Pinnacle Polymers, LLC Versus St. John the Baptist Parish Sales and Use Tax Office

• Court: Louisiana Court of Appeal
• Decided: March 24, 2021
• Docket: 19-CA-310
• Status: Unknown

Opinion

PINNACLE POLYMERS, LLC NO. 19-CA-310

VERSUS FIFTH CIRCUIT

ST. JOHN THE BAPTIST PARISH SALES COURT OF APPEAL AND USE TAX OFFICE STATE OF LOUISIANA

ON APPEAL FROM THE BOARD OF TAX APPEALS STATE OF LOUISIANA NO. L00357

March 24, 2021

SUSAN M. CHEHARDY CHIEF JUDGE

Panel composed of Judges Susan M. Chehardy, Jude G. Gravois, and Hans J. Liljeberg

AFFIRMED SMC JGG HJL COUNSEL FOR PLAINTIFF/APPELLANT, PINNACLE POLYMERS, LLC J. Grant Coleman Robert J. Burvant Timothy S. Madden

COUNSEL FOR DEFENDANT/APPELLEE, ST. JOHN THE BAPTIST PARISH SALES AND USE TAX OFFICE Russell J. Stutes, Jr. Russell J. Stutes, III CHEHARDY, C.J.

Appellant, Pinnacle Polymers, LLC (“Pinnacle”), seeks review of a 2019

judgment issued by the Louisiana Board of Tax Appeals (the “Board”) in favor of

appellee, St. John the Baptist Parish, Sales and Use Tax Office (the “Parish”), as to

the amount of sales taxes Pinnacle paid under protest for its purchases of Avant ZN

203, and any applicable interest, penalties, and costs thereon, totaling

$1,467,994.01. For the following reasons, we affirm.

Procedural History

On February 13, 2017, the Parish issued Pinnacle a Notice of Assessment of

St. John the Baptist Parish Sales and/or Use Taxes and related penalties and

interest for the audit period January 1, 2011 through December 31, 2014 (the

“Audit Period”) in the amount of $1,560,673.63. On March 14, 2017, in

accordance with La. R.S. 47:337.63, Pinnacle paid under protest the full amount of

the taxes assessed by the Parish for the Audit Period, and notified the Parish of its

intent to file a petition with the Board seeking recovery.1

Pinnacle filed a Petition for Refund of Tax Payment Under Protest with the

Board on April 3, 2017, wherein it sought a refund of the $1,560,673.63 in sales

taxes that it had paid under protest. In its petition, Pinnacle challenged the Parish’s

Assessment on three grounds: (1) Pinnacle’s purchases of Avant ZN 203 (“ZN

203”) during the Audit Period in the amount of $795,735.06 was not subject to

sales and use tax based on the applicability of the “further processing” exclusion

under La. R.S. 47:301(10)(c)(i)(aa); (2) Pinnacle’s purchase of water during the

Audit Period in the amount of $25,896.94 was exempt from the Parish’s sales and

use tax; and (3) Pinnacle’s purchases of various goods and services during the

1 La. R.S. 47:337.63 provides, in pertinent part, that “[a]ny taxpayer protesting the payment of any amount found due by the collector … shall remit to the collector the amount due, and at that time give notice of intention to file a petition with the Board of Tax Appeals … .” See La. R.S. 47:337.63(A)(1)(a).

19-CA-310 1 Audit Period in the amount of $51,696.97 were also exempt from the Parish’s sales

and use tax.2

Prior to a hearing before the Board, the parties filed a list of stipulations to

which they agreed. These stipulations purportedly resolved, among other things,

issues related to the various goods and services items, leaving only Pinnacle’s

purchases of ZN 203 and water for the Board’s determination.

At the evidentiary hearing before the Board on September 20, 2018,

Pinnacle provided the testimony of its Vice-President of Operations and plant

manager, Pieter Swanepoel; its controller, Tom Lejeune; and its expert witness, Dr.

Douglas Klendworth. In response, the Parish presented the testimony of its expert,

Dr. Brian Goodall. The Board took the matter under advisement and on January 8,

2019, the Board rendered judgment ruling in favor of both parties, in part, and

issued reasons for judgment. Specifically, the Board found in favor of Pinnacle

regarding taxes paid for its purchases of water under La. R.S. 47:305(D)(1)(c), and

in favor of the Parish finding that Pinnacle’s purchases of ZN 203 were not for the

purpose of inclusion into its final product, as required by La. R.S.

47:301(10)(c)(i)(aa)(I)(ccc), and thus, were taxable.3 The parties disposed of the

remaining issues by stipulation.

During the first week of February 2019, the Parish filed a motion to amend

judgment alleging the Board’s judgment improperly calculated the amounts owed,

and excluded interest and penalties. After addressing the alleged errors, the Board

2 Pinnacle was required to pay the Collector $1,560,673.63 due to the assessment of interest and penalties on these amounts. 3 The “further processing exclusion” relied upon by Pinnacle is set forth in La. R.S. 47:301(10)(c)(i)(aa) and provides: The term “sale at retail” does not include sale of materials for further processing into articles of tangible property for sale at retail when all of the criteria in Subsubitem (I) of this Subitem are met. (I)(aaa) The raw materials are a recognizable and identifiable component of the end product. (bbb) The raw materials are beneficial to the end product. (ccc) The raw materials are material for further processing, and as such, are purchased for the purpose of inclusion into the end product.

19-CA-310 2 issued an amended judgment on April 1, 2019, ruling in favor of Pinnacle in the

amount of $28,149.67 (relative to its purchases of water, and services stipulated by

the parties), and in favor of the Parish in the amount of $1,467,994.81 (relative to

Pinnacle’s purchases of ZN 203).

Pinnacle timely moved for an appeal of the Board’s judgment on April 25,

2019, pursuant to La. R.S. 47:1434 and La. C.C.P. art. 2123, et seq., which the

Board granted on April 30, 2019. The Parish did not appeal the Board’s ruling

regarding Pinnacle’s purchases of water.4

FACTS

Pinnacle’s business is the manufacture of polypropylene in the form of

small, round plastic pellets, which are then sold to Pinnacle’s customers. Pinnacle

produces polypropylene with varying grades of flexibility, durability, and heat

tolerance, which its customers can then use in a wide range of applications, such as

packaging, plastic goods, housewares, and industrial grade carpets.

Polypropylene is a polymer, which is a molecule that is made up of several

monomers, in this case propylene. The process of converting monomers

(propylene) to polymers (polypropylene), is known as “polymerization.”

According to Pinnacle’s plant manager, Pieter Swanepoel, Pinnacle’s process of

producing polypropylene involves three steps: the reaction phase, the degassing

phase, and the extrusion phase.

4 Once the appellate record was lodged and a briefing schedule was issued, it became apparent that the record was incomplete, as it was missing portions of the cross-examination testimony of Pinnacle’s expert witness, Dr. Klendworth. Consequently, this Court remanded the matter to the Board for the limited purpose of rehearing and transcribing the supplemental cross-examination and redirect of Dr. Klendworth, which occurred on October 14, 2020.

19-CA-310 3 Reaction Phase

The polymerization process begins by pumping a slurry of the catalyst,

Avant ZN 203,5 with inert oil into a reactor through an injection tube, which places

it inside of a fluidized bed reactor known as a “polymer bed.” Gas moves through

the bed to keep the polymer suspended, at which point the catalyst and propylene

are mixed together and exposed to heat and pressure. Pinnacle’s catalyst system

contains ZN 203, tri-ethyl aluminum (“TEA1,” a cocatalyst), and D donor, which

are needed to initiate a reaction. These three components are introduced during the

reaction phase, along with other feedstock (or raw materials, such as propylene,

and hydrogen), in varying ratios depending upon the specific characteristics sought

to be achieved in its end product. By controlling the balance of monomers, ZN

203, and other chemicals used in the reaction phase, Pinnacle can control the size

and shape of the polymers it creates, in addition to the molecular structure and

weight of the end product, which in turn determines the end product’s strength,

flexibility, durability, and heat tolerance.6

Evidence introduced at the hearing established that ZN 203 is comprised by

weight of 50% magnesium chloride, titanium tetrachloride, and an internal donor

(a diether component) as co-catalysts, and 50% pre-polymerized polypropylene.

