United States: Missouri Supreme Court Denies Use Of Manufacturing Exemption From Sales Tax

In two separate cases, the Missouri Supreme Court denied taxpayers use of the manufacturing exemption from sales tax. In the first case, the Court concluded that electricity and natural gas used to operate in-store bakery equipment failed to qualify for the statutory exemption for energy used in processing products.1 In the second case, the Court denied a taxpayer an exemption from sales tax for soap and specialized water treatment chemicals consumed in its commercial laundry operations.2

Missouri Manufacturing and Processing Exemption

Both cases focused on application of Missouri's statutory provision exempting from sales tax "electrical energy and gas, whether natural, artificial, or propane, water, coal, and energy sources, chemicals, machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product ...."3 The term "processing" is defined by Mo. Rev. Stat. Section 144.054 to include "any mode of treatment, act, or series of acts performed upon materials to transform or reduce them to a different state or thing, including treatment necessary to maintain or preserve such processing by the producer at the production facility."4 The specific manufacturing exemption under Section 144.054 was adopted in 2007.

In addition to the Section 144.054 exemption, an historic manufacturing exemption, contained in Mo. Rev. Stat. Section 144.030 utilizes more restrictive language and provides for exemption from sales tax for:

Materials, manufactured goods, machinery and parts which when used in manufacturing, processing, compounding, mining, producing or fabricating become a component part or ingredient of the new personal property resulting from such manufacturing, processing, compounding, mining, producing or fabricating and which new personal property is intended to be sold ultimately for final use or consumption; and materials, including without limitation, gases and manufactured goods, including without limitation slagging materials and firebrick, which are ultimately consumed in the manufacturing process by blending, reacting or interacting with or by becoming, in whole or in part, component parts or ingredients of steel products intended to be sold ultimately for final use or consumption.5

Denial of Manufacturing Exemption to Operation of Bakery Equipment

The taxpayer in the first case sought a refund for sales tax paid on electricity and natural gas energy used to operate bakery equipment such as ovens, retarders, and proofers in retail stores. The baked goods sold at the stores arrived either fully or partially formed and frozen or in the form of frozen dough. The products were prepared for retail sale at the store outside the retail area using the above-mentioned equipment. Upon denial of a claim for refund by the Missouri Department of Revenue and the Missouri Administrative Hearing Commission (AHC), the taxpayer appealed to the Missouri Supreme Court.6

The Court cited as precedent a case involving another retail bakery in which it rejected the store's argument that food preparation operations, which included in-store cooking and preparation of pizza dough and cake doughnuts for retail sale, fell within the Section 144.054 exemption at issue.7 In the previous case, the Court conceded that the term "processing" and its related definition created some ambiguity regarding the full range of activities to be included within its meaning. However, the Court ultimately settled on a narrow construction to conclude that the in-store bakery did not engage in manufacturing or processing in rejecting its claim for exemption.

To support its use of the manufacturing exemption, the taxpayer cited an example included in the regulations referencing bakeries.8 However, the court applied a narrow interpretation of the term "bakery," finding the term to be exclusive of retail or grocery store bakeries, and inapplicable to the taxpayer. Furthermore, the Court noted that even if the example in the regulation applied to the taxpayer, allowing the exemption to the taxpayer would result in the regulation impermissibly expanding or modifying the statute.9 Accordingly, the Court determined that the processing exemption did not apply to the taxpayer's in-store preparation of bakery goods for retail sale and affirmed the AHC's decision.

Denial of Manufacturing Exemption to Commercial Launderer

In the second case, the taxpayer was assessed use tax upon audit by the Department for cleaning supplies ("soap") and water treatment chemicals it purchased from out-of-state vendors. The taxpayer operated a commercial laundry service and periodically delivered clean uniforms and other items to its customers and picked up soiled uniforms, charging its customers a taxable "rental" fee for this service. In laundering its rotating stock of uniforms, the taxpayer consumed large quantities of soap and generated a significant amount of wastewater. Large amounts of water treatment chemicals were consumed by the taxpayer as required to treat the wastewater prior to its release into the city sewer system. The taxpayer sought review of its use tax assessment before the AHC, which concluded that the purchases were exempt. Subsequently, the Department sought the Court's review of the AHC's decision.

The Court cited as precedent a case involving a commercial launderer denied use of the manufacturing exemption.10 Similar to the taxpayer, that launderer operated a commercial laundry engaged in uniform delivery, pick-up, and laundry services and argued that its laundry equipment was exempt from sales or use taxes based on its determination that laundering qualified as manufacturing. The launderer requested exemption pursuant to the Section 144.030 exemption, which was the only manufacturing exemption available at the time.

