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CYNTHIA BRIDGES,                                                                 *                    NO. 2010-CA-0905
SECRETARY, DEPARTMENT
OF REVENUE, STATE OF                                                             *
LOUISIANA                                                                                             COURT OF APPEAL
*
VERSUS                                                                           FOURTH CIRCUIT
*
PRODUCTION OPERATORS,                                                            STATE OF LOUISIANA
INC.                                                                             *
APPEAL FROM
CIVIL DISTRICT COURT, ORLEANS PARISH
NO. 2001-20936, DIVISION “G-11”
Honorable Robin M. Giarrusso, Judge
Judge Patricia Rivet Murray
(Court composed of Judge Patricia Rivet Murray, Judge Dennis R. Bagneris, Sr.,
Judge Edwin A. Lombard)
Donald Bowman
Frederick Mulhearn
Shone T. Pierre
Miranda Conner
Antonio Charles Ferachi
Adrienne D. Quillen
Louisiana Department of Revenue, Legal Division
617 North Third Street
P. O. Box 4064
Baton Rouge, LA 70821--4064
COUNSEL FOR PLAINTIFF/APPELLANT
Jesse R. Adams III
Andre B. Burvant
JONES WALKER WAECHTER POITEVENT CARRERE & DENEGRE, L.L.P.
201 St. Charles Avenue, 51st Floor
New Orleans, LA 70170--5100
COUNSEL FOR DEFENDANT/APPELLEE
AFFIRMED




This is a sales tax case.  In an earlier decision, this court found the
transactions at issue were taxable barters between Production Operators, Inc.
(“POI”) and its customers and remanded for a determination of the sales price on
which the sales taxes due could be calculated.  Bridges v. Production Operators,
Inc., 07-0648 (La. App. 4 Cir. 12/12/07), 974 So.2d 54 (Bridges I).  On remand,
the trial court determined that “[u]nder the unique facts of these transactions, there
is simply no sale price that is subject to taxation.”  From this decision, the
Louisiana Department of Revenue (the “Department”) appeals.  For the reasons
that follow, we affirm.
FACTUAL AND PROCEDURAL BACKGROUND
This sales tax dispute arises out of the Department’s audit of POI for the tax
period January 1, 1997, through December 31, 1999. During the tax period, POI
was a provider of natural gas compression services to companies engaged in the
exploration and production of natural resources in Louisiana.  POI’s services were
provided pursuant to a standard gas compression contract with its customers.
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Under the contract, the customer was required to provide compressor fuel (fuel
gas) at no cost to POI.  Following the audit, the Department determined that POI
owed additional taxes on the customer-supplied compressor fuel. On
September 28, 2000, the Department issued a proposed assessment of $129,652.96
in taxes and interest, which POI refused to pay.
On December 20, 2001, the Department filed this suit against POI seeking to
recover taxes, interest, and attorney’s fees pursuant to La. R.S. 47:1561(3).  POI
answered the suit and filed a motion for summary judgment seeking an order that
the Department vacate its assessment.  The trial court granted POI’s motion and
rendered judgment ordering the Department to vacate its assessment.  In Bridges I,
supra., this court reversed and remanded for a determination of the sales price on
which the sales taxes due could be calculated.
On February 3, 2010, a trial was held at which three witnesses testified.1 To
provide a background for deciding the factual issue presented on this appeal, we
summarize the testimony of the three witnesses.
1.  Arthur Champ
Arthur Champ, a revenue tax auditor specialist, was the Department’s only
witness.  Mr. Champ testified that the Department assessed tax liability on the cost
of POI’s taxable use of natural gas in Louisiana.2  He acknowledged that the
compressor fuel at issue was neither metered nor measured and that the
1 The parties also introduced various exhibits, including a sample gas compression contract and two sample
invoices.
2 Although the Department’s witness refers to a taxable use, it is undisputed that this case involves only a claim for
sales taxes. Bridges I, 07-0648, p. 1, n. 1, 974 So.2d at 55.
