Title: Dreyer Electric Co., LLC v. Director of Revenue

State: missouri

Issuer: Missouri Supreme Court

Document:

SUPREME COURT OF MISSOURI 
en banc 
 
DREYER ELECTRIC CO., LLC, 
) 
Opinion issued June 16, 2020 
 
 
 
 
 
 
) 
 
 
Respondent,  
 
) 
 
 
 
 
 
 
) 
v.  
 
 
 
 
 
) 
No. SC98007 
 
 
 
 
 
 
) 
DIRECTOR OF REVENUE, 
 
) 
 
 
 
 
 
 
) 
 
 
Appellant. 
 
 
) 
 
 
 
 
 
 
 
 
 
 
Petition for Review of a Decision of the Administrative Hearing Commission  
The Honorable Renee T. Slusher, Commissioner 
 
The Director of Revenue petitions this Court for review of the decision of the 
Administrative Hearing Commission (AHC) that equipment purchased by Dreyer Electric 
Co., LLC, was exempt from sales tax because it was “replacement equipment” “used 
directly in the manufacturing process,” as those terms are used in section 144.030.2(5).1  
For the reasons set forth below, this Court reverses the decision and remands the case for 
a redetermination of Dreyer’s tax liability. 
The Director is incorrect in arguing the AHC should have applied the exemption 
                                              
1 Effective August 2018, section 144.030.2(5) was amended and is currently codified at 
section 144.030.2(4).  Citations in this opinion are to the 2016 version of the statute that 
was in effect at the times relevant to this case.  Other statutory citations are to RSMo 
 
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only to replacement equipment used to transform raw materials into a finished product.  
This Court rejected that test in Floyd Charcoal Co. v. Director of Revenue, 599 S.W.2d 
173, 177 (Mo. banc 1980), and reaffirms its holding today.  The AHC correctly applied 
Floyd Charcoal’s three-factor “integrated plant” test to determine whether the 
replacement parts and equipment at issue were “used directly in manufacturing.”  But the 
AHC then erred by making specific findings as to some parts and then grouping all the 
parts together, including those it had not discussed, to find they were collectively integral 
to the electrical system that powered the machinery.  It should have considered whether 
each type of equipment was independently exempt under the integrated plant doctrine.  
This Court, therefore, reverses and remands for application of the “integrated plant 
doctrine” test to each type of replacement part or equipment purchased. 
I. 
FACTUAL AND PROCEDURAL BACKGROUND 
B&B Timber Company is a sawmill that manufactures flooring, railroad ties, 
pallet materials and other timber products using multiple pieces of equipment.  Much of 
this admittedly exempt equipment, such as the debarker, the chain rollers, the saws, and 
the grinders and chippers, is located in building A and requires electricity to run.  After a 
fire in August 2016, B&B rebuilt building A and other facilities.  B&B hired Dreyer to 
install a new electrical system for the building.  This required Dreyer to buy and install a 
wide variety of equipment such as wiring, electrical outlets, and safety equipment the 
electric company required for safe manufacturing.  Equipment purchased included “soft 
starters” that cause the machinery to draw power slowly to avoid a sudden surge of power 
                                                                                                                                                  
2016 unless otherwise noted.   
 
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that could cause other electric customers to experience service disruptions; a 1,200 amp 
disconnect service that provides circuit breakers for various machines in the event of a 
malfunction; and a NEMA overload relay to stop the machinery in the case of 
overheating, as well as all conduits, couplings, ground rods and cables, washers, 
connectors and disconnectors, and a variety of other equipment.  Together these items 
and systems comprise the “disputed parts.” 
After Dreyer completed the work, B&B gave Dreyer a tax-exemption certificate 
describing the equipment installed as “electrical panels, starters, wiring, motors, support 
material.”  Describing the disputed equipment as permanent electrical components that 
direct and manage the electric current to each of B&B’s machines used in the 
manufacturing of its products or to protect the motors used to operate the machinery, 
Dreyer submitted a claim seeking a refund of the $6,366.61 it had paid in sales tax on the 
disputed equipment, which it said was replacement equipment used directly in 
manufacturing B&B’s wood products and exempt from tax under section 114.030.2(4).  
The Director denied the claim, believing the items were not replacement 
equipment directly related to manufacturing.  Dreyer petitioned the AHC for review.  
Dreyer presented evidence that most of the items were used either to provide power to the 
machines manufacturing B&B’s products, or to safely disconnect them in the event of a 
problem, and that they were needed to safely power the manufacturing machinery.  The 
AHC determined the “disputed items” were replacement equipment “because they are a 
combination of parts that work together to create an electrical system designed 
specifically for B&B’s manufacturing machinery” and were “necessary in order for B&B 
 
