Title: Western Blue Print Co., Respondent v. Director of Revenue, Apellant.

State: missouri

Issuer: Missouri Supreme Court

Document:

Supreme Court of Missouri 
en banc 
 
WESTERN BLUE PRINT CO.,  
 
) 
 
 
 
 
 
 
 
) 
 
 
 
Respondent,     
           ) 
 
 
 
 
 
 
 
) 
 
 
v. 
 
 
 
 
) 
No. SC 90172 
 
 
 
 
 
 
 
) 
DIRECTOR OF REVENUE, 
 
 
) 
  
 
 
 
 
 
                                            ) 
Appellant. 
 
 
) 
 
 
 
 
 
 
 
) 
 
PETITION FOR REVIEW OF A DECISION OF THE ADMINISTRATIVE 
HEARING COMMISSION  
Honorable John J. Kopp, Commissioner 
 
Opinion issued April 20, 2010 
 
Because the “true object” of Western Blue Print’s business was the 
conversion of paper documents into electronic format and not the sale of compact 
disks (“CDs”), the CDs it provided its customers were merely incidental to a non-
taxable service.  This Court affirms the decision of the Administrative Hearing 
Commission. 
Factual and Procedural Background 
Western Blue Print (“WBP”) is a limited liability company with its 
principal office in Kansas City, Missouri.  It is a professional printing and copying 
company.  At issue in this case is its business of document automation.  Document 
automation is the electronic scanning of paper documents onto CDs.   
According to the parties’ stipulation, WBP’s business can be described 
most easily as follows:  WBP’s customers bring in hard copies of important 
documents they would like converted into electronic format.  WBP scans images 
of those documents onto CDs.  WBP then returns the original documents and the 
CDs to the customer.  Under the terms of most customers’ contracts, WBP also 
keeps a copy of the CDs.  WBP charges its customers a fee-per-page for the 
documents it scans and an additional $15 for each CD it distributes.1  Before 
purchasing these services, customers sign detailed contracts that explain the price 
break-down.  WBP’s customers also are given the option of requesting additional 
services, such as indexing of the CDs’ contents into folders, conversion of the 
scanned documents to PDF files, or labeling of the documents to facilitate the 
search functions in Acrobat Reader or Windows Explorer. 
In February 2006, the director of revenue (“the director”) initiated an audit 
of WBP’s sales, use, and withholding tax records for the previous three years.  At 
the conclusion of the audit, the director assessed WBP $41,414.29 in unpaid sales 
tax.  The amount included $35,971.62 in unpaid sales tax for the CDs WBP sold to 
its customers plus $5,442.67 in statutory interest for the time period in question. 
                                             
 
1 The $15 fee actually encompasses both the CD given to the customer and the 
duplicate stored by WBP. 
In January 2007, WBP challenged the director’s assessment before the 
Administrative Hearing Commission (“the commission”).  WBP made two 
arguments to the commission.  First, WBP argued that the “true object” of its sales 
was a non-taxable service, not a tangible finished product, so the CDs it provided 
its customers did not transform its transactions into taxable sales of personal 
property.  Second, WBP argued that even if provision of the CDs did render its 
transactions taxable retail sales, they are tax-exempt “computer output” under 
section 144.010(10), RSMo.2  The commission ruled in favor of WBP on both 
points.   
The director makes two arguments on appeal.  First, the director argues that 
the commission erred in finding that WBP’s transactions were non-taxable 
services because the CDs, which were tangible personal property, were the “true 
object” of WBP’s sales.  Second, the director argues that the commission erred in 
finding that WBP’s sales were exempt from taxation because the CDs did not 
constitute “computer output” under the statute.  Analysis of the first issue is 
dispositive of the case. 
Jurisdiction 
This Court has exclusive appellate jurisdiction over all cases involving the 
construction of the revenue laws of the state.  Mo. Const. art. V, sec. 3. 
Analysis 
Standard of Review 
                                             