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Department relied on theoretical calculations to determine the amount of
compressor fuel POI used.3  He explained that the Department valued the
compressor fuel using the spot market rate, which it calculated based on the Henry
Hub market rate. He further explained that the Henry Hub market rate is the rate
used to value commercial quality gas—the type used in businesses and
residences—and that the compressor fuel at issue is a lower quality gas.4
2.  Kirk Townsend
Kirk Townsend, a retired former employee and president of Exterran
Company, testified on POI’s behalf.  Mr. Townsend testified that he worked in the
gas compression industry for thirty years.  According to Mr. Townsend, Exterran
(his former employer) acquired ownership of POI in 2000.    He testified that he
was familiar with POI’s operations during the tax period (1997 to 1999).  He
explained that the service POI (and Exterran) provides is moving “stranded gas”—
gas that will not flow on its own from point A to point B without being
compressed. He further explained that the service generally is provided in very
3 The basis for the theoretical calculations was data that POI’s engineering staff provided to the Department.   As we
noted in Bridges I, supra:
At the request of the auditor, POI was able to provide a listing by compressor unit of the fuel used
for each year and the engine specifications for several compressor engines to explain how it
calculated the fuel used.   The reports compiled by POI’s engineering and operations departments
were included as schedules as part of the Department’s audit report.   The information about the
quality of gas utilized, horsepower capacity of the engines and operating time of the engines used
by POI were taken into account by its engineering and operations departments in compiling the
reports, which identified the compressor fuel utilized.   This information was also included in the
audit.
07-0648, p. 4, 974 So.2d at 57.
4 Mr. Champ testified that to account for the compressor fuel being a lower quality gas the Department recently went
back and reduced the rate it used to value the compressor fuel at issue.   He explained that the Department took the
lowest monthly average of four different gas markets on a monthly basis and reduced that figure by an additional
fifteen percent.   However, he acknowledged that this reduction was not reflected in any of the documents that were
introduced at trial.
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remote (or offshore) locations where no other power source (gas or electricity) is
available.
Mr. Townsend identified a copy of POI’s standard contract, which he
characterized as a typical boilerplate contract used in the industry. He testified that
under the terms of the contract the customer is required to provide compressor fuel
at no cost to POI; thus, “POI pays nothing to its customers for fuel gas [compressor
fuel].”  Mr. Townsend also characterized the contract as a negotiated, arms-length
one.  He indicated that in negotiating the contract only two things are mentioned
regarding compressor fuel: its pressure—compressor fuel must have an adequate
pressure to run the engine—and the content of any poisons in it.
Mr. Townsend testified that POI bills its customer a flat monthly fee for its
service.  He identified two invoices as representative samples of POI’s monthly
billing invoices during the tax period.  He testified that compressor fuel plays no
role in calculating the amount of the flat monthly fee and that the fee is not
adjusted for the amount of compressor fuel POI uses.  He noted that neither POI
nor its customer (the producer) keeps track of, measures, or meters the amount of
compressor fuel POI uses.  Mr. Townsend testified that “[t]here’s no accounting
entry or ledger that says we [POI] used this much this month.”
In terms of economics, Mr. Townsend explained that the producer allows
POI to use the compressor fuel at no cost because “it’s the most economical way
for us to operate the piece of equipment.”  Mr. Townsend characterized the quality
of the compressor fuel as “minimally cleaned fuel gas” coming straight out of the
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well that could not be used in a business or residence.  When asked about the
concept that “businesses don’t give things away for free” and whether it applies in
this particular factual scenario, Mr. Townsend replied “[n]ot at all.”  He noted that
worldwide in the industry it is understood that in this type of business relationship
compressor fuel is provided to the compression company at no cost.
Answering the question of what would occur if the producer required POI to
pay for the compressor fuel, Mr. Townsend replied that POI would, in turn, charge
the producer the same amount as the producer charged it.  He emphasized that “it’s
a zero sum for us because we don’t get a benefit from it.”  Stated otherwise, he
testified that “if he [the producer] says, I’m going to charge you for using my fuel
gas [compressor fuel], I’m going to charge him the same amount probably, plus
some sort of handling fee for the gas that he’s charging me for.”
On cross-examination, Mr. Townsend testified that it would be
uneconomical for POI to purchase a fuel source from a third party to run its
compressors.  He explained that bringing fuel in from another source would be
completely uneconomical because POI provides its service at very remote
locations.  Indeed, he noted that this has never happened.  As to whether it is
possible, he replied “anything is possible, but it’s completely uneconomical.”  On
redirect, Mr. Townsend explained that “[i]f I had to do that, my fee would be
huge.”  He indicated that he absolutely would charge the fuel costs back to the
customer, and the customer would most likely lose money on the whole deal
because that would be “very cost prohibitive.”
