Title: IBM Corp. v. Dir. of Revenue
Citation: N/A
Docket Number: SC94999
State: Missouri
Issuer: Missouri Supreme Court
Date: April 5, 2016

SUPREME COURT OF MISSOURI 
en banc 
 
IBM CORPORATION,  
 
 
) 
 
 
 
 
 
 
 
) 
 
Respondent/Cross-Appellant, 
 
) 
 
 
 
 
 
 
 
) 
vs. 
 
 
 
 
 
 
) 
No. SC94999 
 
 
 
 
 
 
 
) 
DIRECTOR OF REVENUE, 
 
 
) 
 
 
 
 
 
 
 
 
 
 
 
 
) 
 
Appellant/Cross-Respondent. 
 
) 
 
PETITION FOR REVIEW OF A DECISION OF THE ADMINISTRATIVE 
HEARING COMMISSION 
The Honorable Sreenivasa Rao Dandamudi, Commissioner 
 
Opinion issued April 5, 2016, and modified on the Court’s own motion May 24, 2016 
 
 
The Director of Revenue seeks review1 of the Administrative Hearing 
Commission’s decision that IBM Corporation is entitled to a use tax refund under section 
144.054.22 for its sales of hardware and software to MasterCard International, LLC, for 
MasterCard’s use in processing credit and debit card transactions.  Using the MasterCard 
network, MasterCard communicates information between merchants and banks, including 
the banks’ determination of  whether customers’ purchases should be approved and 
whether a bank owes money or fees on the transaction.  The Commission found that 
MasterCard’s use of the hardware and software qualified as “manufacturing a product” as 
 
 
1 Although IBM is also listed as a cross-appellant, it determined not to pursue its cross-
appeal before this Court.   
2 Unless otherwise indicated, citations are to RSMo 2000 or RSMo Supp. 2013.  
2 
 
that term is used in the use tax exemption set out in section 144.054.2.  This Court 
reverses. 
IBM is not entitled to an exemption from use tax because MasterCard’s use of the 
hardware and software does not qualify as the “manufacturing of any product” under 
section 144.054.2, which provides an exemption from sales or use tax for “equipment[] 
and materials used or consumed in the manufacturing, processing, compounding, mining, 
or producing of any product ….”  Interpretation of the word “manufacturing” (and of its 
near synonym, “processing”) as used in this statute is governed by the well-established 
principle that an exemption must be narrowly and strictly interpreted against the taxpayer 
according to its plain and ordinary meaning.3   
While IBM is correct that the organization and creation of intangible products 
such as computer data can constitute manufacturing, it does not follow that the term 
“manufacturing” should be broadly interpreted to include MasterCard’s use of computers 
to transmit financial information between its customers, who are the issuing and 
acquiring banks, and merchants.  This expansive reading of “manufacturing” goes too far.  
Products, whether tangible or intangible, still must undergo “the alteration or physical 
change of an object or material in such a way that produces an article with a use, identity, 
and value different from the use, identity, and value of the original,” Galamet, Inc. v. Dir. 
 
 
3 See, e.g., Ben Hur Steel Worx, LLC v. Dir. of Revenue, 452 S.W.3d 624, 626–27 (Mo. 
banc 2015); Union Electric Co. v. Dir. of Revenue, 425 S.W.3d 118, 124 (Mo. banc 
2014); Brinker Missouri, Inc. v. Dir. of Revenue, 319 S.W.3d 433, 437 (Mo. banc 2010).   
3 
 
of Revenue, 915 S.W.2d 331, 333 (Mo. banc 1996), to be manufactured.  
Here, IBM does not create or transform a product; it provides equipment that 
allows merchants to check their customers’ credit information while completing and 
approving a purchase.  If such transmission of information is manufacturing, then so is 
the use of any computer to answer a customer’s query.  If the legislature wished to 
exclude from the use tax all computers used by financial institutions to provide credit 
information, or all computers used to answer customer queries, it could have done so.  Cf. 
Utilicorp United, Inc. v. Dir. of Revenue, 75 S.W.3d 725 (Mo. banc 2001).   But it did not.   
I.  
STATEMENT OF FACTS AND PROCEDURAL HISTORY 
 
