Well, I guess in these leaner economic times state and local tax collectors are willing to look for “gold” anywhere!
On September 17, 2014, the Louisiana First Circuit Court of Appeal held in the case of Pot-O-Gold Rentals, LLC v. City of Baton Rouge that a taxpayer’s waste removal services were taxable as part of the “gross proceeds” of the lease of portable toilets. In doing so, the First Circuit has, it seems, again stretched the reach of the Louisiana lease tax by broadening the scope of taxable “gross proceeds” (a term which is currently undefined by the Louisiana legislature).
There now seems to be a legitimate circuit split in Louisiana as to just how “gross” the reach of “gross proceeds” should be. … [This] may be a good opportunity to ask Louisiana’s highest court to clean up this mess.
In this case, the taxpayer, Pot-O-Gold, (1) leased portable toilets, (2) provided cleaning and sanitation services for the rented toilets, and also (3) provided sanitation services for other toilets not owned by Pot-O-Gold. When renting the toilets, customers were able to choose to reject the sanitation service option by Pot-O-Gold. In addition, there were several other third-party providers available for such sanitation service.
In ruling for the tax collector that these services should be included as part of the gross proceeds of the lease of the toilets, the First Circuit analyzed the prior decisions in Enterprise Leasing Co. of New Orleans v. Curtis (First Circuit), and Rent-A-Center East, Inc. v. Lincoln Parish Sales and Use Tax Commission (Second Circuit), which both utilized the “true object” test and the concept of substance over form in determining the scope of “gross proceeds” for purposes of the lease tax.
There is also a prior Revenue Ruling from the Louisiana Department of Revenue addressing this same “smelly” issue.
The First Circuit ultimately found an “inexorable intertwined relationship between the services and the leased property,” and thus found that the separate service charges were not non-taxable services, but rather should be included as part of the taxable gross proceeds of the leases of the toilets. The court reasoned that the true object of the transactions at issue was the lease of toilets, regardless of the fact that: (1) the customers could turn down such sanitation services, (2) Pot-O-Gold had other customers that only received sanitation services, and (3) other service providers were available to perform these sanitation services.
Importantly, the First Circuit seems to have now broadened the scope of gross proceeds even farther than the Second Circuit in the prior Rent-A-Center case, by concluding:
It is of no import whether the services were optional for the lessees, whether the services could be purchased from another party, whether the services could be rejected, or whether the services could be purchased independently from the plaintiff by others.
In analyzing the Second Circuit’s prior Rent-A-Center case, the First Circuit stated:
While the [Rent-A-Center court] may have relied, in part, on the fact that the disputed [loss damage waiver] service could not be purchased from anyone other than [Rent-A-Center], the possibility of purchasing the disputed service from another party is not dispositive. Rather, a court must review the totality of the circumstances surrounding the event incident to the initial use of the rented property, i.e. the transaction itself, to determine its taxability.
Thus, there now seems to be a legitimate circuit split in Louisiana as to just how “gross” the reach of “gross proceeds” should be (especially in light of the fact that, under Louisiana law, any ambiguity in a taxing statute must be interpreted in favor of the taxpayer and against taxation). As a result, this issue may be ripe for clarification by the Louisiana Supreme Court.
The taxpayer has not yet appealed to the Louisiana Supreme Court; however, such appeal may be a good opportunity to ask Louisiana’s highest court to clean up this mess. We’ll be sure to keep you posted on this one!