The Court rejected the taxpayer's attempt to differentiate its use of the Section 144.054 exemption from the launderer's attempted use of the Section 144.030 exemption in the cited case, simply noting that "there is little to no difference between the terms 'processing' and 'manufacturing,' as a practical manner."11 The Court found no compelling reason to distinguish the taxpayer's case from that in the previous determination, despite the use of different statutes to support the exemptions. Thus, the Court concluded that the processing exemption did not apply to the soap or wastewater chemicals used in the taxpayer's commercial laundering business.

The taxpayer also argued that its out-of-state purchases of wastewater treatment chemicals were exempt from use tax under an exemption for machinery or equipment used to deter water pollution.12 Though the Court agreed that this exemption applied to the taxpayer's purchases of various machines and other equipment to treat the wastewater generated by its laundering applications (which was not at issue in the decision), it declined to expand the exemption to include the chemicals consumed in the process. Based on earlier precedent,13 the exemption was found to apply only to fixed assets, excluding any items consumed in the process.

Commentary

In both cases, the Court noted the requirement to strictly construe sales tax exemptions against the taxpayer, only allowing them upon clear and equivocal proof by the party claiming the exemption.14 The Court also noted the pertinent role of stare decisis in these two decisions, relying heavily on conclusions reached in previous cases addressing taxpayers with similar facts.

While the facts at issue may have been similar, the statutes in place at the time of the conclusions involving the two commercial launderers were quite different. When the legislature added the Section 144.054 exemption in 2007, a new exemption was intentionally created, purportedly to provide for more liberal use of the manufacturing exemption by Missouri businesses. The new exemption specifically added and defined the term "processing" and did not include the language used in the Section 144.030 exemption requiring items be "used directly in..." in order to qualify for the exemption. By refusing to recognize a difference between the terms "manufacturing" and "processing" and relying upon cases determined prior to enactment of the second exemption, the Court seemingly rejects any application of the Section 144.054 exemption to non-traditional manufacturers.

Amicus briefs filed in the commercial laundry case, at least, seem to indicate widespread use within the commercial laundry industry of the processing exemption for soap and other materials used in providing the service. This decision will adversely impact those providing laundry services that have relied upon this exemption to their peril.

It will be interesting to see whether the taxpayers or others engaged in the retail bakery or commercial laundry service industries choose to pursue legislative or other action to allow them to use the Section 144.054 exemption in the future.

Footnotes

1 Union Electric Co. d/b/a/Ameren Missouri v. Dep't. of Revenue, Missouri Supreme Court, No. SC93083, Mar. 11, 2014.

2 AAA Linen & Laundry Supply Co. v. Dep't. of Revenue, Missouri Supreme Court, No. SC93331, Mar. 11, 2014.

3 MO. REV. STAT. §144.054.2; as added by S.B. 30, Laws 2007, effective Aug. 28, 2007; as amended by H.B. 683, Laws 2009, effective Aug. 28, 2009.

4 MO. REV. STAT. §144.054.1(1).

5 MO. REV. STAT. § 144.030.2(2).

6 Union Electric Co. d/b/a/Ameren Missouri v. Dep't. of Revenue, Missouri Supreme Court, No. SC93083, Mar. 11, 2014.

7 Aquila Foreign Qualifications Corp. v. Dir. of Revenue, 362 S.W. 3d. 1 (Mo. Banc 2012).

8 MO. CODE REGS. ANN. tit. 12, § 10-110.621(4)(O). Specifically, the example reads as follows: A bakery creates baked goods for sale directly to the public or through retailers. The energy sources, chemicals, machinery, equipment, and materials used by the bakery are exempt from state sales and use tax.

9 Citing Greenbriar Hills Country Club v. Dir. of Revenue, 47 S.W. 3d. 346 (Mo. Banc 2001) and Hansen v. State, Dep't. of Social Services, Family Support Div., 226 S.W. 3d. 137 (Mo. Banc 2007).

10 Unitog Rental Services, Inc. v. Dir. of Revenue, 779 S.W. 3d. 568 (Mo. Banc 1989). Note that the sales tax exemption at issue in the current case, MO. REV. STAT. §144.054.2, was not yet enacted by law.

11 Citing Hudson Foods v. Dir. of Revenue, 924 S.W. 2d. 277 (Mo. Banc 1996).

12 MO. REV. STAT. § 144.030.2(15).

13 Citing Walsworth Pub.Co. v. Dir. of Revenue, 935 S.W. 39 (Mo. Banc 1996).

14 Citing Branson Properties USA, L.P. v. Dir. of Revenue, 110 S.W. 3d. 824 (Mo. Banc 2003).

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