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to manufacture its products.”  The AHC also found the disputed items “were physically 
and causally close to B&B’s manufacturing machinery.”  It rejected the Director’s 
argument that equipment used to distribute or transmit electricity cannot be used directly 
in manufacturing, finding unpersuasive the Director’s analogy to Emerson Electric Co. v. 
Director of Revenue, 204 S.W.3d 642 (Mo. banc 2006), and Utilicorp United, Inc. v. 
Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001).  In Emerson Electric, the 
equipment was used only to prepare for, or as a prelude to, manufacturing.  204 S.W.3d at 
646.  In Utilicorp, this Court determined electricity was not being used as part of the 
manufacturing process itself.  75 S.W.3d at 730.  Here, the AHC found B&B used the 
electrical equipment directly in manufacturing products to “ensure that the machine 
motors operate, are protected from electrical spikes, do not overheat, and are directly 
wired into machine motors.” 
Based on this assessment, the AHC held all of the electrical equipment was 
directly related to manufacturing and found in Dreyer’s favor for the full amount of the 
claimed exemption.  The Director seeks this Court’s review.  This Court has exclusive 
jurisdiction in all appeals involving the construction of Missouri’s state revenue laws.  
Mo. Const. art. V, § 3.  “A ‘revenue law’ is [a state law] that imposes, amends, or 
abolishes a tax or fee.”  Armstrong-Trotwood, LLC v. State Tax Comm’n, 516 S.W.3d 
830, 834 (Mo. banc 2017).   
II. 
STANDARD OF REVIEW AND BURDEN OF PROOF 
“This Court will affirm a decision of the AHC if it: (1) is authorized by law; (2) is 
supported by competent and substantial evidence on the whole record; (3) does not 
 
5 
violate mandatory procedural safeguards; and (4) is not clearly contrary to the General 
Assembly’s reasonable expectations.”  Bus. Aviation, LLC v. Dir. of Revenue, 579 S.W.3d 
212, 215 (Mo. banc 2019); § 621.193; Mo. Const. art. V, § 18.  This Court does not 
uphold a decision of the AHC if it is “arbitrary, capricious, unreasonable, unlawful, or in 
excess of jurisdiction.”  Myron Green Corp. v. Dir. of Revenue, 567 S.W.3d 161, 164 
(Mo. banc 2019).  This Court reviews the AHC’s legal decisions de novo.  Id.  “This 
Court is not bound by the [AHC]’s interpretation and application of the law.”  Gervich v. 
Condaire, Inc., 370 S.W.3d 617, 620 (Mo. banc 2012).   
“Taxing statutes must be strictly construed in favor of the taxpayer and against the 
taxing authority.”  Bartlett Int’l, Inc. v. Dir. of Revenue, 487 S.W.3d 470, 472 (Mo. banc 
2016).  “Tax exemptions or exclusions, on the other hand, must be strictly construed 
against the taxpayer, and any doubt must be resolved in favor of the application of the 
tax.”  Id.            
III. 
DISPUTED PARTS MUST BE ANALYZED INDIVIDUALLY 
At issue is whether some or all of the replacement equipment Dreyer purchased 
for B&B qualified for a tax exemption under section 144.030.2(5).   When the items were 
purchased in 2016, the statute exempted from sales tax:  
Replacement machinery, equipment, and parts and the materials and 
supplies solely required for the installation or construction of such 
replacement 
machinery, 
equipment 
and 
parts, 
used 
directly 
in 
manufacturing … a product ….  
 
In the proceedings before the AHC, the Director contended the disputed items 
were not replacement equipment or parts, and, even if they were, they were not used 
 
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directly in manufacturing a product.  In this Court, the Director contends only that the 
equipment and parts were not “used directly in manufacturing.”   It is to the meaning of 
the latter phrase, therefore, that this Court turns. 
The Director contends the phrase should be interpreted according to the dictionary 
definition of “direct” to include only items used in the actual machines that transform the 
wood into products.  It should not, the Director argues, apply to equipment that allows the 
machines to operate safely and that provides power to them because: 
Some of these items work to deliver and control power to the 
manufacturing machinery; other items are required by the electric company 
solely for safety reasons and are not necessary to power the equipment. The 
items that work to deliver and control power, while necessary, are causally 
one step removed from the actual manufacturing process itself and thus are 
not exempt under the manufacturing statute. 
 
Relying on cases decided by states such as Georgia and Ohio, the Director argues such 
equipment and parts should not be exempt because they are not “directly involved in the 
alteration of the graded logs into the final products that B&B produces” and “do not 
cause a change to any raw materials and are not a part of the production line.” 
 
