Apr 11, 2016
From KPMG TaxWatch
The Missouri Supreme Court recently overturned an Administrative Hearing Commission decision in which the Commission held that certain equipment purchased by a credit card company qualified for Missouri’s sales and use tax manufacturing exemption. The taxpayer (seller of the equipment) sought a refund of vendor’s use tax claiming that the hardware used in processing credit card transactions was exempt manufacturing equipment. The taxpayer also argued 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, after a thorough review of several Missouri Supreme Court cases, held that the credit card company’s activities constituted manufacturing as its services were substantially similar to the services performed in a line of cases holding that various uses of computer technology constituted manufacturing. With respect to the software, the Commission concluded that it was not eligible for the manufacturing exemption because it was not “equipment,” but that it was not taxable in any event because it was not delivered in tangible form.
The Missouri Supreme Court granted review and reversed the Commission’s ruling. While it had previously held that the production of intangible products such as computer data may be “manufacturing,” the court noted it had also rejected the idea that every use of a computer to aid a business or transmit information constituted “manufacturing.” In the court’s view, while intangible products can still be “manufactured” through the use of computer equipment, the credit card company was not manufacturing a product as required under the exemption statute. Rather, it was receiving information, analyzing it and making determinations based on the analysis and relaying the determinations to its customers. As a result, the Commission’s expansive reading of the term “manufacturing” went too far. It also violated the fundamental principle—long recognized and applied in Missouri—that exemptions are to be construed narrowly against the taxpayer. In the court’s view, considering the credit card company’s activity as “manufacturing” would be inconsistent with several recent cases in which it had interpreted the term “manufacturing” based on the “common sense meaning of the word.” If the taxpayer’s interpretation were adopted, every time a person received an email, made some type of business or mathematical decision, and sent back an email with that decision, the person could be said to be “manufacturing” the data sent and received.
In its conclusion to the case, the court noted that certain of its earlier decisions that attempted to apply sales tax laws designed in the 1930s to “modern information and communications technologies” (specifically two Southwestern Bell Telephone cases from the early 2000s) “put the Court too far down a slippery slope” of suggesting an expansive definition of manufacturing. It then specifically stated that to the extent the Bell cases suggested an expansive definition of manufacturing and to the extent that they held that the electronic transfer of voices alone constitutes manufacturing, “they are no longer to be followed.” For more information on IBM Corporation v. Dep’t of Revenue, please contact 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.