Opinion ID: 1796249
Heading Depth: 1
Heading Rank: 3

Heading: What is used directly?

Text: The standard for determining what is used directly in manufacturing has evolved as manufacturing itself has changed from traditional rust-belt factories to industries that are increasingly reliant on what the AHC appropriately calls technology of a new millennium. Keeping pace with modern industry, especially in information and communication technologies, has required consideration of how the manufacturing exemption applies to intangible products or services. Bell I, 78 S.W.3d at 766. 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.' Id. at 763-64 (quoting Bridge Data Co. v. Dir. of Revenue, 794 S.W.2d 204, 205 (Mo. banc 1990), abrogated by Int'l Bus. Machs. Corp. v. Dir. of Revenue, 958 S.W.2d 554 (Mo. banc 1997)). The meaning of used directly in manufacturing a product was first addressed in Floyd Charcoal Co., Inc. v. Director of Revenue, 599 S.W.2d 173, 176 (Mo. banc 1980), abrogated on other grounds by Al-Tom Inv., Inc. v. Dir. of Revenue, 774 S.W.2d 131 (Mo. banc 1989). In Floyd Charcoal , this Court adopted the integrated plant theory [5] for determining what is directly used in manufacturing. 599 S.W.2d at 177-78. The integrated plant theory stresses that: `The basic questions are the following: (1) Is the disputed item necessary to production? (2) How close, physically and causally, 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? . . . . It is not practical to divide [the] plant into `distinct' stages. It was not built that way, and it does not operate that way. The words `directly and exclusively' should not be construed to require the division into theoretically distinct stages of what is in fact continuous and indivisible.' Id. at 177 (quoting Niagara Mohawk Power Corp. v. Wanamaker, 286 A.D. 446, 144 N.Y.S.2d 458, 461-62 (1955), aff'd, 2 N.Y.2d 764, 157 N.Y.S.2d 972, 139 N.E.2d 150 (1956)). Floyd Charcoal rejected the argument that equipment could not qualify for the manufacturing exemption if it did not produce a change in the composition of raw materials involved in the manufacturing process, stating: Modern manufacturing facilities are designed to operate on an integrated basis.... [and] limit[ing] 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. Floyd Charcoal, 599 S.W.2d at 178. Floyd Charcoal also rejected the contention that the relevant question was whether or not the manufacturing operation may be carried on without the machinery in question, because [s]uch a test does not comport with the reality of the process involved. Id. Floyd Charcoal's adoption of the three-prong integrated plant theory approach was consistent with the purpose of Missouri's manufacturing exemption, which was enacted by the legislature to encourage the production of items ultimately subject to sales tax and to encourage the location and expansion of industry in Missouri. Id.; Concord Publ'g House, Inc. v. Dir. of Revenue, 916 S.W.2d 186, 190 (Mo. banc 1996). The exemption reduces multiple taxation that occurs where purchases for resale are taxed numerous times during the journey of goods to the ultimate consumer, such that the tax paid by the manufacturer is passed on to the consumer, who is, in turn, effectively taxed on a tax. Since Floyd Charcoal , other cases have considered the integrated plant theory in deciding whether items are used directly in manufacturing such that they are exempt from sales and use tax. The integrated plant theory as adopted in Floyd Charcoal was applied in Noranda Aluminum, Inc. v. Missouri Department of Revenue, 599 S.W.2d 1 (Mo. 1980), wherein this Court discussed that the equipment at issue was used in steps or operations that are essential to and comprise an integral part of [the] manufacturing process, and [was, therefore,] used directly for manufacturing or fabricating a product. . . . Noranda, 599 S.W.2d at 4 (internal citations omitted). Concord, 916 S.W.2d 186, reiterated that Floyd Charcoal had rejected strict interpretation of the phrase directly used to exempt only machines that physically alter raw materials to a finished product. Concord, 916 S.W.2d at 191-92. It asserted that Missouri has adopted the integrated plant doctrine, viewing manufacturing operations as continuous and indivisible. Id. at 191 (internal citations omitted). In Concord , computers used in manufacturing [6] a newspaper were determined to be directly used in manufacturing because they [were] an integral part of the publication process and provided the most important step in manufacturing a newspaper, the composition and editing of its contents. Id. at 192. In holding that the computers were exempt in Concord , this Court found the integrated plant doctrine can apply where two distinct corporations are cooperatively involved in manufacturing because it can span two corporate entities as long as both businesses work together to manufacture a single product and the exchange between [the two corporations] occur[s] as a coordinated and necessary step in the manufacturing process. Id. at 192-93. [7] Concord also found that physical distance between the claimed computers and other manufacturing equipment was a factor to consider in determining if the computers were an integral part of manufacturing, but it was not a determinative factor. Id. at 193. Concord noted that because the computers were essential to manufacturing, their physical distance from other equipment did not break the direct tie required for the manufacturing exemption to apply. Id. Similarly, in DST Systems, a computer system was found to be part of an integrated plant for producing printed statements via a subsidiary, even though the printing and computing occurred at different sites. 43 S.W.3d at 803. [8] DST Systems discussed that the integrated plant doctrine views manufacturing operations as continuous and indivisible and found that DST's equipment was exempt because it was substantially, though not exclusively, used for manufacturing the products and was an integral part in producing the ultimate product. Id. The most recent case discussing the integrated plant theory is Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001). Utilicorp concluded that electricity transmission and distribution equipment is not part of an integrated plant, because the equipment essentially repackages an existing product and, therefore, is not used directly in manufacturing. 75 S.W.3d at 728-29. In this case, the AHC concluded that each category of equipment that Bell claimed qualified for the manufacturing exemption because it was used directly in manufacturing.