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3.  Lesa Adair
Lesa Adair, who also testified on POI’s behalf, was qualified as an expert in
natural gas operations and valuation.  Ms. Adair explained that gas typically is
metered for the first time when it leaves the lease—at the facility line.  She further
explained that the facility line is the key place from an accounting perspective to
meter the gas because it is the point where royalty owners get paid and severance
taxes get collected.  She noted that the problem with metering the gas before that
point (at the wellhead) is that there is “gas and liquid together, and if you try to
meter that, you just get garbage coming out of the meter reading, because it doesn’t
know whether it’s looking at gas or liquid, and so it doesn’t know how to account
for it.”
Ms. Adair corroborated Mr. Townsend’s testimony regarding the standard
contract used by compression companies, like POI.  She testified that the contract
typically provides that “some gas needs to be consumed on the lease for the
minerals to be produced in the first place” and that the compressor fuel is to be
provided at no cost.  Indeed, she noted that providing compressor fuel at no cost is
“an accepted practice in the industry.”  She indicated that the reason the producer
allows the compression company to use the compressor fuel at no cost is because it
is part of the cost of doing business.
Ms. Adair testified that the compressor fuel at issue is not commercial
market quality gas and that there is no market for compressor fuel on the lease.  In
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contrast, she described the Henry Hub as a unique location—delivery point—in the
United States at which there is a huge market for commercial quality gas.
Addressing the hypothetical question of what would occur if the industry
practice of allowing the compression company to use compressor fuel at no cost
was changed, Ms. Adair testified that the economics of the deal likewise would
change “[b]ecause POI would then be subject to gas price risk or commodity price
risk that’s not part of their business offering today.”  She noted that, at a minimum,
there would be some type of “charge back mechanism to the producer, and they
would have to negotiate how they would handle that.”  She echoed Mr.
Townsend’s testimony that the result would probably be a zero sum “because the
third party compression operator is not going to absorb that fuel cost.”
Assuming POI would have to pay for the compressor fuel (and would charge
it back to the customer), Ms. Adair testified that the value of the compressor fuel
“would be negotiated between the parties.”  She testified that if the producer would
charge the compression company for the compressor gas, the producer would not
charge the commercial market value; rather, the producer probably would charge
the cost of actually producing the gas at the well and delivering it to the
compressor.  Based on the Energy Information Administration (a part of the
Department of Energy) data for the tax period, Ms. Adair determined that the cost
to produce at the well in Louisiana during the tax period was in the “32 to 33 cent
per MCF range.”5
5 In the oil and gas industry, mcf refers to 1,000 cubic feet.
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Based on her experience, Ms. Adair reiterated that the producer typically
does not charge anything to a compression company, like POI, for the compressor
fuel.  She testified:                                                                     “It’s not accounted for.  There’s no invoices for it.  It’s not
charged for at all.”
As noted earlier, the trial court, based on the evidence presented at trial,
made a factual finding that under the unique facts of these transactions no sales tax
is due.  In accord with that finding, the trial court on February 24, 2010, rendered a
judgment dismissing the Department’s petition with prejudice.  On that same date,
the trial court also issued written reasons for judgment stating:
This Court is called upon to determine how much, if any, sales tax is
owed by Production Operators, Inc. (POI) to the State.   After hearing
all of the testimony, it is this Court’s conclusion that no sales tax is
due.   Under the unique facts of these transactions, there is simply no
sales price that is subject to taxation.
From this judgment, the Department appeals.
DISCUSSION
In reviewing the factual findings of a trial court, an appellate court is limited
to a determination of whether those findings are manifestly erroneous.  Stobart v.
State Through Dep’t of Transp. and Dev., 617 So.2d 880, 882 (La. 1993). Under
the manifest error rule, an appellate court must give great weight to the trial court’s
factual conclusions, and “where two permissible views of the evidence exist, the
factfinder's choice between them cannot be manifestly erroneous or clearly
wrong.” Id. (citing Canter v. Koehring Co., 283 So.2d 716, 724 (La. 1973)).
Stated otherwise, “where there is conflict in the testimony, reasonable evaluations
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of credibility and reasonable inferences of fact should not be disturbed upon
review, even though the appellate court may feel that its own evaluations and
inferences are as reasonable.” Rosell v. ESCO, 549 So.2d 840, 844 (La. 1989).
