Title: Custom Hardware Eng'g & Consulting, Inc. v. Dir. of Rev.

State: missouri

Issuer: Missouri Supreme Court

Document:

SUPREME COURT OF MISSOURI 
en banc 
 
 
 
Custom Hardware Engineering & Consulting, )    
Inc.,  
 
 
 
 
 
) 
 
 
 
 
 
 
 
) 
 
 
 
Appellant, 
 
 
) 
 
 
 
 
 
 
 
 
 
) 
vs. 
 
 
 
 
 
 
) 
No. SC91415 
 
 
 
 
 
 
 
) 
Director of Revenue, 
 
 
 
) 
 
 
 
 
 
 
 
) 
 
 
 
Respondent.  
 
) 
 
 
Petition for Review of a Decision of the Administrative Hearing Commission 
 
Opinion issued January 17, 2012 
 
Custom Hardware Engineering, Inc. (CHE) appeals an Administrative Hearing 
Commission (AHC) decision determining that CHE is liable for use tax plus interest and 
additions to tax on its purchases of parts for use in fulfilling maintenance contracts.  CHE 
asserts that it is not liable for any use tax because it did not use the parts and, instead, 
retained them for “temporary storage” as provided in section 144.605(13), RSMo 2000.1  
The record demonstrates that CHE used the parts for testing and certification on behalf of 
its customers.  Therefore, CHE is liable for use tax as provided in section 144.610.  The 
AHC decision is affirmed.   
                                                 
1 All statutory citations are to RSMo 2000. 
 
FACTS 
CHE performs computer hardware maintenance and repair on “enterprise class” 
machines such as mainframe computers.  CHE provides the services, parts and equipment 
required for such maintenance.  The parts at issue in this case are those that CHE 
purchased from vendors outside the state of Missouri.  Those parts were shipped to CHE 
at its Missouri headquarters.  CHE tested the parts and certified them for use by its 
customers.  The testing and certification process lasted five to seven days.  After testing 
and certifying the parts, CHE shipped the parts to its customers.  CHE retains title to the 
parts until they are utilized by the customer. 
CHE did not file use tax returns on its purchases of parts from out-of-state 
vendors.  The director of revenue audited CHE for the April 2001 through  March 2006 
tax period.2  The director determined that CHE owed sales taxes.  CHE paid the sales tax.  
The director also determined that CHE owed use taxes and proposed an assessment of 
“$19,756.49, with interest at $3,811.87 and additions of 5%, at $942.48, for a total of 
$24,519.84.” 
CHE paid the use tax under protest and filed a complaint with the AHC.  CHE 
noted that section 144.605(13) provides that the term “use” does not include the 
“temporary storage of property in this state for subsequent use out of this state ….”  CHE 
                                                 
2 CHE and the director agreed to use the 2005 calendar year as a sample because CHE’s 
business model was consistent throughout the audit period.  The director determined the 
cost of the parts CHE purchased in 2005 and then divided that amount by 12 to reach a 
monthly average cost of the parts purchased.  The director determined the total amount at 
issue by multiplying the monthly average cost by the number of months in the audit 
period.   
 
argued that its testing and certification of the computer parts was not a taxable use and, 
instead, was non-taxable “temporary storage.”  The AHC concluded that the testing and 
certification process was not temporary storage and constituted a taxable “use” under 
section 144.610.  The AHC determined that CHE’s use tax liability was $57,030.77 and 
that CHE owed additions totaling $2,396.55.  The AHC credited the $24,519.84 CHE 
paid under protest.  CHE filed a petition for review of the AHC decision.   
ANALYSIS 
This Court has jurisdiction to review the AHC’s decision pursuant to Mo. Const. 
article V, section 3, because the case involves construction of state revenue laws.  The 
AHC’s interpretation of revenue laws is reviewed de novo.  DST Sys., Inc. v. Dir. of 
Revenue, 43 S.W.3d 799, 800 (Mo. banc 2001).  The AHC’s decision shall be affirmed if: 
(1) it is authorized by law; (2) it is supported by competent and substantial evidence on 
the whole record; (3) mandatory procedural safeguards are not violated; and (4) it is not 
clearly contrary to the reasonable expectations of the General Assembly.  Section 
621.193.  The AHC’s factual findings will be upheld if the findings are supported by 
substantial evidence in the record.  MFA Petroleum Co. v. Director of revenue, 279 
S.W.3d 177, 178 (Mo. 2009).  
I. Temporary Storage 
 
 Section 144.610 imposes a use tax on out-of-state purchases “for the privilege of 
storing, using or consuming within this state any article of tangible personal property .…”  
Section 144.605(13) defines “use” as “the exercise of any right or power over tangible 
personal property incident to the ownership or control of that property, except that it does 
 
3
not include the temporary storage of property in this state for subsequent use outside the 
state .…”  The computer parts that CHE purchased out of state and then brought to 
Missouri for testing and certification are subject to the section 144.610 use tax if: (1) 
CHE exercised a right or power incident to the ownership or control of the parts; and (2) 
CHE’s exercise of a right or power of ownership or control over the computer parts was 
more than “temporary storage.” 
 
