Developments on Missouri's sales tax exemption for manufacturing.

• Author: Duncan, Harley

Missouri, like many states, has a sales and use tax exemption for certain machinery, equipment, and products used in manufacturing and production. Recently, the Missouri Supreme Court has decided several cases that appear to refine the scope of the exemption and provide additional guidance on what types of activities qualify for the exemption.

Missouri's manufacturing exemption applies to (1) energy, chemicals, machinery, equipment, and materials (2) used or consumed in the manufacturing, processing, compounding, mining, or producing (3) of any product (Mo. Rev. Stat. [section]144.054.2). Missouri tax exemptions are strictly construed against the taxpayer, and any doubt is resolved in favor of applying the sales tax.

Missouri Code of State Regulations Tide 12, Section 10-110.621, provides various examples for applying the exemption. As identified in the regulation, a manufacturer purchasing propane to operate forklifts to move raw materials between production lines would be making an exempt use of the fuel. Likewise, a manufacturer using coal to fuel boilers to generate steam used to manufacture a product or a commercial printer using energy, chemicals, machinery, materials, and equipment would be making an exempt use of those items. On the other hand, a restaurant preparing food for immediate consumption, a company constructing a road or building, or a butcher shop cutting beef into steaks and hamburger does not qualify for the exemption under the regulation. The recent cases have largely dealt with the second element of the exemption, i.e., whether an activity is "manufacturing, processing, compounding, mining, or producing." The courts have looked at whether certain food processing, commercial laundering, and construction activities qualify for the exemption.

Food Preparation

Recent cases on construction begin, oddly enough, by drawing on decisions involving food preparation. In Aquila Foreign Qualifications Corp. v. Director of Revenue, 362 S.W.3d 1 (Mo. 2012), the Missouri Supreme Court reversed a decision of the Administrative Hearing Commission (AHC). (The AHC is a tribunal with jurisdiction over determinations of various state agencies, including the Department of Revenue.) Aquila sold electricity to Casey's, a convenience store that used the electricity to prepare food. Many of the items were precooked and only required reheating before consumption. Casey's also served pizza and doughnuts, which were made from scratch on-site. Aquila (which, as the seller that remitted the sales tax, filed a complaint with the AHC on Casey's behalf) argued that all the food preparation qualified as "processing" under the statute.

The court found the term "processing" ambiguous. To resolve the ambiguity, the court noted the statute did not include "restaurants" and determined the Missouri Legislature would have included "restaurant" or...