As the Director recognizes elsewhere in his brief, however, the meaning of “used 
directly in manufacturing” is determined not by separating out and defining each word of 
the phrase independently but by looking at the statutory language as a whole in light of its 
legislative purpose.  Undertaking just such an analysis, this Court expressly rejected in 
Floyd Charcoal an argument nearly identical to the one the Director makes today.  The 
issue in Floyd Charcoal was how to determine whether replacement parts and equipment 
used in manufacturing charcoal came within the definition of “used directly in 
 
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manufacturing.”  599 S.W.2d at 176.  In Floyd Charcoal, as here, the Director relied on 
the laws of Georgia and Ohio to argue for a narrow definition of that phase, asserting 
only equipment that produced a change in the composition of the raw materials was 
directly related to manufacturing and the phrase, therefore, excludes other equipment.  Id. 
This Court rejected the Director’s argument, stating it was based, at best, on 
outdated methods of manufacturing and failed to consider that “[m]odern manufacturing 
facilities are designed to operate on an integrated basis.”  Id. at 178.  A machine cannot 
change a raw product into a finished one by itself; rather, today’s machines are integrated 
with other machinery that is also essential to the process.   For this reason, “[t]o limit the 
exemption to those items of machinery or equipment which produce a change in the 
composition of the raw materials involved in the manufacturing process would ignore the 
essential contribution of the devices required for such operation.”  Id. 
Floyd Charcoal instead adopted the broader test it called the “integrated plant 
rule” – which since has been referred to as the “integrated plant doctrine.”  That doctrine, 
Floyd Charcoal said, was more consistent with the Missouri legislature’s intent “to 
encourage the location and expansion of industries” in the state by providing an 
exemption for replacement equipment and parts used directly in manufacturing.  Id. at 
177.  In applying this broader test to determine whether a particular part or process falls 
within the statutory exemption, a court should consider three questions:  
(1) Is the disputed item necessary to production? (2) How close, physically 
and casually, is the disputed item to the finished product? (3) Does the 
disputed item operate harmoniously with the admittedly exempt machinery 
to make an integrated and synchronized system? 
 
 
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Id.  In Floyd Charcoal, the issue was the taxability of various pieces of replacement 
equipment used to manufacture charcoal, including a starch system (consisting of 
conveyer belts and storage bins), weight scales, a sacking system and filter, a check 
weight system, pallets, plastic bags, and stairways and ramps.  Id. at 175.   
Floyd Charcoal did not apply the integrated plant doctrine by deciding whether 
the equipment as a whole was used directly in manufacturing.  Instead, it looked at each 
type of equipment and considered whether it qualified for the exemption.  This Court first 
considered and rejected the Director’s argument that the starch system was not directly 
related to manufacturing charcoal because charcoal could be produced without it.  Floyd 
Charcoal held the starch system was used directly in manufacturing because it 
“contributes to the continuous flow process … and that process requires the starch 
system.”  Id. at 178. 
Floyd Charcoal then considered and rejected the Director’s argument that the 
equipment used in weighing and sacking the charcoal could not be considered directly 
used in manufacturing because the charcoal was fully produced by the time it was 
weighed and sacked.  This Court reasoned the charcoal is manufactured “for distribution 
and sale only in packages which must be accurately weighed and closed. Those steps are 
an integral part of the respondent’s manufacturing process.” Id.  The Court found, 
however, that the company had not shown its pallets, fuel oil, ramps, and certain other 
equipment were used directly in manufacturing even though they were part of the 
process; therefore, the company failed to show these types of equipment were entitled to 
the exemption.  Id. at 178-81.  
 
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This Court applied Floyd Charcoal’s integrated plant doctrine in Southwestern 
Bell Telephone Co. v. Director of Revenue, 182 S.W.3d 226, 233-34 (Mo. banc 2005).  
The question in Southwestern Bell was whether equipment used in the telephone system 
was directly related to manufacturing.  Id at 229.  The disputed items included a signals 
system with components at both the company’s warehouse and the customer’s home and 
also included pay telephones.  Id at 233-37.  Because the telephone signal system 
performed sending functions at the plant and receiving functions at the customer’s 
location, the Director argued the system did not meet the prong of the integrated plant 
doctrine that asks “how close, physically and casually” the disputed item is to the 
finished product.  Id. at 232-33. 
Southwestern Bell rejected the Director’s argument, stating, “The multitude of 
component parts of the telephone system are necessarily spread over far distances, but 
they are not scattered and unconnected.”  Id. at 233.  “Nothing in [the location] question 
requires claimed machinery and equipment to be located in the same building or to have 
common ownership to qualify for the exemption.”  Id.  “The end product of telephone 
service could not be produced without the conversion of voice-to-signal and signal-to-
voice that occurs at customers’ premises.”  Id.  “[T]he manufacture of telephone services 
occurs throughout the entire telephone system, not only at customers’ locations.”  Id.  
“[T]he entire system operates continuously along pathways formed by much of the 
equipment at issue in this case.”   Id.   For these reasons, this equipment was exempt.2 
                                              
