By: Ray McCarty, president/CEO, Associated Industries of Missouri
April 28, 2023 - Associated Industries of Missouri (AIM) member, Charter Communications, secured a significant victory for all Missouri manufacturers at the Missouri Supreme Court last week.
In a unanimous decision, the Court held that a Charter subsidiary was entitled to a refund of use tax paid on its 2011-2012 purchases of network equipment used, in part, to provide telecommunications service, because providing telecommunications service qualifies as manufacturing under both of Missouri’s sales and use tax manufacturing exemptions—RSMo § 144.030(4) (the “030 Exemption”) and RSMo § 144.054.2 (the “054 Exemption”). The Court also held that taxpayers are not required to prove that mixed-use equipment is “substantially used” for an exempt purpose in order to qualify for the Exemptions.
Charter was represented by Matt Landwehr, Janette Lohman, Dave Mangian, and Kristen Sanocki of Thompson Coburn LLP (also an AIM member). Matt is a member of the AIM Board of Directors and Chairman of the AIM Tax Committee, and Janette has been actively involved with AIM for many years.
Charter filed its refund claims with the Department of Revenue based in part on the Supreme Court’s prior decisions holding that providing telecommunications service qualifies as manufacturing under the 030 Exemption. See Sw. Bell Tel. Co. v. Dir. of Rev., 78 S.W.3d 763 (Mo. banc 2002) (“Bell I”); Sw. Bell Tel. Co. v. Dir. of Rev., 182 S.W.3d 226 (Mo. banc 2005) (“Bell II”). The Department denied the refund claims and Charter appealed to the Administrative Hearing Commission (“AHC”). While those claims were being litigated at the AHC, the Supreme Court decided IBM Corp. v. Dir. of Rev., 491 S.W.3d 535 (Mo. banc 2016) (“IBM”). IBM did not involve telecommunications, but the Court stated in its opinion that the Bell cases should no longer be followed to the extent they held “that electronic transfer of voices is itself manufacturing.”
AIM immediately pursued legislation to abrogate IBM, culminating with the 2018 enactment of Senate Bill 768 amending the Exemptions to clarify that the production and transmission of telecommunications service qualifies, and always has qualified, as manufacturing. Nevertheless, the Director maintained its position that Charter did not qualify, arguing that (1) Senate Bill 768 did not apply retroactively to Charter’s purchases made in 2011-2012 and thus IBM controlled, and (2) Charter’s equipment was primarily used for non-exempt internet and video service, and thus was not “substantially used” in manufacturing. After an evidentiary hearing in August 2020 (during the pandemic), the AHC issued its decision on January 18, 2022, rejecting the Director’s arguments and awarding Charter its requested refund. The Director then filed a petition for review in the Supreme Court.
After briefing by the parties, Matt argued Charter’s case before the Supreme Court on September 21, 2022, and the Supreme Court handed down its opinion affirming the AHC’s Decision last week on April 18, 2023.
The Supreme Court agreed with Charter that (1) the provision of telecommunications service qualifies as manufacturing under both the 030 Exemption and the 054 Exemption, and (2) there is no “substantial use” requirement in either Exemption.
Regarding the first issue, while the Court did not directly address the retroactivity of Senate Bill 768, it agreed with Charter that the Court’s statement in IBM concerning telecommunications did not control because (1) it was obiter dictum (i.e., not necessary to the IBM decision, and thus not binding), and (2) it’s “characterization of telecommunications services as merely ‘the transfer of voices itself’ is a misstatement of the nature of telecommunications services that was at issue in Bell I, Bell II, and this case.”
The Court reiterated that manufacturing “encompasses only activities that transform an input into an output with a separate and distinct use, identity, or value from the original,” and held that Charter qualified because its “telecommunications equipment is used to transform the caller’s voice many times across several different stages of the Charter network until eventually transforming it into a complete reproduction of the caller’s voice at the receiver’s handset ‘with new value to a listener who could not otherwise hear or understand it.’” The Court also agreed with Charter that the General Assembly intended to include taxable telecommunications service as manufacturing in 1999 when it defined the 030 Exemption’s statutory phrase “product which is intended to be sold ultimately for final use and consumption” to specifically include taxable services.
Regarding the second issue, the Court rejected the Director’s interpretation that the “used directly” requirement in the 030 Exemption requires that mixed-use equipment be “substantially used” for an exempt purpose. In so doing, the Court clarified that its prior decisions in DST Systems, Inc. v. Dir. of Rev., 43 S.W.3d 799 (Mo. banc 2001) and Emerson Elec. Co. v. Dir. of Rev., 204 S.W.3d 642 (Mo. banc 2006) did not create a “substantial use” requirement. Rather, the Court held that “used directly” is to be analyzed under the Court’s “integrated plant doctrine” which focuses on three questions: (1) Is the disputed item necessary to production? (2) How close, physically and causally, is the disputed item to the finished product? (3) Does the disputed item operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system? Because neither the Exemptions nor the integrated plant doctrine contain the words “substantially used,” the Court held there is no “substantial use” requirement.
This well-reasoned decision applies across many industries, and thus is an important win for all Missouri manufacturers.
The case is Charter Communications Entertainment I, LLC v. Director of Revenue, No. SC99517. You can read the Supreme Court’s Opinion here, and the affirmed Administrative Hearing Commission decision here. You can find the parties’ Supreme Court briefs and listen to the oral argument here (scroll up).