The Missouri Supreme Court has held that a convenience store was not entitled to an exemption from sales and use tax for the electricity it purchased for its food preparation operations.1 The Court held that the term "processing" that is used in the sales tax exemption for electricity used or consumed in manufacturing, processing or producing any product was not intended to include retail food preparation.
Background
The business filing the complaint was a utility company (Aquila) that sold electricity to residential and commercial customers, including Casey's General Stores (Casey's). Casey's operated convenience stores that were engaged in the retail sale of gas, grocery items, various non)food items and prepared foods. Many of the food products only required minimal preparation such as reheating before they were served, but additional preparation was required for pizza and donuts.2 Casey's filed a refund claim with the Missouri Director of Revenue for one month's tax paid for a portion of electricity that Aquila sold to two Casey's stores. The Director denied Casey's refund claim.
At Casey's request, Aquila filed a complaint challenging the Director's final decision denying Casey's refund claim for state sales and use tax paid. The Missouri Administrative Hearing Commission (AHC) reversed the Director's final decision and decided that a portion of Casey's purchased electricity was exempt from sales and use tax as electricity used in processing a product.3 The AHC held that the statute was intended to exempt a broad range of activities and that Casey's food preparation operations were "processing" within the meaning of the statutory exemption. The Director appealed the Commission's decision.
Food Preparation Did Not Qualify as "Processing"
Missouri law provides an exemption from sales and use tax for "electrical energy and gas . . . used or consumed in the manufacturing, processing, compounding, mining, or producing of any product."4 In determining whether Casey's was entitled to the exemption for electricity purchased for its food preparation, the Missouri Supreme Court needed to decide if Casey's engaged in "processing" for purposes of the exemption. Although Missouri provides a statutory definition of "processing,"5 the Court found that the definition was ambiguous. The Missouri statute defines "processing" as "any mode of treatment, act, or series of acts performed upon materials to transform or reduce them to a different state or thing."6 After concluding that the definition was unclear regarding the scope of the activities it encompassed, the Court needed to construe the statute to resolve the ambiguity.
Because there was little precedent that analyzed the relevant exemption, the Court relied on a case decided in 2010 where it interpreted a related exemption under similar facts. In Brinker Mo., Inc. v. Director of Revenue,7 a restaurant conglomerate argued that kitchen equipment, silverware, chairs and other furniture purchased for use in its restaurants were exempt from sales and use tax under manufacturing equipment exemptions.8 The Brinker Court determined the restaurants were not "plants" exempt from taxation because they did not "fabricate," "manufacture" or "mine" products to be sold ultimately for final use or consumption. In Brinker, the Court relied on the fact the statutory exemption did not include the terms "restaurant," "preparation," "furnishing" or "serving." The Court in Brinker ultimately determined that if the legislature had intended to exempt these activities from taxation, it would have included language in the statute to indicate that intent. The Court acknowledged that the exemption at issue in Brinker did not include the term "processing," but determined that Brinker was still instructive regarding the analysis of the exemption for electricity used in "processing." As Brinker stated, if the legislature intended to exempt "restaurants" from tax on electricity purchased to "prepare," "furnish" or "serve" food, it would have included language in the statute to indicate that intent.
Further, the Court's interpretation of "processing" was guided by the statutory maxim of noscitur a sociis – a word is known by the company it keeps. The statutory exemption lists "processing" along with "manufacturing," "compounding," "mining," and "producing." The industrial connotations of those terms indicate that the legislature did not intend "processing" to include food preparation for retail consumption. As determined in Brinker, if the legislature intended to encompass retail food sales under "processing," it would have included terms that related to such activities.
Commentary
This decision is not surprising in light of the Missouri Supreme Court's decision in Brinker. In both cases, the Court held that broad sales tax exemptions did not apply to restaurants or food preparation. Both decisions also are similar because they contain dissents written by the same judge. The dissent noted that "processing" is the most generic term that the legislature could have chosen when writing the energy tax exemption. According to the dissent, "processing" is not ambiguous and applied to Casey's activities in preparing the pizza and donuts. Because the term was not ambiguous, the Court should not have employed the statutory maxim of noscitur a sociis. Also, the dissent explained that the Court's reliance on Brinker was inappropriate because it interpreted a different term appearing in a different statute.
Based on this case and Brinker, the Missouri Supreme Court is following a trend of narrowly interpreting sales tax exemptions so that they do not apply to restaurants or food preparation. Thus, taxpayers in these industries, as well as businesses that collect and remit sales and use taxes on their behalf should be aware that general sales tax exemptions for processing activities may be more narrowly construed than previously thought.
Footnotes
1 Aquila Foreign Qualifications Corp. v. Director of Revenue, Supreme Court of Missouri, No. SC91784, March 6, 2012.
2 The preparation of pizza involved mixing the dough, adding toppings and baking. The preparation of donuts included mixing the dough, frying the donuts and adding icing or toppings.
3 Aquila Foreign Qualifications Corp. v. Director of Revenue, Missouri Administrative Hearing Commission, No. 09) 0376 RS, April 28, 2011.
4 MO. REV. STAT. § 144.054.2.
5 MO. REV. STAT. § 144.054.1(1).
6 Id. (Emphasis added by Missouri Supreme Court.)
7 319 S.W.3d 433 (Mo. Bank 2010).
8 MO. REV. STAT. § 144.030.2(4))(5). For example, the second subsection provides a sales and use tax exemption for machinery and equipment "purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption."
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