CHE does not dispute that it exercised a right and power incident to ownership and 
control of the computer parts.  CHE received the parts, removed them from the 
packaging, and then subjected the parts to a five-to-seven-day testing and certification 
process.  Therefore, the dispositive issue is whether CHE’s testing and certification went 
beyond “temporary storage” and, instead, constituted a taxable “use.” 
 
There is no statutory definition of “temporary storage.”  The word “temporary” 
means “lasting for a time only; existing or continuing for a limited time.”  WEBSTER’S 
THIRD NEW INT’L DICTIONARY (1966).   Section 144.605(10) defines “storage” as “any 
keeping or retention in this state of tangible personal property purchased from a vendor, 
except property for sale or property that is temporarily kept or retained in this state for 
subsequent use outside the state.”   
To test and certify the computer parts, CHE also had to store those parts 
temporarily.  However, the record demonstrates that CHE did more than simply provide a 
warehouse for temporary storage and reshipping.  As required by its contracts, CHE 
unpackaged, inspected, tested, and repackaged the parts.  CHE then certified the products 
for use and shipped them to its customers.  By performing those functions, CHE did more 
 
4
than simply keep or retain the parts for a limited time period.  Instead, CHE engaged in a 
taxable “use” as provided in section 144.610.  The AHC correctly concluded that CHE 
engaged in a taxable “use.” 
II. Resale Exemption 
 
In its second point, CHE asserts that it is entitled to a resale exemption from the 
use tax. This argument is foreclosed by ICC Management, Inc., v. Director of revenue, 
290 S.W.3d 699 (Mo. banc 2009).  In ICC, this Court held that the resale exemption in 
section 144.615(6) is only available when the property at issue is purchased for a 
subsequent taxable sale.  Id. at 703.  CHE does not purchase the computer parts for a 
subsequent taxable sale.  Rather than reselling the parts, CHE purchases the parts its 
customers require and then inspects, tests, and certifies those parts for use in its 
customer’s machines.  CHE asks this Court to overturn ICC.   This Court declines to do 
so.  
 
In its third point, CHE argues that it should not have to pay a use tax on contracts 
made with public entities that are not required to pay sales or use taxes.  The fact that 
some of CHE’s customers are exempt from state sales and use taxes does not change the 
fact that CHE’s activities constitute a taxable “use” under section 144.610.  There is no 
applicable resale exemption.  
III.   Increase in Deficiency Assessment 
In its fourth point, CHE asserts that the AHC is not authorized to increase the 
amount of tax liability calculated by the director in the post-audit assessment.  This is 
incorrect.  Section 621.050.1 states that “[e]xcept as otherwise provided by law, any 
 
5
person or entity shall have the right to appeal to the administrative hearing commission 
from any finding, order, decision, assessment or additional assessment made by the 
director of revenue.”  The AHC’s review of CHE’s claims is governed by section 
621.050.2: 
In any proceeding before the administrative hearing commission 
under this section the burden of proof shall be on the taxpayer except 
for the following issues, as to which the burden of proof shall be on 
the director of revenue: 
 
… 
 
(3) Whether the taxpayer is liable for any increase in a deficiency 
where such increase is asserted initially after the notice of deficiency 
was mailed and a protest filed …. 
 
 
Section 621.050 provides that CHE bears the burden of proving either it is not 
liable for use tax or is liable for less than what the director assessed.  In contrast, the 
director bears the burden of proving “any increase in a deficiency.”  By specifying that 
the director bears the burden of proving any increase in a deficiency, section 621.050.2(3) 
necessarily assumes the AHC’s authority to increase CHE’s use tax liability above that 
determined by the director.   
The AHC’s authority to alter the director’s assessment reflects the fact that the 
AHC is “an adjunct executive agency [exercising] ... independent and impartial 
decisionmaking authority in disputes between agencies and those persons affected by 
their actions.”  J.C. Nichols Co. v. Director of Revenue, 796 S.W.2d 16, 20 (Mo. banc 
1990)(quoting State Tax Commission v. Administrative Hearing Commission, 641 
S.W.2d 69, 75 (Mo. banc 1982)).  In Nichols, the Court held that the AHC is not bound 
 
6
 
7
by the director’s notice of tax deficiency because the AHC decision becomes the 
administrative action of the agency involved.  Nichols, 796 S.W.2d at 20.  Because the 
AHC announces the agency decision, the AHC does not exceed its authority by 
increasing the director’s assessment.  Id.   The AHC had the authority independently to 
determine CHE’s tax liability and, if necessary, increase the liability initially determined 
by the director. 
IV.  Additions 
 
CHE’s final point is that the AHC should not have assessed additions to its tax 
liability because it is not liable for use taxes.  This point fails because the AHC correctly 
determined that CHE is liable for use taxes.  
CONCLUSION 
 
The AHC decision is affirmed.   
 
 
 
 
 
 
 
______________________________________  
 
 
 
 
 
 
Richard B. Teitelman, Chief Justice  
 
Russell, Breckenridge, Fischer, Stith and 
Price, JJ., and Pritchett, Sp.J., concur. 
Draper, J., not participating.