Mr. Swanepoel explained that during the reaction phase, when all of the materials,

including ZN 203, are fed into the reactor, the reaction is initiated causing

monomers to combine together to form polymer chains that then grow to the

desired length. As the polymer grows, “it intertwines like spaghetti[,] with the

5 The ZN 203 catalyst that Pinnacle uses in its polymerization process derives its name from Karl Ziegler and Giulio Natta, the two scientists credited with developing the first-generation catalyst used in the polymerization reaction of converting monomers to polymers. Pinnacle purchases the ZN 203 from LyondellBasell, who sells it commercially under the name of Equistar. A “slurry” is a mixture of solids suspended in liquid. Here, the ZN 203 is suspended in an inert oil. The oil is meant to be a delivery assister to facilitate pumping the ZN 203 catalyst into the reactor. 6 According to Pinnacle’s expert, Dr. Douglas Klendworth, in Pinnacle’s manufacturing process, ZN 203 participates in the chemical reaction as a reactant, as do propylene and hydrogen, because there are chemical bonds being formed to create polymer. A “reactant” is something that enters into a chemical reaction where bonds are formed and/or broken.

19-CA-310 4 catalyst uniformly interspersed throughout.” There is a “chain termination”

process where additional hydrogen is added, which reacts to determine the specific

length of the polymer chain. The chain then separates and a new polymer chain

commences to grow; this is a continuous process such that every chain growth

takes approximately two seconds. Pinnacle’s expert, Dr. Klendworth,7 described

the polymer chains as long strings of molecules, connected end to end, that wrap

around each other to form tiny lumps of plastic. He compared this molecular

structure to a bale of straw, and compared each individual polymer chain to a

single piece of straw. Hydrogen can be found at the “end of every chain in

Pinnacle’s process.”8 ZN 203 does not contain hydrogen. When polypropylene

polymer is removed from the reactor, it has a “washing powder type of

consistency.” Once the reaction phase is complete, polymer is created and the ZN

203 catalyst has completed its job.

Dr. Klendworth testified that ZN 203 is pre-polymerized by its

manufacturer, LyondellBasell, prior to being shipped in specialized drums to

Pinnacle. Pre-polymerized means that the “reaction was initially started” by the

manufacturer. Dr. Klendworth explained that pre-polymerization entails exposing

a portion of ZN 203 to a small amount of TEA1. ZN 203 reacts with TEA1 by

“exchanging” a chloride molecule for a carbon molecule. The carbon molecule

then bonds with titanium in the ZN 203, which in turn, is exposed to a metered

amount of propylene to trigger a polymerization reaction, which is capable of

being fully polymerized at a later date. These nascent polymers are dispersed

throughout the ZN 203 and provide the first building block for the ultimate

7 Dr. Klendworth was accepted as an expert in inorganic chemistry, the working of Ziegler-Natta catalysts and catalysis, and the polymerization of propylene. 8 Hydrogen molecules are found at the end of each polymer chain, except for the first chain, where the pre-polymerized polypropylene present in the ZN 203 is organically linked in the first molecule formed, which is part of the 72 parts per million of the pre-polymerized polypropylene found in the final product, discussed infra.

19-CA-310 5 polymerization, which occurs when Pinnacle later pumps the pre-polymerized ZN

203 into the reactor. The pre-polymerized polypropylene component of ZN 203

provides greater stability and control of the reaction, helps control the size and

shape of the polymer chains, increases efficiency, and prevents explosivity during

the reaction phase.9 By the end of the reaction phase, the pre-polymerized polymer

component of ZN 203 is intermingled with the polymer chain molecules and is

interspersed throughout the final product—polypropylene polymer—that Pinnacle

produces.

According to Mr. Swanepoel, Pinnacle specifically chooses to use the ZN

203 catalyst because it has a narrow molecular structure, which enables Pinnacle to

imbue polymers with a wide range of characteristics during the reaction phase of

its production process (a second set of characteristics of its end product is

developed during the extrusion phase). Mr. Swanepoel emphasized that it is the

specific characteristics and performance of the end product that customers desire

(such as higher heat deflection temperatures, better stiffness, and impact balance,

which he testified the ZN 203 provides during the reaction phase), rather than the

product’s particular molecular structure or composition. In short, Mr. Swanepoel

stated that Pinnacle’s customers demand polypropylene polymers with specific

degrees of strength, flexibility, and durability. Pinnacle’s customers do not

demand polypropylene polymers with specific amounts of titanium, chlorides, or

other chemicals.

Degassing Phase

After the reaction phase is complete, the polymer is removed from the

reactor and transferred to the degassing part of Pinnacle’s production process. Mr.

Swanepoel explained that ZN 203 is a catalyst, which speeds up the reaction that

9 According to Mr. Swanepoel, if the reaction were to occur too quickly, the catalyst shatters and makes a lot of “fines,” which can lead to gels, or unwanted polymer chains, in the product.

19-CA-310 6 occurs in the reactor during the reaction phase, but unlike a processed chemical,

ZN 203 is not completely consumed—it leaves behind trace elemental catalyst

residues in amounts of “parts-per-million.” He stated that during the degassing

phase, the polymer is hydrolyzed, or treated with steam, in order to deactivate or

“kill” the ZN 203 catalyst residues (the inorganic half of ZN 203—chloride,

magnesium, or titanium). By hydrolyzing the catalyst residue, this prevents any

chlorine, magnesium, or titanium residues from causing further reactions in the

finished product, which, if not rendered inert, could result in discoloration or

corrosion damage to the polymer after manufacture is complete. The experts

agreed that, after being neutralized by steam, the catalyst residues are of no benefit

to Pinnacle’s end product, are harmless, and too expense to remove.

Approximately 144 pounds of ZN 203 (of which 72 pounds is pre-

polymerized polypropylene and the other half is catalyst), are used to create

approximately 1,000,000 pounds of polypropylene. The ZN 203 catalyst residue

that remains in Pinnacle’s end product can be measured in parts per million and is

hydrolyzed, or rendered inert, by steam. The parties’ experts agreed that the

titanium component of ZN 203, which is the polymer’s only source of titanium, is

recognizable and identifiable (though hydrolyzed) in Pinnacle’s finished product

by using x-ray fluorescence. The experts further agreed that, while the other

components of the ZN 203 catalyst, such as magnesium and chloride, are

identifiable in Pinnacle’s finished product, they cannot be traced back specifically

to ZN 203, because there are other sources of these chemicals introduced during

Pinnacle’s manufacturing process. Similarly, the pre-polymerized polypropylene

component of ZN 203 becomes indistinguishable from the other polypropylene

molecules in the end product. The experts also agreed that each million pounds of

polypropylene pellets produced by Pinnacle contains approximately 72 pounds of

pre-polymerized polypropylene that is derived from the ZN 203 used to create it.

19-CA-310 7 Put another way, about 72 parts per million of polypropylene in Pinnacle’s end

product is derived from the pre-polymerized polypropylene component of ZN 203.

According to Pinnacle’s own expert, in terms of identifying those pre-polymerized

polypropylene molecules, “it’s a straw in a bale of straw, but it’s there.”