The sole issue presented on this appeal is whether the trial court’s factual
finding that under the unique facts of these transactions there was no sales price is
manifestly erroneous. The term sales price is defined by statute as “the total
amount for which tangible personal property is sold . . . including any services,
except services for financing, that are a part of the sale valued in money, whether
paid in money or otherwise.”  La. R.S. 47:301(13)(a).6
The Department contends that the trial court erred in concluding that the
sales price (value) of the compressor fuel is zero. The Department contends that if
POI had to purchase a fuel source from a third party, it would have done so at the
spot market rate.  The Department further contends that POI has not suggested any
alternative valuation methodology.  According to the Department, using the spot
market rate to impute a sale price to the barter transactions at issue therefore is
reasonable.
POI counters that the record supports the trial court’s factual finding that no
amount was paid by POI, in any form, for the compressor fuel and thus that there is
6 The sales tax is levied upon the sales price of each item or article of tangible personal property when the property
is sold at retail in Louisiana. La. R.S. 47:302(A).   The amount of the sales tax is calculated based on the sales price.
In contrast, the use tax is calculated based on “the cost price of each item or article of tangible personal property that
has not been sold, but rather has been used, consumed, distributed or stored for use or consumption in Louisiana.”
Bruce J. Oreck, Louisiana Sales & Use Taxation, §2.9 (2d ed. 1996).                                                          “Cost price is the lesser of (1) the actual cost
of the property subject to the tax . . . or (2) the reasonable market value of the tangible personal property at the time
it becomes susceptible to the use tax.” Id.
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no sales price.  According to POI, the evidence presented at trial regarding the
sales price—the amount, if any, it paid for the compressor fuel—is as follows:
Under its contract with its customers, POI provided compression services to
producers in the oil and gas industry;
POI provided the equipment and personnel necessary to operate and
maintain the compressor at the customer’s jobsite;
The customers’ jobsites were typically in remote areas or offshore;
The customers provided “at no cost to POI” fuel gas [compressor fuel] to
operate the compressors;
POI invoiced its customers a monthly charge for its services;
POI’s use of the fuel gas [compressor fuel] was not negotiated between the
parties;
Neither POI nor its customers kept track of the amount of fuel gas
[compressor fuel] used and did not associate any value with it for purposes
of their contracts;
The fuel gas [compressor fuel] provided to POI had not been processed and
contained contaminants, including dust, liquids and sand, and did not meet
the necessary specifications for use in commercial or residential settings;
and
There is no market for the fuel gas [compressor fuel] where it is provided to
POI.
POI thus contends that the trial court’s finding that there is no sales price is not
manifestly erroneous and should be affirmed.  We agree.
In Bridges I, supra, this court held that the transactions between POI and its
customers were taxable sales—barters.  In so holding, we observed that POI
received consideration from its customers in the form of compressor fuel.
Addressing the consideration, we noted:
[T]he consideration that POI received in exchange for its compression
services included not only the flat monthly fee but also the fuel
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necessary  for  this  process.    We  are  persuaded  by  the  Board’s
argument that had its customers not provided the gas mixture to power
its compressors, POI would have been required to obtain the fuel for
the compressors from an outside source, incurring additional expense.
It can be inferred that POI factored this saving into the calculation of
its monthly rate.
Bridges I, 07-0648, pp. 11-12, 974 So.2d at 61-62. Given the procedural posture of
the case (a reversal of a summary judgment in the taxpayer’s favor), we expressly
declined to reach the factual issue of the amount of the consideration.  Bridges I,
07-0648, p. 12, n. 11, 974 So.2d at 62. Rather, we remanded for the trial court to
take evidence on the issue and to make the factual determination.  Id.
At the trial on remand, the evidence presented established that POI did not
factor the compressor fuel cost savings into the calculation of its monthly rate.
Rather, the evidence established that the parties did not consider the compressor
fuel savings in their contract negotiations. The evidence further established that the
monthly rate POI charged its customers was a flat fee, which did not vary based on
the amount of compressor fuel POI used.  The evidence still further established the
lack of a market for the compressor fuel where it was provided to POI.  Given the
lack of a market for the compressor fuel, the Department’s reliance on the spot
market rate to impute a sales price for it was misplaced.  Moreover, POI’s
witnesses testified that if its customers had charged it for the compressor fuel (or if
it had to acquire such fuel from another source),7 POI would have passed that cost
along to its customers; and the result would have been a zero sum.
7 POI’s witness, Mr. Townsend, testified that it was impractical and uneconomical for POI to acquire compressor
fuel from another source.
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Based on the evidence presented at trial, we cannot conclude that the trial
court was manifestly erroneous in finding under the unique facts of these
transactions there is no sales price and thus no taxes owed.
DECREE
For the foregoing reasons, the judgment of the trial court is affirmed.
AFFIRMED
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