 
2 All references are to RSMo 2000, as amended, unless otherwise noted. 
 
3
This Court reviews agency determinations of tax law de novo.  DST Sys., 
Inc. v. Dir. of Revenue, 43 S.W.3d 799, 800 (Mo. banc 2001).  Determinations of 
fact will be upheld if, after considering the entire record, they are supported by 
substantial evidence.  Id.  WBP has the burden of proving that its sales are non-
taxable.  Branson Props.USA, L.P. v. Dir. of Revenue, 110 S.W.3d 824, 825 (Mo. 
banc 2003). 
Applicable Statutes 
Section 144.020.1(1) imposes a sales tax on “every retail sale in this state 
of tangible personal property.”  A retail sale is “any transfer made by any person 
engaged in business as defined herein of the ownership of, or title to, tangible 
personal property to the purchaser.”  Section 144.010.1(10) RSMo.  This text has 
never been modified, despite a technological revolution in the way we conduct 
business in Missouri and across our nation.3  As Chief Justice Blackmar noted in 
Bridge Data Company, this Court must work with the “imperfect mold” of section 
144.010.  Bridge Data Company v. Director of Revenue, 794 S.W.2d 204, 205 
(Mo. banc 1990).  The question before the Court is what the terms “retail sale” and 
“tangible personal property” mean as set out in sections 144.010.1(10) and 
144.020.1(1). 
This Court’s Precedent 
                                             
 
3 The current language is identical to the original language.  This statute first was 
enacted during the fiscal crisis of 1933-1934. 1933-1934 ex. session Mo. Laws 
156. 
 
4
Over the past 20 years, this Court has dealt with the scope of section 
144.010.1(10) many times.  The Court has developed the “true object” test to 
determine which types of “mixed” transactions are taxable under sections 
144.010.1(1) and 144.020.1(1).  This Court has held that to determine the “true 
object” of a transaction that involves both non-taxable services and taxable retail 
sales, the Court looks to the “real object the buyer seeks.”  Sneary v. Director of 
Revenue, 865 S.W.2d 342, 345 (Mo. banc 1993).   
This Court has recognized a class of transactions in which tangible personal 
property “serves only as the medium of transmission for an intangible product or 
service.”  Id. at 349.  If the tangible personal property is “merely incidental” to a 
non-taxable service, its existence will not transform the entire transaction into a 
taxable retail sale.  Id.   
The Court first discussed the “true object test” in James v. TRES Computer 
Systems, Inc., 642 S.W.2d 347 (Mo. banc 1982).  TRES Computer Systems, Inc., 
(“TRES”) was a Texas-based corporation that sold computer software to a 
Missouri customer.  TRES delivered software to its customers via magnetic tapes.4  
The director argued that the transfer of the tapes, which, admittedly, were tangible 
personal property, rendered the transactions taxable retail sales.  This Court, 
however, concluded that the tapes were not the “ultimate object of the sale” for 
two reasons.  First, the customers were really buying an intangible service from 
                                             
 
4 TRES was decided under section 144.610, RSMo 1978, but the operative phrase, 
“tangible personal property,” has not changed.  
 
5
TRES, not tangible personal property.  Even though they were provided with 
tapes, after the customers “translated and introduced the information into the 
computer … what actually remain[ed] in the computer [wa]s intangible 
knowledge.”  Id. at 349. That is, what TRES’s customers were truly seeking was 
the electronic data the tapes contained, not the tapes themselves. Therefore, “the 
tapes themselves were not the ultimate object of the sale.”  Id.  Second, the 
existence of the tapes did not transform the transactions into taxable retail sales 
because the tapes themselves were not necessary to the transactions.  Instead, the 
data and information on the tapes “could have been sent to the customers through 
electronic communications.”  Id.  
In K&A Litho Process, Inc. v. Director of Revenue, 653 S.W.2d 195 (Mo. 
banc 1983), a lithography company received film transparencies from a third 
party, then separated the colors onto a sheet of film and prepared something called 
a color key. The color key and film were then sold to printers who created plates 
from them that the printers used to make photographs.  Those color photographs 
were sold to the printers’ customers, and the color key and separated film could be 
discarded.  The director argued that K&A Litho’s transactions amounted to taxable 
retail sales because the company sold tangible personal property (the color keys 
and film sheets).  This Court, however, following TRES, held that the items of 
tangible personal property were not the “true object” K&A Litho’s customers were 
seeking.  Instead, what they were buying were the company’s skill and experience 
in producing the color keys and separated films.  The tangible items were merely a 
 