Dr. Klendworth explained that ZN 203 is a “fifth generation” catalyst

product that is used to initiate a chemical reaction to convert a monomer, i.e.,

propylene, into to polymer, i.e., polypropylene. He stated that with regards to the

first, second and third generation catalysts, the catalyst residue could not be

deactivated with steam, but rather, often required an expensive “de-ashing” process

during production to remove any harmful catalyst residue from the polypropylene

polymer. With the advent of fourth generation catalysts, the need for de-ashing

was eliminated, as deactivating the catalyst residue could be accomplished using

less expensive procedures. Developers then began to focus on creating a catalyst

that was not only inexpensive to deactivate, but which also added some value to

the finished product, resulting in the development of fifth generation catalysts,

such as ZN 203. Fifth generation catalysts, which are magnesium supported

catalysts, increased the catalysts’ reactivity, thereby reducing the catalyst residues

to such insignificant amounts that removing the residue was no longer necessary or

cost-efficient. Additionally, fifth generation catalysts, such as ZN 203, have the

added benefit of narrower molecular structure and greater variation in molecular

weight distribution.10

Extrusion Phase

In the final extrusion phase of Pinnacle’s manufacturing process, the

polypropylene polymer, which has the consistency of a “washing powder,” gets

10 The ZN 203 catalyst is a high-activity catalyst that, in terms of molecular weight distribution, helps control the average length of the polymer chains in order to produce a “tighter polymer molecule” that provides certain characteristics of the polymer produced during the reaction phase. According to Dr. Klendworth, part of the role of the ZN 203 catalyst is to affect the molecular weight distribution in Pinnacle’s end product.

19-CA-310 8 melted and blended. The powder is put into an extruder, which contains a melting

section and a mixing section where the polymer gets well mixed with any additives

that are introduced. It is during the extrusion phase that Pinnacle is able to further

manipulate and refine the characteristics of the end product according to its

customer’s specifications. The polymer then moves through a die plate, “much

like a meat grinder with blades on it,” which occurs in an underwater application.

Water is used to cool the polymer so that it can be cut and then shaped into round

pellets. The pellets are then dewatered and dried. After extrusion, the pellets are

placed into Pinnacle’s packaging silos before being loaded onto rail cars for

delivery.

Pinnacle contends that ZN 203 is vital to its manufacturing of the various

grades of polypropylene polymers it produces. Pinnacle asserts that it should not

be required to pay sales tax on its purchases of ZN 203, because not only is ZN

203 purchased by Pinnacle for the purpose of “react[ing] with all [the] other

reactants” during the reaction phase of Pinnacle’s manufacturing process, but ZN

203 is also purchased by Pinnacle for further processing, or so that it will “be in the

final products” that Pinnacle sells to its customers.

To the contrary, the Parish contends that Pinnacle’s purchases of ZN 203 are

not excluded from taxation because Pinnacle, not its customers, is the ultimate

consumer of the ZN 203 it purchases. The Parish claims that the purpose for

which Pinnacle purchases the ZN 203 “pre-polymerized catalyst [is] to efficiently

and safely catalyze, in the reaction phase of production, its monomer feedstock or

raw material, propylene, into a polymer end product.” According to the Parish,

Pinnacle does not purchase ZN 203 for purposes of further processing the pre-

polymerized polypropylene component into its end product, but rather, the trace

elements that end up in Pinnacle’s final product are merely an incidental benefit.

19-CA-310 9 ISSUE PRESENTED FOR REVIEW

While Pinnacle sets forth four assignments of error, the sole issue for this

Court’s review is whether the Avant ZN 203 purchases by Pinnacle to manufacture

its polypropylene pellets are excluded from sales and use tax under the “further

processing exclusion” set forth in La. R.S. 47:301(10)(c)(i)(aa). Based upon the

evidence and testimony presented at the hearing, the Board determined that the

“further processing exclusion” does not apply to relieve Pinnacle from sales tax

liability on its purchases of ZN 203. We agree.

STANDARDS OF APPELLATE REVIEW

Judicial review of a decision of the Board of Tax Appeals is rendered upon

the record as developed in proceedings before the Board, is limited to the facts on

the record, and to questions of law. A decision of the Board will not be reversed

on appeal absent a finding that the Board (1) failed to correctly apply the law and

adhere to procedural standards or (2) that the Board’s findings of fact are

manifestly erroneous in view of the evidence on the entire record. See

International Paper, Inc. v. Bridges, 07-1151 (La. 1/16/08), 972 So.2d 1121, 1127-

28; St. Pierre’s Fabrication and Welding, Inc. v. McNamara, 495 So.2d 1295,

1298 (La. 1986); Falco Lime, Inc. v. Kennedy, 99-189 (La. App. 5 Cir. 7/27/99),

739 So.2d 953, 955; Ferrara v. Secretary, Dept. of Revenue and Taxation, State of

La., 96-806 (La. App. 5 Cir. 1/28/97), 688 So.2d 147, 148. See also La. R.S.

47:1435.

Here, if we find that the Board utilized the appropriate laws and procedures

in reaching its decision, we must then determine, in view of the evidence on the

entire record, whether the Board was manifestly erroneous in reaching its

conclusion that Pinnacle’s purchases of ZN 203 were not for purposes of inclusion

in its final product, and therefore, should not be excluded from the sales and use

tax provisions. If the Board has correctly applied the law and adhered to correct

19-CA-310 10 procedural standards, and its findings are not manifestly erroneous, its judgment

should be affirmed. See Int’l Paper, 972 So.2d at 1127-28; Falco Lime, 739 So.2d

at 955; Ferrara, 688 So.2d at 148.

LEGAL ANALYSIS

A manufacturer, like any consumer, is taxed on items of tangible personal

property that it purchases and uses in manufacturing its product, pursuant to La.

R.S. 47:302(A), which states, in pertinent part:

There is hereby levied a tax upon sale at retail, the use, the consumption, the distribution, and the storage for use of consumption in this state, of each item or article of tangible personal property as defined herein … .

Tangible personal property is that which is otherwise perceptible to the

senses. La. R.S. 47:301(16)(a). “Sale at retail” is defined in La. R.S.

47:301(10)(a)(i) as a “sale to a consumer or to any other person or for any purpose

other than for resale as tangible personal property … .” Generally, items that are

purchased for the purpose of reselling them in the open market are not taxed until

they are sold at retail to the end consumer. A manufacturer may exclude a raw

material from the sales and use tax obligation when three specific criteria are met:

 The raw materials become a recognizable and identifiable component of the end product.

 The raw materials are beneficial to the end product.

 The raw materials are material for further processing, and as such, are purchased for the purpose of inclusion into the end product.

La. R.S. 47:301(10)(c)(i)(aa)(I)(aaa)-(ccc).

This exclusion is known as the “further processing exclusion” under which

Pinnacle claims that its purchases of ZN 203 during the Audit Period qualify for

tax exclusion because the material was used in its process of manufacturing

polypropylene. The “further processing exclusion” was designed to eliminate the

19-CA-310 11 tax on the sale of a material purchased for further processing into an article of

tangible property, and to place the tax on the ultimate consumer when the finished

product is sold. See Bridges v. Nelson Indus. Steam Co., 15-1439 (La. 5/3/16), 190

So.3d 276, 280 (citing Int’l Paper, 972 So.2d at 1133). The “further processing”

provision is an exclusion from sales tax, rather than an exemption, and thus is to be

liberally construed in favor of the taxpayer. Id. at 281; Harrah’s Bossier City Inv.

Co., LLC v. Bridges, 09-1916 (La. 5/11/10), 41 So.3d 438.

The Board concluded that because trace amounts of ZN 203 were

recognizable and identifiable components of Pinnacle’s end product, Pinnacle’s

purchase of ZN 203 satisfied the first criteria. The Parish has not appealed this

finding. The parties stipulated as to the second criteria of the three-pronged test;

that is, that Pinnacle’s end product derived some benefit from ZN 203. Thus, the

crux of the matter before us lies in the third criteria, which seeks to ascertain

whether the raw materials were purchased by Pinnacle for the purpose of inclusion

in its end product.

