Opinion ID: 2446936
Heading Depth: 1
Heading Rank: 1

Heading: The Sales Tax

Text: The primary issue is whether the sales by Sneary to his clients constitute the sales of tangible personal property within the meaning of § 144.020, RSMo 1986, or whether, as Sneary asserts, the transactions are nontaxable performances of a service. This Court will affirm the commission's decision upholding the director's assessment of sales tax if it is: [A]uthorized by law and supported by competent and substantial evidence upon the whole record, ... and if the approval or disapproval of the exercise of authority in question by the administrative hearing commission does not create a result or results clearly contrary to that which the court concludes were the reasonable expectations of the general assembly at the time such authority was delegated to the agency. § 621.193, RSMo 1986. In correcting errors of law, this Court will exercise its independent judgment. Daily Record Co. v. James, 629 S.W.2d 348 (Mo. banc 1982). Taxing statutes and regulations must be strictly construed in favor of the taxpayer. St. Louis Country Club v. Admin. Hearing Comm'n, 657 S.W.2d 614 (Mo. banc 1983). Section 144.020 imposes a sales tax upon every retail sale in Missouri of tangible personal property. § 144.020.1(1), RSMo 1986. Sale at retail is defined in § 144.010.1(8) as any transfer made by any person engaged in business ... of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption ... for a valuable consideration. The sales tax is imposed on gross receipts: [T]he total amount of the sales price of the sales at retail including any services ... that are part of such sales. § 144.010.1(3), RSMo Supp.1992. The transfer of ownership of the tangible architectural illustrations in this case for valuable consideration falls in the literal sense within the sales tax statute. This Court has recognized, however, that the true object or essence of the transaction determines whether to treat a transaction as a taxable transfer of tangible personal property or the nontaxable performance of a service. The test focuses on the essentials of the transaction to determine the real object the buyer seeks. James v. TRES Computer Sys., Inc., 642 S.W.2d 347 (Mo. banc 1982); K & A Litho Process, Inc. v. Director of Revenue, 653 S.W.2d 195 (Mo. banc 1983). Under the test, this Court has recognized a class of transactions in which tangible personal property serves exclusively as the medium of transmission for an intangible product or service. The intangible component is the true object of the sale; the tangible component is of little utility and may even be discarded after the buyer has used it to obtain access to the intangible component. In such transactions, the intangible object of the sale does not assume the taxable character of the tangible medium, TRES Computer, 642 S.W.2d at 349, or the tangible medium is inconsequential and nontaxable, K & A Litho, 653 S.W.2d at 197. The decision in this case is dictated by evidence that reflects that the architectural illustrations are the objects of the transactions between Sneary and the architectural firms. The evidence shows that the architectural firms retained Sneary to provide illustrations. No mention was made of other architectural services. The architectural firm's purpose was to obtain an attractive example of what the firm could do for a proposed project so as to persuade a project owner to use the firm's services. Sneary's billings evidence that the object of the transactions were the illustrations. Both the letter agreements and billing statements describe transfers of the illustrations and detail their specific sizes and layouts, reflecting that the buyers placed importance on the tangible illustrations. The fact that Sneary used ink and watercolor only on the final illustrations further reflects that the clients placed importance on the illustrations. Testimony in the record also reveals that Sneary's clients desired and used the illustrations. Sneary's contracts involved the sale of tangible personal property subject to the sales tax. Sneary contends, nevertheless, that the assessed transactions are within the excluded class because he uses his significant architectural talents and training to interact with the rest of the architectural team to produce a definitive expression of their design concepts in his final illustration. He argues that the architectural illustrations were not the object of the transactions; they merely served as a medium to convey architectural information to clients. Since books, video tapes, audio tapes, maps, and mass produced computer programs [1] can serve as a medium to convey information, yet be subject to the sales tax, Sneary must distinguish his transactions to avoid the sales tax. He seeks to distinguish the sales in his case by reliance on James v. TRES Computer Service., Inc., 642 S.W.2d 347 (Mo. banc 1982), and K & A Litho Process, Inc. v. Director of Revenue, 653 S.W.2d 195 (Mo. banc 1983). Neither TRES Computer nor K & A Litho supports Sneary's position. TRES Computer involved the sale of $135,000 worth of custom data and computer programing (program) sold on computer tapes worth