MasterCard purchased computer hardware and software from IBM for use in 
providing various financial services to its customers.  The core services it provided are 
what it calls its “ACS” services – authorization, clearing, and settlement of transactions 
made with bank-issued credit and debit cards which use the MasterCard logo.4   
During “authorization,” when a customer presents a credit or debit card to a 
merchant to make a purchase, the merchant sends information concerning the transaction 
to the merchant’s bank, called the “acquiring bank.”  The acquiring bank sends that 
information to MasterCard, which sends it to the bank that issued the credit or debit card 
to the customer, called the “issuing bank.”  The issuing bank decides whether to accept or 
 
 
4 Aside from these core ACS services, MasterCard also provides several ancillary 
services including “InControl,” “Fraud Scoring,” and data warehousing.   
4 
 
decline the transaction and sends its decision through MasterCard’s network  to the 
acquiring bank, which forwards it  to the merchant.   In “clearing,” merchants send 
periodic data concerning their transactions to their acquiring banks, which communicate 
the data to MasterCard.  MasterCard aggregates the data received from acquiring banks 
and calculates the sums due from each issuing bank to each acquiring bank based on how 
much the acquiring bank has loaned to its customers – the merchants.  The net amount of 
funds owed by or to a particular bank is called a “settlement position.”  In “settlement,” 
MasterCard communicates the settlement positions it calculated to each issuing bank.  If 
the issuing bank owes money, it remits the amount owed to MasterCard’s settlement 
bank, which remits the money owed to each acquiring bank that is owed money, after 
deducting its fee. 
 
In 2012, IBM filed a use tax return on behalf of MasterCard for purchases of 
computer hardware and software.  IBM claimed that the equipment it sold to MasterCard 
was exempt from use tax because MasterCard’s activities qualify as “manufacturing” 
under section 144.054.2, which exempts “equipment[] and materials used or consumed in 
the manufacturing, processing, compounding, mining, or producing of any product ….”  
The Commission found against the Director and granted IBM a refund, finding that 
MasterCard’s activities could not be distinguished from cases in which the Commission 
believed this Court broadly construed the manufacturing exemption, especially 
Southwestern Bell Tel. Co. v. Dir. of Revenue, 182 S.W.3d 226 (Mo. banc 2005) (“Bell 
II”), in which this Court held that the transmission of a voice over telephone lines 
5 
 
qualified as “manufacturing.”  The Director seeks review.    
II. 
STANDARD OF REVIEW 
Because this case involves the construction of a revenue law of this state, this 
Court has exclusive appellate jurisdiction.  Mo. Const. art. V, § 3.  This Court reviews the 
Commission’s interpretation of a revenue statute de novo.  Fred Weber, Inc. v. Dir. of 
Revenue, 452 S.W.3d 628, 629-30 (Mo. banc 2015).  The Commission’s decision will be 
“upheld when authorized by law and supported by competent and substantial evidence 
upon the whole record, if a mandatory procedural safeguard is not violated” so long as 
the Commission’s decision is not contrary to what the Court concludes were the 
reasonable expectations of the legislature.  § 621.193.   
 
“Tax exemptions are strictly construed against the taxpayer.”  Ben Hur, 452 
S.W.3d at 626.  “A taxpayer must show by ‘clear and unequivocal proof’ that it qualifies 
for an exemption, and all doubts are resolved against the taxpayer.”  Fred Weber, 452 
S.W.3d at 630.  This Court interprets statutes in a way that is not hypertechnical but 
instead is reasonable and logical and gives meaning to the statute and the legislature’s 
intent as reflected in the plain language of the statute at issue.  Id.         
III. 
MASTERCARD’S ACTIVITIES ARE NOT THE “MANUFACTURING OF A 
PRODUCT” UNDER SECTION 144.054.2  
 
 
 
 
 
 
 
 
To qualify for the use tax exemption under section 144.054.2, IBM must show: (1) 
that MasterCard sold equipment or materials used or consumed (2) during the 
manufacturing, processing, compounding, mining, or producing (3) of a product.  Fred 
6 
 
Weber, 452 S.W.3d at 630.  The taxpayer has the burden of proof.  Id.  If IBM fails to 
meet any of these three criteria, it does not qualify for the exemption under section 
144.054.2.  Id.  IBM’s failure to meet the second requirement is dispositive here.    
 