Although recognizing that inclusion in the final product need not be the

primary purpose for which the materials were purchased, based on the evidence

and testimony presented at the hearing regarding “the chemical make-up and the

physical reactions at play in [Pinnacle’s] manufacturing process[,]” the Board

found that Pinnacle’s purchase of ZN 203 was not for purposes of inclusion in the

polypropylene pellets it manufactures. The Parish frames this as a fact to be

believed or rejected. Pinnacle, however, contends that the BTA improperly

employed a more restrictive “purpose test” that, essentially, interdicted the fact-

finding process, such that the Board’s finding regarding Pinnacle’s purchases of

ZN 203 was the result of an improper legal analysis.

Before we can consider whether the Board’s findings were manifestly

erroneous, we must turn our attention to the applicable law.

19-CA-310 12 Prior Jurisprudential Analyses of the “Further Processing Exclusion”

Prior to 2016, the “further processing exclusion” provided, in pertinent part:

The term “sale at retail” does not include sale of materials for further processing into articles of tangible personal property for sale at retail. The exclusion was first analyzed by the Supreme Court in Traigle v. PPG

Industries, 332 So.2d 777 (La. 1976), wherein the Court recognized a “purpose”

requirement, distinguishing those materials which were purchased for “processing

‘into’ the finished article” from those materials purchased “only to be used in the

process of producing the manufactured product for sale.” Traigle, 332 So.2d at

781. At issue in Traigle was whether the purchase of graphite blades utilized in

the manufacture of chlorine was excluded from taxation under the sales and use tax

provisions. The manufacturer claimed that its purchase of graphite blades used to

make anodes were excluded from taxation because carbon residue from the anodes

was found in the final chlorine product. Id. at 780. In recognizing the purpose of

the “further processing exclusion”—which is to place the tax burden on the

ultimate consumer—the Court considered whether the manufacturer, or the

manufacturer’s customer, was the ultimate consumer of the graphite blades. Id. at

779.

After thoroughly reviewing the manufacturer’s process of chlorine

production,11 the Court determined that the manufacturer was the ultimate

consumer of the graphite anodes because, even though “waste carbon dioxides”

from the graphite remained in the final product, the residue constituted “waste

materials in the chemical reaction, the purpose of which was to produce chlorine

11 Chlorine is produced from salt water brine by an electrolytic process. Vulcan used graphite blades to make anodes so that electricity could pass through a salt water brine in such a way as to break down the brine into its component parts (chlorine, hydrogen, and caustic soda, all saleable products). See Traigle, 332 So.2d at 779. During the electrolytic process, chlorine (a pure element) escapes as a gas. Mingled with it is a small residue of carbon monoxide and carbon dioxide, about 1.5 to 2 percent of the total volume. Approximately sixty percent of the original graphite anodes remained in the final product, the removal of which was not economically feasible. Id. at 780.

19-CA-310 13 (not carbon oxides) for sale at retail.” Id. at 782. Specifically, the Court found that

the inclusion of the waste residue from the graphite into the final product resulted

from an unintended (although unavoidable) inefficiency of the manufacturing

process, and was in the nature of an “impurity rather than an integral part” of the

finished product. Id. at 781. Thus, the Traigle Court held that the graphite blades

were taxable to the manufacturer because they were not purchased for further

processing into chlorine. See Int’l Paper, 972 So.2d at 1132.

A few years later, in Vulcan Foundry, Inc. v. McNamara, 414 So.2d 1193

(La. 1981), the Supreme Court reiterated the “purpose” factor in the test for

determining the ultimate consumer of the raw material. In Vulcan, the

manufacturer produced manhole covers, drain grates, and other municipal castings

made of iron. The product standards required that the iron contain between 3.10

and 3.30 percent of carbon by weight, which meant that, depending on how

deficient the scrap iron was, carbon might have to be added during processing to

meet the requirements. Id., 414 So.2d at 1198. As a heat source for melting the

scrap iron, Vulcan used coke, a coal derivative, which gives off carbon as it burns,

and added necessary, though small, quantities of carbon to the iron. The

manufacturer placed alternating layers of scrap iron and coke into a cylindrical

structure (i.e., a cupola) for heating. The molten iron would then be drained from

the bottom of the cupola and poured into the casting molds. Relying on the

testimony of a metallurgist, a chemist, and Vulcan’s general manager, the Court

determined that Vulcan’s use of coke in its manufacturing process resulted in a net

increase of approximately .046 percent (or less than one-half of one percent) of the

3.2 percent carbon present in the final product. Id. at 1199.

Vulcan claimed that its purchase of coke was excluded from taxation

because coke—a raw material primarily composed of carbon—while used in the

manufacturing process, was a key and beneficial component of the final iron

19-CA-310 14 products Vulcan produced. Id. at 1198. The Supreme Court disagreed. Although

the Vulcan Court recognized that the presence of carbon from the coke became an

identifiable and beneficial component of the iron products that Vulcan

manufactured, it stated that “the proper inquiry, however, is the purpose for which

the coke is bought.” Id. at 1198 (emphasis added). After considering Vulcan’s

manufacturing process, the Vulcan Court held:

It is clear from the evidence in this case that coke is purchased for the purpose of heating the scrap iron; the small amount of carbon in the finished product is incidental. The fact that using coke as a fuel has a beneficial side effect does not change the purpose for which it is bought. Accordingly, we conclude that Vulcan’s purchase of coke is as a “consumer” for a “purpose other than for resale,” that is, for its use as a heat source to melt scrap iron and not for further processing into an article of tangible property for sale at retail.

Id. at 1199. The “further processing exclusion” did not apply to exclude Vulcan’s

purchase of coke from taxation because the coke was purchased as an efficient

heating source, not for further processing into the iron products Vulcan

manufactured for sale at retail. Id.

Following the Vulcan decision, the Louisiana Department of Revenue

(“DOR”) promulgated an administrative regulation to provide guidance on the

meaning of the “further processing exclusion.” La. Admin. Code, Title 61, Part I,

§ 4301, Retail Sale or Sale at Retail (d) provides:

Sale of materials for further processing into articles of tangible personal property for subsequent sale at retail do no constitute retail sales. This exemption does not cover materials which are used in any process by which tangible personal property is produced, but only those materials which themselves are further processed into tangible personal property. Whether materials are further processed or simply used in the processing activity will depend entirely upon an analysis of the end product. Although any particular materials may be fully used,

19-CA-310 15 consumed, absorbed, dissipated or otherwise completely disappear during processing, if it does not become a recognizable and identifiable component which is of some benefit to the end product, it is not exempt under this provision. The fact that a material remained as a recognizable component of an end product by accident because the cost of removal from the end product was prohibitive or for any other reason, if it does not benefit the property by its presence, it was not material for further processing and the sale is not exempt under this provision.

From this regulation, the “three-pronged test” (now codified in La. R.S.

47:301(10)(c)(i)(aa)(I)(aaa)-(ccc)) for determining the taxability of those materials

purchased for further processing was developed, and formed the basis for the

Supreme Court’s 2008 decision in International Paper. Int’l Paper, 972 So.2d at

1129.

In International Paper, at issue was whether chemicals purchased by the

manufacturer for use in its production of white paper products were excluded from

taxation under the sales and use tax provisions. The manufacturer, IP, converted

raw timber and wood chips into pulp for the ultimate production of white paper

products. Once converted, lignin remained in the pulp, leaving a brown/tan color

that was unusable for the grades of paper that IP produced. Id. at 1124. A small

percentage of lignin must remain in the pulp for the paper to be usable. Id. In

order to turn the brown pulp white, IP employed a “decolorization” or “bleaching”

phase during its manufacturing process using three chemicals: sodium chlorate,

hydrogen peroxide, and elemental oxygen, which are oxidizing agents. Id.

