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4/3/01

SUPREME COURT OF LOUISIANA
No. 00-C-1227

SHOWBOAT STAR PARTNERSHIP, SHOWBOAT OF LOUISIANA, INC., AND LAKE PONTCHARTRAIN SHOWBOAT, INC. Versus RALPH SLAUGHTER, SECRETARY OF THE DEPARTMENT OF REVENUE AND TAXATION, STATE OF LOUISIANA

ON WRIT OF CERTIORARI TO THE COURT OF APPEAL, FIRST CIRCUIT, PARISH OF EAST BATON ROUGE

LEMMON, Justice This is a suit for refund of state sales and use taxes paid under protest. Plaintiffs-taxpayers are a group of three entities that own and operate a riverboat gaming vessel. The Department of Revenue and Taxation assessed the taxes at issue on plaintiffs' purchases of certain "gaming equipment," including slot machines, roulette tables, cabinets, currency conveyor systems, surveillance equipment and illuminated signs, that was installed during construction on the vessel. In doing so, the Department rejected plaintiffs' claim for an exemption of the equipment as component parts of the vessel under La. Rev. Stat. 47:305.1A. While the lower courts determined that the taxes were due, those courts nonetheless concluded that the doctrines of detrimental reliance and equitable estoppel precluded the Department from collecting not only the interest, but also the taxes due.

Facts The facts are virtually undisputed.1 In 1991, the Internal Revenue Service and the Department created a joint task force to study the new gaming industry that was being introduced into Louisiana and to educate and assist members of this new industry with various tax issues. The task force's functions included holding educational meetings with the new gaming industry members. Earl Millet, a regional tax director, and John McShane, a revenue audit manager, represented the Department on the task force. One tax issue facing the industry was whether purchasers of riverboats for conducting gaming may invoke the sales tax exemption for materials, equipment, and machinery incorporated into vessels built in Louisiana. This exemption is authorized by La. Rev. Stat. 47:305.1A, which provides in part: The tax imposed by R.S. 47:302(A)(1), 321(A)(1), and 331(A)(1) shall not apply to sales of materials, equipment, and machinery which enter into and become component parts of ships, vessels, or barges, including commercial fishing vessels, drilling ships, or drilling barges . . . . (emphasis added). Two years after the task force was formed, Barbara Roe, a Senior Agent in the Research and Technical Division of the Department, addressed the issue in writing in an internal memorandum, dated June 16, 1993, to McShane. The memorandum, discussing vessels which satisfy the size requirement (which most of these riverboats do), stated that: All original purchases of equipment to outfit the vessels including the gambling machines would also be eligible for the exemption provided under that statute. Any tangible personal property that is needed for the vessel to function will be included in the exemption. This includes even such things as linens, eating utensils, glasswares, etc. (emphasis added).

For purposes of the trial in this matter, the parties entered into a joint stipulation of nineteen uncontested facts. This stipulation covers virtually all the relevant factual matters in this case. 2

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On August 3, 1993, plaintiffs' representatives attended a meeting of the task force, at which Millet and McShane informed them, in accordance with Roe's memorandum, that gaming equipment purchased for installation on a riverboat during construction of the vessel would qualify for the component parts exemption under Section 305.1A. The task force also provided plaintiffs with sales tax exemption forms and instructed them to give the exemption certificates to the equipment vendors at the time of purchase so that no sales or use tax would be imposed. Plaintiffs, relying on the Department's representations, used the exemption certificates in purchasing various gaming equipment for installation during construction on their riverboat vessel, without paying sales or use taxes. These purchases occurred after the August 1993 meeting and during the construction of the vessel. Title to the completed vessel passed on November 8, 1993. The vessel was the first to begin operations as a riverboat under the new gaming laws. Thereafter, the Department, without notice to plaintiffs, changed its position on the component parts exemption for riverboat equipment. A January 1994

memorandum from Roe to McShane contained a position statement that the component parts exemption, as to gaming riverboats, would not encompass "[p]urchases of free-standing equipment (anything not secured to the deck), consumable supplies as well as silverware, barware, glassware and dishes, linens, cookware, serving trays, and similar property which is not related directly to gambling and which is not a structural component of the vessel. . . ." (emphasis added).2

Later in January 1994, the tax attorney for the Legal Division directed a memorandum to the director of the Sales Tax Division, stating: [T]he intent of this statute [establishing the component part exemption] was to promote the ship building industry in Louisiana and relieve ship builders of inordinate tax burdens as they compete with other shipbuilding states. This statute also 3

