Missouri Supreme Court sides with taxpayer in manufacturing sales/use tax exemption case
Supreme Court affirms the "integrated plant doctrine" still applies to Missouri’s manufacturing exemption
By Matt Landwehr, Thompson Coburn LLP, firstname.lastname@example.org
The Supreme Court of Missouri recently issued its opinion in Dreyer Electric Co, LLC. v. Director of Revenue, Case No. SC98007 (Mo. banc, June 16, 2020). The Court held that the “integrated plant doctrine”—first announced 40-years ago in Floyd Charcoal Co. v. Director of Revenue, 599 S.W.2d 173 (Mo. banc 1980) (“Floyd Charcoal”)—still applies to the statutory requirement that equipment must be “used directly in manufacturing” in order to qualify for Missouri’s sales and use tax manufacturing exemption under § 144.030.2(5). This is a major victory for Missouri taxpayers.
B&B Timber Company (“B&B”) is a Missouri-based sawmill that manufactures flooring, railroad ties, pallet materials and other timber products using multiple pieces of equipment. B&B rebuilt its facilities after a 2016 fire. As part of the rebuild, B&B purchased an electrical system from Dreyer Electric Co. (“Dreyer”) which included soft starters, a 1,200 Amp service, NEMA overload relay, a heater element, disconnects, conduits, couplings, ground rods, cables, and other equipment used to power B&B’s manufacturing machinery, including regulation of electrical flow to B&B’s machinery in compliance with safety standards (the “Disputed Items”). Dreyer collected and remitted sales tax on the Disputed Items, and filed a claim for refund which was denied by the Missouri Department of Revenue (“DOR” or the “Director”).
Dreyer appealed to the Administrative Hearing Commission (“AHC”), and the AHC found in favor of Dreyer and awarded the refund. See AHC Decision dated June 13, 2019, attached. The AHC applied the integrated plant doctrine’s 3-part-inquiry, and found that the Disputed Items were used directly in manufacturing because they (1) were necessary to production, (2) were close, physically and causally, to the finished product, and (3) operated harmoniously with the admittedly exempt equipment to make an integrated and synchronized system. In applying the integrated plant doctrine, the AHC primarily relied on two cases: Floyd Charcoal and Southwestern Bell Telephone Co. v. Director of Revenue, 182 S.W.3d 226 (Mo. banc 2005) (“Bell II”). In citing to Bell II, the AHC noted that Bell II had been “abrogated by IBM Corporation v. Director of Revenue, 491 S.W.3d 535 (Mo. banc 2016) (“IBM”), but that IBM, in turn, had been abrogated by the Missouri General Assembly in 2018 when it passed Senate Bill 768 (“SB 768”). The AHC discussed SB 768 in detail and found that “[b]ecause the legislature made its abrogation of IBM retroactive…, we do not apply IBM to the extent it may have been applicable when Dreyer issued its invoices to B&B.”
The Director filed a Petition for Review in the Supreme Court. The Director argued for a limited interpretation of “used directly in manufacturing” that would exempt only equipment used to transform raw materials into a finished product. The Supreme Court rejected the Director’s proposed interpretation, holding that such interpretation was inconsistent with the integrated plant doctrine. The Court discussed and expressly affirmed Floyd Charcoal’s and Bell II’s application of the integrated plant doctrine, including the policy considerations supporting the integrated plant doctrine’s “broad” interpretation of the “used directly in manufacturing” requirement.
In applying the integrated plant doctrine to Dreyer’s facts:
First, the Court agreed with the AHC that items such as circuit breakers, soft starters, and overload relays, connectors and disconnectors, and power and control wires qualified for the exemption because “such equipment is a part of an integrated process that is necessary to the production of B&B’s word products….”
Second, the Court, however, held that “electric outlets, lights, and lamps not used in powering the plant and heat for the buildings generally is not part of the integrated process used to produce B&B’s products and so is not exempt….”
Third, the Court held that “[t]he AHC failed to mention other replacement equipment specifically in its decision, seeming to assume that, because the major equipment purchased was exempt, every item purchased was exempt. This Court, therefore, remands so the AHC can apply the analysis approved in cases such as Floyd Charcoal and Southwestern Bell to the remaining types of replacement equipment to determine if they are used directly in manufacturing like the soft starters or, instead, are simply of general used to B&B, such as electrical outlets, but are not used directly in manufacturing.”
The takeaway is that while a broad interpretation of “used directly in manufacturing” under the integrated plant doctrine is still the law, it is no longer sufficient only to prove that the major components of a replacement system qualify. Rather, a taxpayer must prove that each type of equipment purchased for the replacement system independently qualifies for the exemption.
Finally, while the Court did not expressly address the retroactivity of SB 768, the Court did indirectly touch on the issue in two ways:
The Court noted in a footnote that “[w]hen the legislature amended section 144.030 in 2018, it stated it was abrogating the holding of [IBM] to the extent IBM disapproved the application to telecommunications services of the broad reading of ‘used directly in manufacturing’ this Court applied in [Bell II] and its predecessor case Southwestern Bell Telephone Co. v. Director of Revenue, 78 S.W.3d 763 (Mo. banc 2002). The instant case, of course, does not concern telecommunications equipment; therefore, IBM’s discussion of the application of the integrated plant doctrine to such equipment would not govern here.”
The Court reaffirmed, and citied extensively to, Bell II, and ordered the AHC on remand to apply Bell II to Dreyer’s facts which, of course, arose after IBM had abrogated Bell II.
While there remain some open issues related to the scope of SB 768 and whether it will be applied retroactively by the Court, the Court’s affirmation of the integrated plant doctrine is certainly good news for Missouri taxpayers.