Oxygen atoms derived from the bleaching chemicals would “break away” from the

original compounds and recombine or bond with the molecular structure of the

pulp, particularly the lignin molecules, during the bleaching process which turned

the pulp a white color. The incorporation of the oxygen atoms derived from the

bleaching chemicals into the molecular structure of the pulp, not only gave the

19-CA-310 16 pulp its white color, but also improved the quality of the pulp making it suitable for

manufacture of the types and grades of paper IP desired to produce.

Applying the analysis set forth in Traigle, Vulcan, and the DOR’s

regulation, LAC 61:I:4301(d), the Board issued a decision finding that IP’s

purchase of the three chemicals was excluded from taxation, stating:

[I]n order to be “material for further processing” as contemplated by the [La. R.S. 47:301(10)(c)(i)], the raw materials or their component molecular parts must meet three criteria: (1) they must be of benefit to the end product; (2) they must be a recognizable and identifiable component of the end product; and (3) they must have been purchased for the purpose of reprocessing into the end product.

Int’l Paper, 972 So.2d at 1125. After considering IP’s manufacturing process, the

Board found that IP had purchased the chemicals to function as a source of oxygen

needed in the bleaching process for creation of its white paper products. The

Board also found that a significant amount of the oxygen derived from the

bleaching chemicals was not only recognizable and identifiable in the resulting

bleached pulp, but that the oxygen from the chemicals was also beneficial to the

quality of bleached pulp. Having determined that IP’s purchase of the chemicals

was for further processing which met all three prongs of the test, the Board found

that the sales tax exclusion applied. Id. at 1126.

The district court affirmed, finding that the Board’s factual determinations

were not manifestly erroneous. Id. The Second Circuit, however, reversed,

finding that IP failed to show that its “primary” purpose for purchasing the

oxidizing agents was for further processing into its end product. See International

Paper, Inc. v. Bridges, 42,023 (La. App. 2 Cir. 4/4/07), 954 So.2d 321, 329-34.

The appellate court observed that “[a]lthough the chemical reactions in the process

[of bleaching the paper] involve adding oxygen atoms whose origins can be traced

to the chemicals or processes in question, the purpose of the chemicals is to

19-CA-310 17 process the lignin in the pulp for paper, not to incorporate raw materials [the

chemicals] into the paper product.” Id.

After examining its prior jurisprudence in Traigle and Vulcan, and

considering the DOR’s administrative rule addressing the “further processing

exclusion,” the Supreme Court reversed the appellate court, reinstated the Board’s

decision, and formulated the “test for determining which raw materials, purchased

for the further processing of final products for resale, are excluded from the sales

and tax provisions.” Int’l Paper, 972 So.2d at 1136. The International Paper

Court held that raw materials that are “further processed” into end products are

excluded from sales and use taxation when: “(1) the raw materials become

recognizable and identifiable components of the end products; (2) the raw

materials are beneficial to the end products; and (3) the raw materials are material

for further processing, and as such, are purchased with the purpose of inclusion in

the end products.” Id.

In formulating this test, the Supreme Court expressly rejected the Second

Circuit’s use of a “primary purpose” test, finding that it was an improper expansion

of the Court’s prior holdings in Traigle, supra, and Vulcan, supra. The Court did

not overrule its holdings in Traigle and Vulcan, however, stating that neither case

“suggested that a ‘primary’ purpose was required,” but rather, “both the Traigle

and Vulcan Courts recognized the necessity of a ‘purpose’ test.” Id. at 1135

[emphasis added].

The Supreme Court last addressed the “further processing exclusion” in

2016, in Bridges v. Nelson Indus. Steam Co., supra. Nelson Industrial Steam

Company (“NISCO”) produces electricity by burning petroleum-coke (“petcoke”)

to create steam that turns turbines to generate electricity for its own use and for

resale. The steam generated is also a product for resale. In order to meet the

Environmental Protection Agency regulations when burning petcoke, NISCO must

19-CA-310 18 mix limestone with the petcoke, thereby limiting the production of sulfur into the

atmosphere. The ash produced by this chemical reaction is also an end product

that NISCO sells for retail. NISCO’s plant was designed with all three products in

mind as revenue producing products in its overall operation. NISCO claimed that

its purchase of limestone was for the dual purpose of inhibiting sulfur emissions in

its production of electricity and for producing ash. In light of the limestone being

further processed into ash, NISCO averred that its purchase of this raw material

was subject to the “further processing exclusion” and, thus, untaxable. NISCO,

190 So.3d at 277-278. The DOR and the Calcasieu Parish School System (“tax

collectors”), who acknowledged that sales and use taxes had not been collected on

NISCO’s purchases of limestone for a number of years, argued that the limestone

was taxable and not subject to any exclusion. Id. at 278.

In holding that the “further processing exclusion” did not apply to NISCO’s

purchase of limestone, the trial court found that NISCO’s process for producing

electricity and steam requires the use of limestone, which results in the

“unavoidable” production of ash (an “incidental byproduct”), and that none of the

component parts of limestone could be detected in either the electricity or steam

that NISCO produces. Id. The appellate court affirmed, emphasizing that “ash” is

an “incidental byproduct” and that the “primary product” NISCO produces for sale

at retail is electricity. Id.

The Supreme Court reversed, finding that the lower courts had committed

legal error in “narrowing their analysis solely to the end product of electricity and

not considering the end product of ash, thereby erroneously interjecting a “primary

product” or “business purpose” test, “which is not rooted in any statutory,

regulatory, or jurisprudential authority.” Id. at 279. The NISCO Court also found

that the lower courts had imposed the “primary purpose” test previously rejected in

International Paper. Id. In considering whether the “further processing

19-CA-310 19 exclusion” applied to NISCO’s purchase of limestone, the Court held that “the end

product is the starting point of the analysis.” Id. at 281. Both of NISCO’s

products—the primary electricity product and the ash byproduct—had to be

separately analyzed under the International Paper three-pronged test to determine

the applicability of the “further processing exclusion.” Id. at 284. After doing so,

the Court found that NISCO’s production of ash satisfied all three prongs, as the

ash produced was an intentional, planned, byproduct/end product of NISCO’s

overall manufacturing operation, that NISCO had purchased equipment

specifically designed for the production of ash, and thus, the limestone used to

produce it was excluded from sales and use tax. Id. at 285.

In addition to these Supreme Court cases, there are two appellate court cases

involving the “further processing exclusion” that merit discussion: Exxon Corp. v.

Schofield, 583 So.2d 1195 (La. App. 1 Cir. 1991), writ denied, 588 So.2d 103 (La.

1991), and Graphic Packaging, Intern., Inc. v. Lewis, 50,371 (La. App. 2 Cir.

2/3/16), 187 So.3d 499. At issue in Exxon was whether the manufacturer’s

purchases of certain initiators and chain transfer agents used to produce

polyethylene pellets were excluded from taxation under the “further processing

exclusion.” Exxon, 583 So.2d at 1196. In its polymerization process, rather than

using a catalyst (such as ZN 203) to convert monomers, ethylene, into polymers,

polyethylene, Exxon utilized a process involving “free radicals.” Id.12 Every

single polymer chain created in production of the pellets contained elements of the

initiators and chain transfer agents. After closely examining Exxon’s

12 Exxon’s polymerization process involved three chemical steps. In the first stage (the “chain initiation stage”), after ethylene was introduced, certain chemicals or chain initiators were added and then heated, causing the initiators to break into fragments, which produced free radicals. In the second stage, the heated ethylene would react with the free radicals and form another radical. The reactions continued down a “chain” until two radicals reacted with themselves. The final stage (the “chain termination” stage), occurred when two chains came together to form a stable bond, with initiator fragments on both ends. The end result was a “macromolecule.” Exxon, 583 So.2d at 1196-97. Other chemicals called “chain transfer agents,” which caused certain molecules added at the bottom of the chain to be transferred to another molecule, making two molecules instead of one, resulting in lower molecular weight. Each pellet produced contained a quadrillion of the chains or macromolecules. Id.

