Louisiana Allows Software Developer to Use Manufacturer’s Apportionment Formula

October 31, 2022

By: Jess Johannesen, SALT Senior Manager

At a glance

  • The main takeaway: A Louisiana software developer was classified as a manufacturer by the Louisiana Board of Tax Appeals and was permitted to use a special apportionment formula for franchise tax purposes.
  • Assess the impact: The decision by the Louisiana Board of Tax Appeals could open the door for software developers to claim sales tax exemptions for manufacturing machinery and equipment.
  • Take the next step: Aprio’s State and Local Tax (SALT) team can help your business address state tax issues related to manufacturing operations and pursue potential qualifying refunds of sales tax paid on machinery and equipment.

Schedule a free consultation today to learn more!

The full story:

Is a software developer considered a “manufacturer” of the software that it creates? 

A recent ruling in Louisiana addresses whether a software developer is entitled to use an apportionment formula for corporate franchise tax purposes specific to corporations engaged in the business of manufacturing.[1] The Louisiana Department of Revenue (Department) took the position that the software developer did not qualify as a manufacturer. However, the Louisiana Board of Tax Appeals (Board) disagreed and held in favor of the taxpayer.[2] 

Take a closer look at the case

The taxpayer created different software platforms that were primarily for use in the medical industry. The software was typically provided to customers through the Internet as a subscription service that allowed customers to access the taxpayer’s software products. 

Under Louisiana’s franchise tax statute, the term “business of manufacturing” is defined to “include taxpayers whose net sales are derived primarily from the manufacture, production, and sale of tangible personal property.”[3] The Department argued that the taxpayer could not use the apportionment formula for manufacturers because the software developed by the taxpayer was not “tangible personal property” (TPP). 

The Department initially relied upon a sales/use tax statute, which stated that “custom computer software” was not TPP.[4] However, the Board viewed the distinction between “canned” and “custom” software for sales/use tax purposes as not relevant since that provision applies only for sales/use tax purposes, and instead referred to a Louisiana Supreme Court ruling which held that software by its nature was TPP.[5] 

Next, the Department argued that the taxpayer’s software is distinguishable because it is accessed over the Internet. The Board dismissed that argument, explaining that while it is not clear whether the taxpayer’s software is delivered to the customers and stored on their computers, this does not mean that the taxpayer’s software is not TPP since the software would still be stored in, and physically exist, on the taxpayer’s servers.

Finally, the Department, relying on the definition of “manufacturing” in the sales/use tax statutes,[6] argued that the production of software inherently cannot be manufacturing because the taxpayer does not transform raw materials into a finished product. Stepping through the process by which the taxpayer’s employees write a set of instructions that ultimately tells the computer hardware what to do, the Board concluded that the baseline arrangement of electrons constitutes the raw material, and that by rearranging those electrons into software, the taxpayer transformed raw material into finished TPP.

The ruling explained

For the reasons above, the Board held that the taxpayer was engaged in the manufacture of software and was entitled to use the apportionment formula reserved for manufacturers. While the definitions of manufacturing will vary from state to state, the Board’s decision presents an interesting analysis when considering the rules available to software developers.[7]  

It is also worth highlighting that the Department’s arguments were based upon rules and definitions contained within the state’s sales/use tax statutes. While the terminology for manufacturing and TPP within state sales/use tax provisions are generally more developed than in the income tax provisions, it is not necessarily the case that sales/use tax provisions will be applied to address income/franchise tax issues. For example, sales tax definitions that specify software is TPP for sales tax purposes may not extend to state income tax concepts such as Public Law 86-272 (which applies only to businesses that sell TPP).

The bottom line

This decision could open the door for software developers to claim sales tax exemptions for manufacturing machinery and equipment. Aprio’s SALT team has experience addressing state tax issues related to manufacturing operations. We have worked with businesses to help them successfully pursue refunds of sales tax paid on machinery and equipment based on the business qualifying as a “manufacturer.” We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jess Johannesen, SALT Senior Manager, at [email protected] or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at [email protected] for more information.

This article was featured in the October 2022 SALT newsletter.

[1] La. Rev. Stat. Ann. §47:606(A)(3)(b). Generally, the franchise tax base is apportioned using the arithmetic average of the net sales and revenue ratio and the property ratio. However, manufacturers use a single net sales and revenue ratio. For Louisiana corporate income tax purposes, beginning in 2016, corporations are generally entitled to use a single sales factor apportionment formula.

[2] Cervey, LLC vs. Secretary of Dept. of Revenue, State of Louisiana, La. Bd. Tax. App., No. 12272D, 09/08/2022.

[3] La. Rev. Stat. Ann. §47:606(A)(3)(c). 

[4] La. Rev. Stat. Ann. §47:301(16)(h)(iv)

[5] South Central Bell Telephone Co. v. Barthelemy, La. Sup. Ct., 94-0499, 10/17/1994.

[6] La. Rev. Stat. Ann. §47:301(3)(i)(ii)(cc) (For the years at issue in the case, the citation is LA Rev. Stat. Ann. §47:301(3)(h)(cc)

[7] Another article in this month’s SALT Newsletter addresses whether Carfax is a “manufacturer” of its vehicle history reports for purposes of claiming Missouri’s sales tax exemption on equipment used in manufacturing.


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