Section 26 Ingredient or Component Part

• Library: Tax Law 2009

Section 144.030.2(2), RSMo Supp. 2007, exempts from sales tax the sale of materials, manufactured goods, machinery, and parts that, when used in manufacturing, processing, compounding, mining, producing, or fabricating, become component parts or ingredients of the new personal property resulting from the production processes. The manufacturer must intend ultimately to sell the property produced for
final use or consumption. Section 144.030.2(2) also exempts materials and manufactured goods that are ultimately consumed in the manufacturing process by becoming, in whole or in part, a component part or ingredient of steel products intended to be sold ultimately for final use or consumption.

Before the Supreme Court of Missouri’s decision in Al-Tom Investment, Inc. v. Director of Revenue,774 S.W.2d 131 (Mo. banc 1989), the AHC consistently took the following approach to the component part exemption:

• The material must be detectably present in the product sold

• The presence of the material must not be accidental, incidental, or unintended, but purposeful and beneficial

• The use of the material as a component part or ingredient must be a purpose, but does not need to be the primary purpose, of its use

• The material is exempt only to the extent that it is physically incorporated into the finished product

See, e.g., Pea Ridge Iron Ore Co. v. Dir. of Revenue,Nos. RS-84-1398; RS-84-1468; RS-84-1469; RS-84-1470; RS-84-1728; RZ-84-1729; RS-86-0517, 1988 WL 152901
(Mo. Admin. Hearing Comm’n, June 30, 1988).

In Al-Tom, the Court expanded the exemption with its holding that a material is entirely exempt under the ingredient or component-part exemption “if any part of a material is intended to and does remain as an essential or necessary element of the finished product. . . . This includes the material that is used or consumed in the manufacturing process.” Al-Tom, 774 S.W.2d at 134. Under Al-Tom,any material at any stage and that, to any extent, is an ingredient or component part becomes entirely exempt from sales or use tax. The Court in Al-Tom also approved Ceramo Co. v. Goldberg,650 S.W.2d 303 (Mo. App. E.D. 1983), in which the court of appeals held that fuel oil mixed with clay to give clay pots a shiny finish was an exempt ingredient or component part even though little, if any, of the fuel oil remained in the finished product. The fact that the fuel oil was consumed in the manufacturing process was irrelevant because “it was initially a ‘component part or...