19-CA-310 20 polymerization process, and finding that elements of the initiators and chain

transfer agents were chemically linked to the final product, were an essential

component of the end product, and affected the specific properties of the pellets

produced, the court determined that the “further processing exclusion” applied. Id.

at 1198.

Similarly, in Graphic Packaging, supra, at issue was whether raw materials

(caustic soda, sodium, and sulfur) were purchased by GPI for further processing in

its production of paperboard products and, thus, subject to the “further processing

exclusion.” In determining whether the third prong (or the “purpose” prong) of the

International Paper test was satisfied, the court stated that “the pertinent inquiry is

whether the chemicals were purchased for the purpose of incorporation or

inclusion in the end product, not whether they were purchased for achieving some

specific benefit in the end product.” Graphic Packaging, 187 So.3d at 505-06

(emphasis supplied). The trial court found that GPI’s manufacturing process was

specifically designed so that a certain amount of the chemicals used remained in its

end product, and if they were removed, the benefits achieved (i.e., mass,

conductivity, sizing, and strength) in the end product would no longer exist. Id. at

503. The trial court held that GPI’s purchase of raw materials met the purpose

prong. Id.

On appeal, the tax collector argued that GPI failed to satisfy the purpose

prong of the “further processing exclusion” because it failed to show that “it

purchased the chemicals for the purpose of achieving conductivity and additional

mass in the end products.” Id. at 505. In rejecting that argument and affirming

that the “further processing exclusion” applied, the Second Circuit found that the

tax collector was “improperly conflating the benefit and purpose prongs, perhaps

in an effort to circumvent the rejection of the ‘primary purpose’ test” in

International Paper. Id.

19-CA-310 21 In 2016, the Legislature amended La. R.S. 47:301(10)(c)(i)(aa), the former

“further processing exclusion,” by Act 3 of the 2016 Second Extraordinary

Session. As previously mentioned, the current provision provides, in pertinent

part:

(10)

(c)(i)(aa) The term “sale at retail” does not include sale of materials for further processing into articles of tangible personal property for sale at retail when all of the criteria in Subsubitem (I) of this Subitem are met.

(I)(aaa) The raw materials become a recognizable and identifiable component of the end product.

(bbb) The raw materials are beneficial to the end product.

(ccc) The raw materials are material for further processing, and as such, are purchased for the purpose of inclusion into the end product.

The amendment redefined “sale at retail” and added subitem (I) parts (aaa),

(bbb) and (ccc), thereby incorporating into the statute the three-pronged test

enunciated in International Paper, which decision reaffirmed the Supreme Court’s

prior rulings in Traigle and Vulcan, and was applied by it in NISCO. The addition

of subitem (I) parts (aaa), (bbb) and (ccc) to the statute is merely a codification of

the prior jurisprudence that makes the International Paper three-pronged test the

statutory test for determining whether or not materials used in further processing

are excluded from sales and use taxation. Section 2 of Act 3 provides that the

amendment was intended to clarify the original intent and application of La. R.S.

47:301(10)(c)(i)(aa). The new statutory definition of “sale at retail” enacted by

Act 3 became effective on June 23, 2016, and was expressly made retroactive and

applicable to all refund claims submitted or assessments of additional taxes due

which were filed on or after the effective date of the Act. Here, the Parish issued

19-CA-310 22 its assessment to Pinnacle on February 13, 2017, after the effective date of the

newly enacted statute.

With these legal principles in mind, we now turn to examine whether the

Board properly applied them to Pinnacle’s purchases of ZN 203.

Pinnacle’s Purchases of ZN 203 and the Further Processing Exclusion

Prior to analyzing whether Pinnacle purchased ZN 203 for the purpose of

inclusion in its final product, the Board expressly recognized that in order to satisfy

the third prong of the “further processing exclusion,” inclusion of ZN 203 in its

final product need not have been the primary purpose for which Pinnacle

purchased ZN 203 for use in its manufacturing process. As directed by the

Supreme Court in NISCO, 190 So.3d at 282, the Board began its analysis with

Pinnacle’s end product—polypropylene pellets—and looked at the product’s

chemical make-up and the physical reactions at play in Pinnacle’s process to

manufacture it. In its written reasons for judgment, the Board concluded that the

“further processing exclusion” does not apply to Pinnacle’s purchases of ZN 203,

because the testimony and evidence did not support a finding that Pinnacle

purchased ZN 203 for the purpose of inclusion in its final product:

[Pinnacle] argues that Exxon Corp. v Schoefield, 583 So.2d 1195, 1196 (La. Ct. App. 1991), writ denied, 588 So.2d 103 (La. 1991), provides instructive guidance for this case. The relevant dispute in Exxon was over the taxability of “initiators and chain transfer agents” under the further processing exclusion. Exxon, 588 So.2d 1196.

On appeal, the First Circuit defined the scope of the further processing exclusion in accordance with the holding of our Supreme Court’s holding in Traigle v. PPG Industries, Inc., 332 So. 2d 777 (La. 1976). The First Circuit read Traigle as applying the exclusion to materials “purchased for the purpose of resale, or for processing into the article produced for sale,” thereby forming a “recognizable, integral part of the finished product.” Exxon, 583 So.2d at 1197 (emphasis in

19-CA-310 23 original). The First Circuit then held that the materials in dispute qualified for the exemption, stating:

We conclude that the initiators and chain transfer agents are chemically linked to the final product in that they affect the specific properties of the polymer produced. As stated by [an expert witness in the field of polymer chemistry], methane is incapable of reacting alone. [The taxpayer] purchased the initiators and chain transfer agents for the purpose of combining them with ethylene, by means of a chemical reaction, to produce polyethylene. These chemicals are vital to the manufacture of the 80 different grades of polyethylene pellets.

Exxon, 583 So.2d at 1198 (substitutions added).

[The Parish], on the other hand, relies on the case of Vulcan Foundry, Inc. v. McNamara, 414 So.2d 1193 (La. 1981). The dispute in Vulcan concerned the taxability of coke, a derivative of coal. The taxpayer in that case used the coke in the process of smelting scrap iron for manhole covers and other iron items. Scrap iron loses some of its carbon content in the smelting process. However, the taxpayer needed to replace some of the lost carbon in the finished products to achieve the appropriate grade of iron.

By using coke, which is comprised of 90% carbon, as a heat source for the smelting process, the taxpayer was able to replace some of the lost carbon. To do this, the taxpayer placed layers of coke above and below layers of scrap iron while melting the scrap iron down. A small amount of the carbon from the coke transferred into the molten iron. The most critical factor to the Supreme Court, however, was that the coke was purchased as a heat source. The Court determined that the addition of carbon to the end product was a secondary benefit of the use of coke.

[The Parish’s] expert witness, Dr. Brian Goodall, testified that although free radicals and catalysts, such a ZN 203, are both used to trigger polymerization, they are as different as “apples” and “oranges.” Dr. Goodall

19-CA-310 24 testified that free radicals leave recognizable and identifiable component molecules at the ends of the resulting polymer chains. ZN 203, however, does not become a terminal component of the finished polymer chain. The polymer chains in this case end up with hydrogen molecules at the end of their chains, and ZN 203 does not contain hydrogen.

The Board can readily conclude that [Pinnacle] purchased ZN 203 to achieve specific molecular weight distributions, and the resulting benefits, in the final products. Achieving the desired physical characteristics was critical for [Pinnacle] to make a marketable polymer. However, under the reasoning of Graphic Design Packaging, the third prong of the International Paper test does not ask whether a material was purchased for its specific benefits to the final product. Those benefits are more pertinent to the second prong of the International Paper test.

