Sales Tax Slice: Missouri Supreme Court Denies Manufacturing Exemptions for Items Used in Construction

Missouri’s manufacturing exemptions do seem to lend themselves to a broad interpretation, but this week’s decisions suggest that the state’s Supreme Court may be reluctant to support too expansive a reading of their applicability. Although these cases all involved construction, the facts-and-circumstances-type analyses applied by the court might well be applied to deny exemptions in other industries.  

At issue in the first two of these cases was Missouri’s expanded sales and use tax exemption for materials used or consumed in manufacturing, processing, compounding or producing. In Fred Weber Inc. v. Dir. of Rev., No. SC94109 (Mo. Jan. 13, 2015), the court reversed an administrative ruling applying this exemption to paving materials.  Had this ruling been upheld, Fred Weber Inc. would have been entitled to a sales tax refund of $139,654 on paving materials it sold to paving contractors.  

The company argued in favor of the exemption that the terms “manufacturing,” “processing,” “compounding” or “producing” should be interpreted to include the sort of paving activities conducted by these contractors.  The court disagreed, stating that paving activities are not “what can best be described as large-scale industrial activities” and, therefore, not the type of activity to which the exemption was intended to apply.  For this reason, the court ruled, the exemption did not apply.    

In Ben Hur Steel Worx LLC v. Dir. of Rev., No. SC94209 (Mo. Jan. 13, 2015), the court similarly held the exemption inapplicable to steel components.  Ben Hur Steel Worx LLC had sought a use tax refund of nearly $200,000 on such components that it used to construct steel frames for buildings and other structures.  As in Fred Weber, the court found that these items were used in construction activities, not appropriately characterized as “manufacturing,” “processing,” “compounding,” or “producing.”  As in that case, the court disallowed the exemption.       

In a third case, Alberici Constructors Inc. v. Dir. of Rev., No. SC93771 (Mo. Jan. 13, 2015), the court again denied a contractor’s claim under Missouri’s manufacturing exemptions.  Notably, the exemption at issue specifically applies to construction activities, exempting materials used to construct manufacturing facilities.  The taxpayer had sought a refund of $18,593 in use tax that it paid on cranes and a welder used to construct such facilities.  Again interpreting the exemption narrowly against the taxpayer, the court found that these items were not “materials” and, therefore, ineligible for exemption.    

In 2007, Missouri expanded its sales and use tax exemptions for manufacturers, removing the prior requirement that materials be used “directly” in manufacturing to qualify and thereby allowing manufacturers to claim an exemption for materials used at almost any step of the manufacturing process.  Nearly eight years following this expansion, it seems the Missouri Supreme Court may be narrowing the exemption’s application.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Based on these decisions, is the court reining expansive in readings of this exemption?   

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by Ernst Hunter