2 When the legislature amended section 144.030 in 2018, it stated it was abrogating the 
holding of IBM Corporation v. Director of Revenue, 491 S.W.3d 535 (Mo. banc 2016), to 
 
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This Court reached a different result when considering the pay telephones the 
company claimed were similarly exempt.  It found these telephones were taxable because 
they “are not absolutely essential to the provision of telephone service, and are not 
closely connected to those portions of the system that actually effect a change in the 
signals[.]”  Id.  
In sum, whether a particular component of a system qualifies for the exemption 
depends on whether that component satisfies the broad three-part “integrated plant” test 
set out in Floyd Charcoal, not the narrow test argued for by the Director and rejected in 
Floyd Charcoal.  The Director is correct, however, that, under the integrated plant 
doctrine, the exemption of one type of replacement equipment, such as the soft starters, 
does not exempt all equipment purchased for the system.  As is evident from the above 
explanation of the approach taken in Floyd Charcoal and Southwestern Bell, exemptions 
are determined by applying the three-part test to the particular type of replacement 
equipment at issue.    
Applying these principles here, this Court rejects the Director’s arguments that 
items such as the circuit breakers, soft starters, and overload relays are not directly used 
in manufacturing because wood products theoretically can be manufactured without 
them.  The AHC found this equipment was necessary to operate the wood-making 
                                                                                                                                                  
the extent IBM disapproved the application to telecommunications services of the broad 
reading of “used directly in manufacturing” this Court applied in Southwestern Bell and 
its predecessor case Southwestern Bell Telephone Co. v. Director of Revenue, 78 S.W.3d 
763 (Mo. banc 2002).  This instant case, of course, does not concern telecommunications 
equipment; therefore, IBM’s discussion of the application of the integrated plant doctrine 
to such equipment would not govern here.  
 
11 
machinery safely and without overloading the electrical system.  The AHC similarly 
found the starters, connectors and disconnectors, and power and control wires were 
necessary to deliver power to the manufacturing equipment.  Clearly, under the reasoning 
of the cited cases, such equipment is a part of an integrated process that is necessary to 
the production of B&B’s wood products and so is exempt. 
By contrast, the Director is correct that electric outlets, lights, and lamps not used 
in powering the plant and heat for the buildings generally is not a part of the integrated 
process used to produce B&B’s products and so is not exempt because they do not 
“operate harmoniously with the admittedly exempt machinery to make an integrated and 
synchronized system” and are not necessary to operate the equipment.3 
The AHC failed to mention other replacement equipment specifically in its 
decision, seeming to assume that, because the major equipment purchased was exempt, 
every item purchased was exempt.  This Court, therefore, remands so the AHC can apply 
the analysis approved in cases such as Floyd Charcoal and Southwestern Bell to the 
remaining types of replacement equipment to determine if they are used directly in 
manufacturing like the soft starters or, instead, are simply of general use to B&B, such as 
electrical outlets, but are not used directly in manufacturing.4 
                                              
3 Dreyer also installed a heating element, which the Director alleges is used to heat the 
building where the machinery is housed and, therefore, is not exempt, but which Dreyer 
alleges is a heating element for the NEMA overload relay and, therefore, is exempt.  
Because the Court is remanding this cause, it need not resolve this disagreement. 
4 Dreyer seems to assume this Court will treat the tax as either owing or not owing as a 
whole, so it is not worthwhile to require the Director to apply the integrated plant 
doctrine to the small amounts spent on other equipment. While, as noted, this is incorrect, 
it does raise the question why either the Director or Dreyer believed the small sum 
 
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IV. 
CONCLUSION 
For the reasons set forth above, the AHC’s decision is reversed, and the cause is 
remanded for further proceedings in accordance with this opinion. 
 
 
 
 
 
 
 
 
 
 
_______________________________   
 
 LAURA DENVIR STITH, JUDGE 
 
All concur. 
                                                                                                                                                  
involved was worth their presumably much higher expense in litigating this issue or 
worth the time involved for the AHC or this Court in resolving it.  This Court will assume 
the parties are concerned that the principles involved need clarification and could have 
broad application beyond the facts of this seemingly minor dispute.