A careful reading of Exxon leaves the Board to conclude that the central dispute in that case concerned the link between the use of free radicals and the resulting benefit to the final product. The connection between the material and the benefit to the final product is properly viewed as an analysis of the second prong of the test. The second prong is not at issue here, because the parties have already stipulated that ZN 203 is beneficial to the final product.

As Dr. Goodall and Mr. Swanepoel testified, the inclusion of pre-polymerized polypropylene in ZN-203 prevents the polymer from losing its shape in the reactor. In this respect, the purpose of pre-polymerization is to provide stability during the polymerization process. The use of a catalyst to cause a reaction is generally not subject to this analysis because it is most often used up in the reaction or separately removed. The evidence established that after its use in the reaction, the ZN-203 is deactivated by steam so that it becomes a harmless impurity. The evidence established that the optimal amount of catalyst residue was zero, but that there was no ongoing need to remove these trace residues. The purpose of introducing ZN-203 was to serve as a catalyst and cause a reaction, not for the inclusion of even its few trace elements in the final product. [Emphasis supplied.]

19-CA-310 25 Pinnacle argues that the Board committed legal error when it utilized an

“improperly restrictive purpose test” and, in essence, employed a “primary” or

“sole” purpose test in contravention of the Supreme Court’s rulings in

International Paper and NISCO, particularly with respect to its failure to find, at a

minimum, that the 50% pre-polymerized polypropylene component of ZN 203 did

not satisfy the third prong of the purpose test. Pinnacle contends that the testimony

of its witnesses established that, because “Pinnacle ‘knowingly’ purchases and uses

ZN 203 with the ‘understanding’ that both components of ZN 203 [the catalyst

component and the pre-polymerized polypropylene component] will remain in the

final product,” its inclusion of ZN 203 in its end product was “not unintended” and

was “by design,” and that this evidence was sufficient to satisfy the third prong of

the International Paper purpose test. We disagree.

Under Pinnacle’s proposed application of the purpose test, a manufacturer

can satisfy the third prong merely by establishing that it “knowingly” uses the

purchased raw material in its manufacturing process with the “understanding” that

elements from the materials—no matter how insignificant or incidental—will

remain in its finished product. While Pinnacle contends the Board utilized an

improperly restrictive purpose test, Pinnacle asks this Court to employ an overly

broad purpose test, which, arguably, eliminates consideration of the actual

“purpose” or “purposes” for which the raw material was purchased altogether or

mistakenly equates “knowing” and “understanding” with “purpose.” Under

Pinnacle’s proposed application, whether the manufacturer purchased the raw

materials for the purpose of inclusion in the end product is either irrelevant or is

satisfied as long as the manufacturer knowingly uses the raw material it purchases

with the understanding that at least some of the material will end up in its final

product.

19-CA-310 26 We find that Pinnacle’s proposed application of the third prong does not

comport with the Supreme Court’s interpretation of the purpose test in

International Paper, supra, or NISCO, supra, upon which Pinnacle relies. At the

very least, the cases are factually distinguishable from the instant case and both

address whether the manufacturer’s purpose for purchasing the raw material was,

at least in part, for inclusion in its end product, a consideration that Pinnacle

appears to gloss over or perhaps redefine.

In International Paper, while the Supreme Court expressly rejected a

“primary” purpose requirement to the purpose test, which Pinnacle erroneously

contends the Board employed here, the Court nevertheless employed a purpose

test, recognizing that IP purchased the chemicals for purposes of bleaching the

lignin in the pulp it used to manufacture white paper products, and because the

significant amount of oxygen atoms derived from those chemicals during the

bleaching process were bonded and incorporated into the molecular structure of the

pulp, thereby increasing the quality of the pulp. The oxygen atoms derived from

the bleaching chemicals remained in the product “by design;” without it, both the

quality and color of the pulp would be compromised and render it unsuitable for

manufacturing the type of paper IP sought to produce. Id. at 1126. Because one

purpose for purchasing the bleaching chemicals was for inclusion of the oxygen

atoms derived from the chemicals into the end product, IP’s purchase met the third

prong of the “further processing exclusion,” and no sales taxes thereon were

determined to be due. Id.

Unlike International Paper, the testimony and evidence introduced at the

hearing herein established that ZN 203 is not necessary for inclusion, nor is it an

integral part of Pinnacle’s end product. Put simply, neither its inclusion nor

exclusion affects the quality of Pinnacle’s end product. The trace elements of the

ZN 203 catalyst component found in the end product are hydrolyzed and even

19-CA-310 27 though they are uniformly dispersed throughout the polypropylene polymer, they

are not bonded into the molecular structure of the polymer. Thus, if the catalyst

residues from ZN 203 were removed from the end product—which the experts

agreed was unnecessary and a needless expense—the integrity of the

polypropylene pellets would not be compromised. Similarly, while the pre-

polymerized polypropylene component of ZN 203 may have the benefit of adding

72 parts per million more of polypropylene in Pinnacle’s end product, the evidence

showed it is merely a “single straw in the bale of straw” and is incidental to, and

not an integral part of, Pinnacle’s end product. Moreover, that “little bit more” of

polypropylene contained in the end product that is derived from ZN 203 is not a

purpose for which Pinnacle purchases ZN 203.

In NISCO, the Supreme Court similarly found that the manufacturer had a

dual purpose for its purchase of limestone: inhibiting sulfur emissions when

producing electricity, and producing ash. The NISCO Court looked to NISCO’s

“purposeful decisions” and “choice of manufacturing process and technology”

when it considered whether NISCO’s purchase of limestone met the purpose prong

of the “further processing exclusion.” Pinnacle avers that, like NISCO, its

purchases of ZN 203 should be excluded from taxation since it “purposefully

selected to include ZN 203 among the materials it utilizes to manufacture its

polypropylene pellets.” However, there is absolutely no evidence in the record

showing that Pinnacle purposefully designed its process for manufacturing

polypropylene so that trace elements from the ZN 203 would remain in its end

product. To the contrary, Pinnacle’s process is arguably designed so that minimal

ZN 203 catalyst residues end up in its final product; during the degassing phase,

Pinnacle specifically aims to hydrolyze or kill any ZN 203 catalyst residues that

might wind up in the polypropylene it produces.

19-CA-310 28 We find that the Board did not err when it determined that the only purpose

for which Pinnacle purchased the ZN 203 was to react with other materials in

Pinnacle’s manufacturing process to create polypropylene pellets. The Board did

not employ an improperly restrictive primary purpose test; it merely found that the

testimony and evidence presented did not support a finding that Pinnacle satisfied

the third prong of the International Paper purpose test. Pinnacle failed to establish

that it purchased ZN 203 “for purposes of inclusion of even its few trace elements

in the final product.”

Pinnacle further contends that the Board committed legal error in its

interpretation of the Graphic Packaging and Exxon cases. We disagree. Pinnacle

contends that the testimony of its witnesses established that the role played by the

catalyst component in ZN 203 in its manufacture of polypropylene pellets is

“remarkably similar” to the role the initiators and chain transfer agents played in

Exxon’s production polyethylene pellets, and, thus, the cases should yield the same

result. As such, Pinnacle avers the Board committed legal error by failing to

conclude that Pinnacle, like Exxon, satisfied the purpose prong of the “further

processing exclusion.” According to the Parish’s expert, however, comparing the

role ZN 203 plays in Pinnacle’s production of polypropylene to the role the

initiators and chain transfer agents play in Exxon’s production of polyethylene was

the equivalent of comparing “apples to oranges.”

In Exxon, the “free radicals” Exxon used in its polymerization process were

chemically linked to every polyethylene pellet Exxon produced. Conversely, with

respect to Pinnacle’s polymerization process, except for the first polymer chain

formed in the reactor, which is the only polymer chain that contains the pre-

polymerized polypropylene component of ZN 203, each of the other millions of

polymer chains created contains hydrogen molecules at its beginning and end.

