Opinion ID: 1796249
Heading Depth: 2
Heading Rank: 5

Heading: Is Bell's transmission equipment used directly in manufacturing?

Text: Finally, Director argues that the AHC erred in exempting Bell's interoffice trunking facilities from use tax because this equipment is not used directly in manufacturing, but is merely used to provide transmission service for the manufactured product. Director cites Utilicorp, 75 S.W.3d 725, in arguing that the AHC's decision wrongly dissolves the line between equipment that is used to create a product and equipment that deals with a product once it is created. She argues that this Court should extend the Utilicorp holding from electricity transmission to telephone transmission, asserting that Bell's transmission and distribution equipment cannot be exempt. Bell, however, contends that the AHC rightly concluded that Utilicorp's holding is confined to the facts in that case and is uniquely applicable to electricity. The AHC distinguished Utilicorp on its facts, highlighting Utilicorp's finding that none of the equipment claimed for an exemption in that case was used in generating electricity, but instead was merely delivering the completed, essential product of electricity from the place where it was generated, without changing it. See Utilicorp, 75 S.W.3d at 726-27 (there are three distinct stages of providing electricity  generation, transmission, and distribution  and the equipment at issue was used only for transmission and distribution, not generation). The AHC contrasted the telephone system from electricity by determining that, unlike electricity, the telephone system cannot be divided into generation and transmission stages because changes to signals occur at various stages in the system, not during one discrete generation phase. The AHC concluded that Utilicorp is not applicable in this case because: The entire telephone system is necessary to provide the service of connecting the caller to the other party, and that service is not complete until that connection is made and the signals transmitted back and forth during the conversation. Moreover, telephone service is a `two-way,' interactive product ... and its final form is shaped both by individual choices [of the callers] ... and what features they may choose to use at a particular time. Electricity, in contrast, is complete when it leaves the generator. It is a `one-way' product, largely unaffected by customer choice or action. The AHC correctly determined that Utilicorp does not control this case. Bell's telephone service is worthless if not transmitted between and among customers. It is not complete at any one stage in the telephone system, but is a product of the entire system. The transmission equipment challenged by Director is used directly in manufacturing telephone service in that it satisfies the three-prong test of the integrated plant doctrine. The transmission equipment is necessary for the production of telephone service in that it enables signals to be carried appreciable distances; the equipment is close, physically and causally, to the finished product of telephone service; and it operates harmoniously with Bell's other exempt equipment in an integrated and synchronized system. The production of telephone service illustrates the integrated plant doctrine's concern that `[i]t is not practical to divide [the] plant into `distinct' stages' and `[t]he words `directly and exclusively' should not be construed to require the division into theoretically distinct stages of what is in fact continuous and indivisible.' Floyd Charcoal, 599 S.W.2d at 177 (quoting Niagara, 144 N.Y.S.2d at 461-62). The AHC did not err in exempting Bell's transmission and distribution equipment.