Tax on processed raw materials moving forward

The Louisiana State Legislature is moving to tax raw materials used for further processing, and industries are cringing at the thought. These businesses believed the Louisiana Supreme Court got them off the sales tax hook, but House Bill 27 aims to make the reprieve short-lived.
HB27 was reported out of the Senate Revenue and Fiscal Committee Monday with unanimous approval and now heads for the Senate floor for final action.
The Supreme Court ruled that limestone used by electric companies to meet federal EPA standards cannot be taxed if the ashes created from the limestone are resold, but Rep. Chris Broadwater, R-Hammond, seeks to change this tax policy.
Under the current law, such a tax is not legal, according to a 4-3 decision in May. So Broadwater set out to change the law and has steadily been guiding the complicated bill through the legislative process with little public notice.
HB27 would tax the raw materials and then give a tax credit for the amount the business makes in sales taxes on the byproduct. His effort clarifies a statute that currently excludes raw materials used for further processing from being taxed.
The measure is strongly supported by local governments which would stand to lose considerable revenues under the judicial ruling without legislative action.
“This is not designed as a new tax,” Broadwater said. “The effort is to maintain the status quo, but to clarify that the Supreme Court ruling was not what the Legislature wanted the law to apply to.”
Broadwater cited one of the justice’s opinion that used the example of 2x4s in the construction industry. The justice said most construction companies pile up wood not used for the building and burn it. But under the court’s ruling, if a company decides to shred the wood and sell it as wood chips, that byproduct would be considered “further processing.” Thus, under current interpretation of the law, the 2x4s bought for the building would be exempt from sales taxes.
A further example: A company buys a raw material for $10 million and sells a byproduct from that material for $5 million. Under the ruling, the business does not pay sales tax on the raw material.
Broadwater’s bill levies a tax on that raw material but sales taxes from any byproduct would become a tax credit. The business would retain what it normally would owe to the state in sales taxes from the byproduct and apply that as a credit to the raw material.