Hydrogen is not a component of ZN 203. Thus, of the millions of polymer chains

19-CA-310 29 created, the only chemical link ZN 203 has to Pinnacle’s end product is the 72

parts per million of the pre-polymerized polypropylene component that is linked to

a single polymer chain of the millions of polymer chains produced, whereas

molecules from the initiators and chain transfer agents used by Exxon were bonded

to every single polymer chain of the end product Exxon produced. As explained

by Dr. Goodall, unlike the initiators and chain transfer agents utilized by Exxon

that become “part of the polymer,” “nothing that came from the catalyst [is]

associated with the polymer” Pinnacle produces. The Board did not commit legal

error in its interpretation and application of Exxon, supra.

Similarly, Pinnacle avers the Board misinterpreted the holding in Graphic

Packaging when it found that, “[while] achieving the desired physical

characteristics was critical for [Pinnacle] to make a marketable polymer[,]”

achieving certain characteristics in the end product is not relevant to the third

prong of the International Paper test, but rather goes to whether the use of ZN 203

was beneficial (i.e., the second prong) to the end product. Although Pinnacle

asserts this interpretation constitutes legal error, we find that the Board’s analysis

directly comports with what the court held in Graphic Paper. Moreover, we, too,

find that Pinnacle’ contention that it purchased ZN 203 “for the purposes of

achieving specific and designed results vis a vis the production of its various

polymer products … to show that the purpose test was met” is irrelevant to the

inquiry of whether Pinnacle’s purchase of ZN 203 was for the purpose of inclusion

in its final product. In short, the Board did not conflate the second and third

prongs or misinterpret the holding in Graphic Packaging.

Unlike Graphic Packaging, where removal of the sodium and sulfur

chemicals from the finished product, to which the chemicals were chemically

bonded, would likely destroy the benefits achieved in the end product during the

manufacturing process (i.e., mass, conductivity, sizing, and strength), Dr. Goodall

19-CA-310 30 testified that if Pinnacle were to remove either the catalyst residues or the pre-

polymerized polypropylene derived from ZN 203 from the polypropylene it

produced, there would still be polypropylene, though approximately 72 parts per

million less.

As stated in International Paper, “to be excluded from sales and use tax …

the raw materials must have been purchased for the purpose of incorporation

within the end products, as the raw material must be material for further

processing of the final products produced.” 972 So.2d at 1135. From our review

of the jurisprudence, the record, and the Board’s written reasons, we detect no

legal error in the Board’s application of the “further processing exclusion” as set

forth in International Paper, Traigle, Vulcan, NISCO, Graphic Packaging, or

Exxon to determine whether Pinnacle’s purchases of ZN 203 were for the purpose

of inclusion into its end product.

Was the Board’s Decision Manifestly Erroneous?

Because we find that the Board utilized the appropriate laws and procedures

in reaching its decision, we must now determine if the Board was manifestly

erroneous in reaching its conclusion that Pinnacle’s purchases of ZN 203 were not

for the purpose of incorporation or inclusion into the end product and, thus, are not

excluded from taxation under the “further processing exclusion.” A careful review

of the record before this Court demonstrates that there is substantial evidence to

support the factual determinations the Board made, and thus, we conclude that the

Board was not manifestly erroneous in reaching its decision.

The testimony of the witnesses established that the purpose for which

Pinnacle purchases ZN 203 is to trigger a chemical reaction to convert monomers

into polymer. While Pinnacle contends that its purchases of ZN 203 were also for

the purpose of inclusion of ZN 203 in its end product, the testimony and evidence

presented at the hearing do not support this contention. Instead, the evidence

19-CA-310 31 revealed that Pinnacle purchases ZN 203 with its pre-polymerized polypropylene

component so that the catalyst will react more efficiently, with less explosivity,

and because it provides stability during the polymerization process. Dr. Goodall

and Mr. Swanepoel both testified that the pre-polymerized polypropylene in ZN

203 also prevents the polymer from losing its shape in the reactor.

The evidence further established that once the reaction is complete and the

polymer is created, the ZN 203 catalyst residues are “deactivated” or “killed” with

steam so that they become an innocuous or harmless impurity in the end product,

and so that they will not cause damage, such as discoloration or corrosion, to the

quality of the final product. According to Dr. Goodall, the optimal level of ZN 203

catalyst residues remaining in the end product is zero. The evidence and testimony

showed that the fifth generation ZN 203 catalyst that Pinnacle uses to manufacture

its polypropylene was developed and designed specifically so that there would be

less of the ZN 203 catalyst residues remaining in the final product, not more. And

while ZN 203 catalyst residues remain in the end product and are uniformly

dispersed throughout Pinnacle’s final product, the presence of ZN 203 is not

integral to the end product, nor are the catalyst residues incorporated into the end

product; they can be removed without compromising the integrity of the

polypropylene pellets.

Though Pinnacle contends that its catalyst system is intentionally designed,

or that it purposely purchases ZN 203 so that it will be incorporated into its final

product, the testimony does not support this contention. The experts agreed that

only 72 pounds of every one million pounds, or 72 parts per million, of the

polypropylene pellets that Pinnacle produces is derived from the pre-polymerized

polypropylene in ZN 203. As to the ZN 203 catalyst residues that end up in the

final product, Dr. Goodall stated this is not intentional, but merely the result of an

inefficiency in the manufacturing process in the nature of an impurity, and to

19-CA-310 32 remove them is unnecessary and not worth the added expense. Moreover, while

Pinnacle purchased ZN 203 knowing its use would result in trace elements of the

pre-polymerized polypropylene component winding up in its finished product,

Pinnacle’s expert, Dr. Klendworth, testified that Pinnacle did not purchase ZN 203

for the polypropylene polymer it contained; it purchased ZN 203 for the catalyst it

contained. In short, it is clear from the record that the purpose for which Pinnacle

introduced ZN 203 into its manufacture of polypropylene was to serve as a catalyst

to trigger a reaction, “not for the inclusion of even its few trace elements in the

final product,” as the Board concluded.

The Board’s findings show that the Board gave more credence to the

testimony of Dr. Goodall over that of Pinnacle’s expert, Dr. Klendworth.

Credibility determinations, evaluations of expert testimony, and resolutions of

conflict in such testimony are questions for the trier of fact and are subject to the

manifest error standard of review. Foley v. Entergy La., Inc., 06-983 (La.

11/29/06), 946 So.2d 144. From our review of the record, we find there to be

ample support for the Board’s factual findings. We detect no manifest error in the

findings that Pinnacle’s purchases of ZN 203 were not for further processing or for

the purpose of inclusion in its end products.

CONCLUSION

In conclusion, we find that the Board of Tax Appeals did not err in its

application of the legal principles governing the “further processing exclusion.” Its

findings of fact and determination that Pinnacle’s purchases of Avant ZN 203 did

not satisfy the third criteria of La. R.S. 47:301(10)(c)(i)(aa)(I)(ccc) because

Pinnacle’s purchases were not for the purpose of inclusion of ZN 203 in its final

product, are not manifestly erroneous. Accordingly, we affirm the Board’s

judgment.

AFFIRMED

19-CA-310 33 SUSAN M. CHEHARDY CURTIS B. PURSELL

CHIEF JUDGE CLERK OF COURT

NANCY F. VEGA FREDERICKA H. WICKER CHIEF DEPUTY CLERK JUDE G. GRAVOIS MARC E. JOHNSON ROBERT A. CHAISSON SUSAN BUCHHOLZ STEPHEN J. WINDHORST FIRST DEPUTY CLERK HANS J. LILJEBERG JOHN J. MOLAISON, JR. FIFTH CIRCUIT MELISSA C. LEDET JUDGES 101 DERBIGNY STREET (70053) DIRECTOR OF CENTRAL STAFF POST OFFICE BOX 489 GRETNA, LOUISIANA 70054 (504) 376-1400

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