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In early 1995, the Department audited plaintiffs' operations for 1993 and 1994. In May 1995, almost a year after the Department adopted its ultimate position and two

appears to apply only to the original construction of the ship itself. This exemption should not and, in the opinion of the Legal Division, does not apply to those items which are added or attached to the ship or vessel after its been constructed. Thus, these items should not be exempted under LSA--R.S. 47:305.1(A). Additionally, the Mississippi Department of Revenue and Taxation has a statute identical to LSA--R.S. 47:305.1(A) and they hold that their gambling machines, materials and supplies are purchased in addition to the basic "ship or barge" itself, are not exempt from Mississippi Sales Tax." (emphasis added). The Department's official policy position on the issue was stated in a March 1994 memorandum to Regional Directors and Area Audit Managers, as follows: The construction and sale of those riverboat gaming vessels and dockside gaming vessels which are of over 50 tons load displacement, and which are sold by the builders, will not be subject to the sales or use tax on the vessel structure itself, as provided for by Revised Statute 47:305.1(A). The sales or use tax will be due on the original and replacement equipment which are placed on the vessels for the vessels' outfitting and operation. Taxable property will include, but not be limited to, slot machines, gaming tables, seating, barware, cookware, as well as the full range of expendable tangible personal property used in the operation of the vessels and in serving their patrons. (emphasis added). In May 1995, the Department also published its policy position in its monthly newsletter, Tax Topics, as follows: The sales tax statutes do not distinguish vessels that are used for gaming from other types of vessels. The construction and sale of those riverboat and dockside gaming vessels that are over 50 tons load displacement, and that are sold by the builders, will not be subject to the sales or use tax on the vessel structures themselves, as provided for by R.S. 47:305.1(A). The sales or use tax will be due on the original and replacement equipment that are placed on the vessels for the vessels' outfitting and operation. Taxable property will include, but not be limited to, slot machines, gaming tables, seating, barware, cookware, as well as the full range of expendable tangible personal property used in the operation of the vessels and in serving their patrons. Louisiana added). Tax Topics, Vol. 15, No. 3 (May 1995)(emphasis

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years after the August 1993 task force meeting attended by plaintiffs, the Department issued to plaintiffs a Notice of Proposed Assessment of sales and use tax, plus interest, on the gaming equipment and other property. Undisputedly, this was the first notice plaintiffs received of the Department's change in its original position. After plaintiffs protested the denial of the exemption and the Department maintained its position, plaintiffs paid under protest the sum of $278,628.12, representing the sales and use taxes associated with the gaming equipment and interest thereon through the date of payment. This action followed to recover the amount paid under protest.

Proceedings in Lower Courts After trial on the merits, the trial court concluded that the gaming equipment did not qualify as component parts of the vessel under La. Rev. Stat. 47:305.1A. However, the court ruled that the Department was equitably estopped from collecting the tax. Although the court acknowledged the only real harm occasioned by plaintiffs was the payment of interest, the court concluded that La. Rev. Stat. 47:1601 was a mandatory "all-or-nothing" statute that inseparably linked interest and taxes.3 The court thus ordered the Department to refund to plaintiffs both the taxes and the interest
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La. Rev. Stat. 47:1601 provides:

A. When any taxpayer fails to pay a tax, or any portion thereof, on or before the day where it is required to be paid under the provisions of this Subtitle, interest at the rate of one and one-quarter percent per month shall be added to the amount of tax due and such interest shall be computed from the due date until the tax is paid. . . . The interest provided for herein shall be an obligation to be collected and accounted for in the same manner as if it were a part of the tax due and can be enforced in a separate action or in the same action for collection of the tax and shall not be waived or remitted. (emphasis added).

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paid under protest. On the Department's appeal, the intermediate court, using a judicially-adopted heightened standard for determining applicability of equitable estoppel in cases involving a state entity, concluded that the doctrine applied in this case. 98-2882 (La. App. 1st Cir. 2/18/00), 752 So. 2d 390. The court also acknowledged that the 1985 codification of detrimental reliance in La. Civ. Code art. 1967 limits the remedy to the harm incurred and that interest was the only harm plaintiffs incurred. Nevertheless, the court agreed with the trial court's interpretation of La. Rev. Stat. 47:1601 and concluded that both taxes and interest are always due, or not due, together, and that since interest cannot be collected, taxes also cannot be collected. Accordingly, the court held that "the trial court's assessment is correct in that the interest and the tax must be levied together or not at all." 98-2882 at p. 8, 752 So. 2d at 395. The dissenting judge disagreed with the majority's reasoning on the latter point and would have limited plaintiffs' recovery to the interest incurred. On the Department's application, we granted certiorari. 00-1227 (La. 6/16/00), 763 So. 2d 612.

Component Parts Exemption The sole dispute is whether the items of gaming equipment, acquired by plaintiffs to outfit the vessel for riverboat gaming operations, qualifies as component parts of the vessel under La. Rev. Stat. 47:305.1A. This statute provides an exemption from sales tax for "sales of materials, equipment, and machinery which enter into and become component parts of ships, vessels, or barges." (emphasis added). The statute, however, does not define "component parts." Because component parts are not defined in the exemption statute, plaintiffs

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contend that the courts should apply La. Civ. Code art. 11, which mandates that words should be given their generally prevailing meaning. Plaintiffs argue that, in the absence of a statutory definition, component parts of vessels should be defined by reference to the codal definition of a component part of a building or other structure set forth in La. Civ. Code art. 466. Article 466, pertaining to component parts of immovables, arguably is susceptible of application to some movables by analogy. See 2 A.N. Yiannopoulos, Louisiana Civil Law Treatise: Property

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