IBM argues that MasterCard’s activities qualify as “manufacturing a product” 
under section 144.054.2 and, therefore, it is entitled to an exemption from use tax for the 
computer hardware and software it sold to MasterCard.  IBM claims that when 
MasterCard transmits approvals and disapprovals of credit card transactions and 
summarizes the credit card transactions undertaken each day by its customers, 
MasterCard organizes, manipulates, and communicates data and by doing so, 
manufactures new products during every transaction.  This Court disagrees.   
While this Court has held that the production of intangible products such as 
computer data may be “manufacturing,” it has rejected the idea that every use of a 
computer to aid a business or transmit information is “manufacturing.”  Such an 
interpretation of the term “manufacturing” would be at odds with the fundamental 
principle, long recognized and applied in Missouri, that exemptions are to be construed 
narrowly against the taxpayer.  See, e.g., State ex rel. Mount Mora Cemetery Ass’n v. 
Casey, 109 S.W. 1, 4 (Mo. 1908); Salvation Army v. Hoehn, 188 S.W.2d 826, 114 (Mo. 
1945); Kansas City Power & Light Co. v. Dir. of Revenue, 783 S.W.2d 910, 911 (Mo. 
banc 1990); Union Electric, 425 S.W.3d at 120.   
This Court’s decisions in Utilicorp and the Bell cases were among its first attempts 
to integrate fast-changing technology into the decades-old exemption for manufacturing.  
7 
 
In Utilicorp, the utility company claimed a manufacturing exemption for the equipment 
used in the transmission of electricity to its customers.  Utilicorp, 75 S.W.3d at 725–26.  
The Court rejected this argument, stating, “Though volts and amperes may change during 
the transmission and distribution, not every change is ‘manufacturing.’”  Id. at 729.  In 
other words, the fact that some intangible products can be manufactured does not mean 
that all intangibles are manufactured products.  Equipment used in the transmission and 
distribution of electricity, Utilicorp concluded, “is not, in the words of section 
144.030.2(4) and (5), ‘used directly’ in manufacturing” and so was not subject to the 
exemption.  Id.  
In Southwestern Bell Tel. Co. v. Dir. of Revenue, 78 S.W. 763 (Mo. banc 2002) 
(“Bell I”) and Bell II, the Court faced the issue of how to apply the terms “product” and 
“manufacturing” to technologies that could not even have been imagined at the time that 
the manufacturing exemption was enacted.  As Bell II said:   
As technology has evolved, consideration has been given to how the 
manufacturing exemption applies when a company’s machinery and 
equipment is connected by telephone lines and via data processing 
connections. As noted in Bell I, this case requires the application of a 
statutory framework that first took shape in the thirties and forties to current 
technology. 
 
Bell II, 182 S.W.3d at 229 (internal quotation marks omitted).   Bell I similarly had noted: 
[T]he growth of modern information and communication technologies has 
challenged lawmakers and courts to keep pace with modern industry. One 
area of specific difficulty in Missouri has been the application of the 
manufacturing sales and use tax exemptions to intangible products or 
services. 
 
8 
 
Bell I, 78 S.W.3d at 766. 
In an attempt to update the definition of “manufacturing” so that it could apply to 
modern technology, Bell I and II stated that voices transmitted over a telephone are 
“products” that are “‘manufactured’ into electronic impulses that can be transmitted and 
reproduced into an understandable replica.”  Bell I, 78 S.W.3d at 768.  Bell I continued, 
“The end ‘product’ is not the same human voice, but a complete reproduction of it, with 
new value to a listener who could not otherwise hear or understand it.”  Id.; see also Bell 
II, 182 S.W.3d at 232.    
IBM premises its argument for the application of the exemption to it on its reading 
of Bell I and Bell II as applying a broad rather than strict definition of “manufacturing” 
and argues that this Court should expand the manufacturing exemption to include just the 
transmission of computer data itself.  This broad interpretation, IBM says, would allow 
this Court to treat the transmission and analysis of credit information among MasterCard, 
its customers and servicing banks as a form of “manufacturing” and so subject to the 
exemption.  IBM’s argument is inconsistent with the well-settled principle that: 
Courts are instructed by the legislature to take the words in a statute in their 
plain and ordinary sense. The plain meaning of words, as found in the 
dictionary, will be used unless the legislature provides a different 
definition. 
 
