note.