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“segment of a larger production operation” that did not render the transactions 
taxable retail sales.”  K&A Litho, 653 S.W.2d at 196.  
TRES and K&A Litho are controlling here.  WBP’s business was the 
conversion of paper documents into electronic format – it scanned its customers’ 
documents, burned the documents onto CDs, and delivered the CDs to the 
customers.  These are non-taxable services under settled Missouri law.  The CDs 
WBP used to transfer the data to its customers were “merely the medium of 
transmission.”  Tres, 642 S.W.2d at 349.   That WBP used CDs as a delivery 
vehicle for its customers’ electronic data was incidental to the services WBP 
provided.  The fact that WBP used CDs instead of delivering its customers’ data 
via the Internet or some other means did not render its business transactions “retail 
sales” subject to sales tax.5  
The CDs WBP used, like the tapes TRES used, were mere conduits for the 
data.  The CDs WBP used, like the tapes TRES used, can be discarded after the 
data is transmitted to the customers’ computers.  Similar to TRES, what WBP’s 
customers really were buying was the conversion of their paper documents into 
electronic format.  “[T]ransfer of tangible personal property under these 
circumstances is merely incidental to the purchase of the intangible … information 
stored on the [media].”  TRES, 642 S.W.2d at 349.  The intangible services 
provided by WBP were the “essence of the transaction[s].”  Sneary, 865 S.W.2d at 
                                             
 
5 The director did not argue that the physical CDs themselves were taxable, so that 
issue is not before this Court.  
 
 
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342.  And, like in K&A Litho, the physical CDs provided by WBP were only a 
“segment of a larger production operation.”  Id. at 196.   
The Director’s Argument 
The director argues that the deliberate choice on the part of WBP’s clients 
to receive their documents on CDs transforms WBP’s transactions into taxable 
retail sales.  The director relies on two primary cases in which this Court held that 
the “mixed” transactions at issue were in fact taxable retail sales.  Neither case is 
persuasive on the facts here. 
The first case is a 1990 case in which a company produced television 
commercials and videotapes for a variety of purposes, including accident 
reconstruction, depositions, and instructional seminars.  The company argued that 
its services were not taxable retail sales.  Gammaitoni v. Director of Revenue, 786 
S.W.2d 126 (Mo. banc 1990).  The Court explained that the transactions at issue 
were taxable sales of tangible personal property because the finished videotapes 
themselves were the objects of the transactions.  Id. at 129.  The facts of 
Gammaitoni are the exact inverse of the facts before us today.  In Gammaitoni, it 
was the services rendered by the company (manufacturing the videotapes) that 
were incidental to the sale of tangible personal property (the physical videotapes).  
Id. at 130.  In this case, by contrast, the physical CDs provided to WBP’s 
customers were incidental to the non-taxable services for which the customers 
were contracting.   
 
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The second case is Universal Images v. Department of Revenue, 608 
S.W.2d 417 (Mo. banc 1980).  In Universal Images, a Missouri corporation 
(“Universal”) produced short advertisements that movie theaters ran as previews.  
Businesses wishing to create an advertisement for this purpose contracted with 
Universal for the use of its moving picture film and sound accompaniment.  This 
Court held that Universal’s transactions were taxable retail sales of personal 
property because its clients were purchasing the films themselves, which were 
“finished products.”  TRES, 642 S.W.2d at 350 (discussing Universal Images).  In 
contrast, WBP’s customers were not buying the physical CDs as “finished 
products.”  They were buying the conversion of their data into electronic format.  
As discussed, the CDs provided by WBP were the medium of transmission 
incidental to the purchase of that service.   
Conclusion: 
This Court affirms the decision of the Administrative Hearing 
Commission. 
 
                                                                 
                                                                 ____________________________ 
    William Ray Price, Jr., Chief Justice 
 
 
All concur. 
 
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