Lincoln Industrial, Inc. v. Dir. of Revenue, 51 S.W.3d 462, 465 (Mo. banc 2001) (internal 
citations omitted).  Furthermore, to the extent that Bell I and Bell II invited this proposed 
further expansion of the meaning of “manufacturing” in their attempt to apply the term to 
9 
 
new technologies, their reasoning was at variance with the well-established rule that 
“[e]xemptions from taxation are to be strictly construed against the taxpayer, and any 
doubt is resolved in favor of application of the tax.”  Brinker, 319 S.W.3d at 436.   
Narrowly construing the term “manufacturing” as used in the exemption in 
question, MasterCard’s computers do not “manufacture” a tangible or intangible product.  
Rather, they receive information, analyze and make determinations based on this 
information, and relay these determinations to their customers.  This type of activity is 
not “manufacturing” under section 144.054.2 or under the common lay terminology one 
uses in speaking of analyzing credit card transactions. See Union Electric, 425 S.W.3d at 
123.  Otherwise, every time a person received an email, made some type of business or 
mathematical decision, and sent back an email with that decision, the person would be 
said to be “manufacturing” the data sent and received.  That these calculations were done 
using sophisticated hardware and software does not change the fact that the activity is not 
“manufacturing.”     
Indeed, even the dissenting opinion in Brinker, which complained of the failure to 
give exemptions a broad construction, drew a distinction between transformation of a 
product and mere transmission of information, agreeing the latter is not “manufacturing,” 
stating: 
Acts that fall outside [the meaning of “manufacturing” in] subdivisions (4) 
and (5) generally involve repairing or transmitting products rather than 
creating output that has a distinct use, identity or value.  See Utilicorp 
United v. Dir. of Revenue, 75 S.W.3d 725, 729 (Mo. banc 2001) 
(transmitting or distributing electricity); Unitog Rental Services v. Dir. of 
10 
 
Revenue, 779 S.W.2d 568, 570–71 (Mo. banc 1989) (cleaning and repairing 
uniforms) ….  
 
Brinker, 319 S.W.3d at 441–42 (Price, J., dissenting).  To give section 144.054.2 the 
expansive meaning sought by IBM would conflict with this Court’s century-old 
requirement of strictly construing tax exemptions against the taxpayer.  See, e.g., Casey, 
109 S.W. at 4.   
 
This determination is supported by the principle noted in many of this Court’s 
recent cases that it would be inconsistent with the appropriate standard of review to 
expand the meaning of words such as “manufacturing” and “processing” beyond their 
normal meaning to encompass activity that the legislature easily could have made subject 
to the statute had it so intended.  Ben Hur and Fred Weber provide good examples of the 
application of this principle.   
Both cases concerned the meaning of “manufacturing” as used in the exemption 
set out in section 144.054.2 for “equipment[] and materials used or consumed in the 
manufacturing, processing, compounding, mining, or producing of any product ….”  In 
Fred Weber, the Court rejected the claim that rock sold to paving companies for use in 
making asphalt to lay down pavements should be exempt from sales tax under section 
144.054.2 because the process of making asphalt and laying pavements does not qualify 
as “manufacturing,” but rather as “construction.”  452 S.W.3d at 628, 631, citing, Union 
Electric, 425 S.W.3d at 124.  But the word “construction” does not appear in section 
144.054.2, “nor do any words that would be associated with construction activities.”  
11 
 
Fred Weber, 452 S.W.3d at 631.  This Court held that, had the legislature intended to 
exempt construction activities, it would have done so as it has in other tax exemptions 
within chapter 144, and rejected the taxpayer’s attempt to fit its construction activities 
within the manufacturing exemption.  Id.   
Ben Hur reached this same result in denying a “manufacturing” exemption to a 
taxpayer for the purchase of beams used to construct steel frames for commercial 
buildings and structures.  452 S.W.3d at 625.  This Court held that the taxpayer engaged 
in construction, not “manufacturing,” and so the exemption did not apply.  Id. at 627. 
 
