May 04, 2015
From KPMG TaxWatch
The Missouri Administrative Hearing Commission recently addressed whether hardware and software, including software licenses and software maintenance agreements, purchased by a credit card company qualified for Missouri’s sales and use tax manufacturing exemption. The taxpayer (seller) sought a refund of vendor’s use tax claiming that the hardware and software used in processing credit card transactions was exempt manufacturing equipment, and alternatively, that the software was not subject to sales and use tax because it was delivered electronically. The taxpayer’s customer, a credit card company, used the hardware and software to provide various services, including authorizing credit transactions, controlling credit card spending limits, fraud scoring, and aggregating and warehousing credit card data. Under Missouri law, “equipment . . . used . . . in the manufacturing . . . of any product” is exempt from sales and use tax.
The Commission first addressed the taxpayer’s position that all of the hardware and software was “equipment” for purposes of the exemption statute. After reviewing several Missouri Supreme Court decisions, the Commission noted that equipment is often likened to “fixed assets” that have some degree of permanence. In the Commission’s view, certain of the items the taxpayer characterized as “equipment” (e.g., cables, tape, and data cartridges) did not appear to meet the definition of equipment as interpreted by the Missouri Supreme Court. Under the doctrine of judicial admission, however, the Director’s failure to challenge the characterization of these items was in essence an admission that they were equipment. Thus, for purposes of the ruling, these items were considered equipment. However, the Commission ruled that software, software licenses, and software maintenance agreements were not equipment under the exemption statute.
Having determined that certain of the items qualified as “equipment,” the Commission next discussed whether the purchaser’s credit card-related activities constituted manufacturing. Since 1970, the Missouri Supreme Court has applied three different definitions of manufacturing—gleaned through various cases— in determining the scope of the exemption. The first is that manufacturing is “organizing information through computer technology.” The second definition is that manufacturing occurs when an article is produced with a “use, identity, and value different from the original.” The third—and most recent pronouncement—is that only activities that have an “industrial connotation” qualify as manufacturing. After analyzing these definitions at length, the Commission concluded that the purchaser’s services in this case were substantially similar to the services in a line of cases holding that various uses of computer technology constituted manufacturing. Because this line of cases had not been repudiated by the Missouri Supreme Court, stare decisis required the Commission to rule that the purchaser engaged in manufacturing and the hardware included in the refund claim qualified for the manufacturing exemption. With respect to the software, there was some disagreement over whether the software was delivered electronically. Ultimately, the Commission found the taxpayer’s testimony persuasive and concluded that the software was not taxable because it was not delivered in tangible form. With respect to the software licenses and software maintenance, however, the Commission denied the taxpayer’s refund claim, observing that it had failed to raise a legal argument as to why it was entitled to a refund on these items. For more information on IBM Corporation, Dkt. No. 12-0030 RS (Apr. 21, 2015), please contact Andrea Turner at (816) 802-5236 or John Griesedieck at (312) 665-3024.
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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.