In other recent cases, this Court has refused to expand the term “manufacturing” to 
the broad limits argued for by IBM.  In Brinker, this Court rejected the taxpayer’s 
argument that a restaurant was engaged in “manufacturing” when it prepares, cooks, and 
serves food.  319 S.W.3d at 435.  The Court held that “[i]n lay terminology, one does not 
speak of a restaurant as manufacturing or producing food or drink; instead, restaurants 
prepare, cook and serve food and drink to their customers.”  Id. at 438.  This holding was 
quoted in Union Electric in which the Court held – similarly to Brinker – that a bakery 
that made baked goods from scratch was not engaged in “manufacturing.”  Union 
Electric, 425 S.W.3d at 123–24.  “One does not speak of a grocery store bakery 
department as ‘processing’ baked goods any more than one speaks of it as manufacturing, 
compounding or producing such goods.”  Id. at 124.  These cases reflect a consensus by 
this Court to interpret the term “manufacturing” based on the “common sense meaning of 
[the word].”  Bell II, 182 S.W.3d at 239 (Stith, J., dissenting).   
12 
 
Applying the principles set out in the above cases here, had the legislature 
intended financial transactions or computer communications to be subject to the 
exemption set out in section 144.054.2, it easily could have added such language to the 
statute.  As in Fred Weber, no terms relating to credit cards, electronic or computerized 
calculations or transmissions are found anywhere in section 144.054.2.  They are found 
in the exemption for “equipment used or consumed directly in television or radio 
broadcasting …,” § 144.054.3 (emphasis added), and in section 144.030.2(9) that 
exempts “computers … used in producing newspapers ….”  (Emphasis added).  In fact, 
chapter 148 is titled “Taxation of Financial Institutions” and contains tax statutes relating 
to banks, credit institutions, and insurance companies.  Had the legislature intended 
section 144.054.2 to apply to the processing of credit card transactions, it could have 
included additional language within the exemption so indicating, rather than relying on 
an unreasonably broad interpretation of “manufacturing” inconsistent with this Court’s 
most basic rule of interpreting exemptions narrowly.  Moreover, one does not speak of 
the transmission and analysis of credit card data as “manufacturing.”  For in lay 
terminology, such activity is not applicable to the term.  To extend the manufacturing 
exemption to this activity would be to ignore this Court’s rule strictly construing 
exemptions against the taxpayer.  MasterCard’s activities are not “manufacturing” under 
section 144.054.2, the hardware and software sold by IBM is not exempt from use tax, 
and it was error for the Commission to grant IBM’s request for a use tax exemption.                  
13 
 
Greater familiarity with computer and other electronic technology and greater 
experience with the application of the word “manufacturing” in cases such as Brinker, 
Ben Hur, Fred Weber and Union Electric, have demonstrated that expanding the statutory 
definition of “manufacturing” in the Bell cases put the Court too far down a slippery 
slope.  To the extent cases such as Bell I and Bell II suggest that an expansive 
interpretation of the word “manufacturing” is authorized by the “manufacturing” 
exemption, and to the extent that they hold that the electronic transfer of voices is itself 
manufacturing as that term is used in the exemption, they are no longer to be followed.5    
IV. 
CONCLUSION 
 
The Commission erred in reversing the Director’s decision and granting IBM’s 
request for a use tax exemption for the computer hardware and software it sold to 
MasterCard.   MasterCard’s activities do not qualify as the “manufacturing of a product” 
under this Court’s strict interpretation of exemptions.  IBM is not entitled to a use tax 
exemption for the hardware and software it sold to MasterCard.  The Commission’s 
decision is reversed.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
_________________________________ 
     LAURA DENVIR STITH, JUDGE  
All concur. 
 
 
5 In addition, to the extent that the Commission and IBM read this Court’s cases prior to 
Bell I and II to permit a broad rather than a narrow reading of exemptions, they are in 
error.  The Commission should have read the exemption narrowly and held that the mere 
transmission and analysis of computer information is not the manufacturing of a product.