fifty dollars. The parties stipulated that the program itself was intangible, but that the tapes were tangible personal property. The tapes were subject to the sales tax. The issue was whether the program lost its intangible nature when transferred to and sold on the tapes. If the program lost its intangible nature, then the seller was liable for sales tax on the combined value of the tapes and the program. This Court held that the program did not lose its intangible nature; therefore, the taxpayer was liable for sales tax only on the fifty dollar tapes. In TRES Computer this Court emphasized that the intangible program was the ultimate object of the sale, not the tangible tapes; the tapes served merely as a conduit to convey the program, and once the program was transferred to a computer, the tapes were no longer of value to the buyer. The program was not sold as a finished product since the buyer had to enter it into a computer where it would be translated into computer language. Finally, the seller could have transferred the program without the tapes, via telephone lines, thereby entirely avoiding the sales tax. A number of the circumstances governing the TRES Computer rationale are distinct from those in the present case. First, in TRES Computer the intangible program was the ultimate object of the sale and the customers placed no value on the tangible tapes. Here, in contrast, Sneary's clients desired and used the tangible architectural illustrations. Second, although the illustrations contain architectural information, they do not act as disposable conduits for that information as did the computer tapes. The architectural information is not transferred from the illustrations, nor do the clients dispose of the illustrations after receiving the information. Instead, the information the illustrations provide remains as Sneary's clients use the illustrations to promote projects. Third, unlike the computer program, the illustrations are a finished product. Whereas the computer program had to be transferred from the tapes into a computer and translated into computer language, the illustrations need no further processing to be utilized by their purchasers. Finally, unlike the program in TRES Computer , there is no evidence that the architectural information is separable from the illustrations and that Sneary could have transferred that information to his client in an intangible form that would have avoided the sales tax. In K & A Litho , the taxpayer received film transparencies from its customers and, by a highly technical and scientific process, separated the colors onto a sheet of film. The taxpayer then prepared a color key. A printer used the taxpayer's color-separated film and color key in preparing its printing plates. Once the printer prepared the plates, the separated film and color key served no further purpose and were usually discarded. This Court found that, under TRES Computer , the transactions were not subject to the sales tax. The Court noted that the film served only as a medium to convey the transparency colors and was of no value after having done so. The color separated film and color keys were the product of highly technical and skilled services, that were themselves the object of the sale, the separated film and color key being merely an incidental and unfinished product. This Court distinguished the taxpayer's separated film, which consisted of colored dots, from the motion picture film found subject to the sales tax in Universal Images, Inc. v. Department of Revenue, 608 S.W.2d 417 (Mo. 1980). A motion picture, unlike the separated film, was a final, finished product which the buyer could use in the form sold. K & A Litho, 653 S.W.2d at 197. The transactions in the present case are distinguishable from those in K & A Litho . The disposable medium and object of the sale factors are addressed and distinguished above. The level of technical or scientific skill required to produce a product may be relevant in determining whether the services constitute the true object of the sale. The level of skill required to produce a product cannot otherwise cause a sale of tangible personal property to be exempted from the sales tax. Although Sneary's illustrations require architectural skill to produce, the objects of the sale, as discussed, were the illustrations themselves. Finally, Sneary's architectural illustrations more closely resemble Universal's finished motion picture, which was used as sold, than K & A Litho's separated film and color key, which had no use except to transfer colors in the next stage of the printing process. As stated, the illustrations' form does not change after they are sold; Sneary's clients desire and use the illustrations in the form sold. K & A Litho does not support Sneary's contention. Sneary also argues that architectural illustration is an integral part of the practice of architecture and that architecture is a service-oriented industry exempt from sales tax. He cites 12 CSR 10-3.070(1), which states that [s]ervice-oriented industries are generally providing only services which are not subject to the sales tax. That regulation goes on to state, however, that [s]hould a service industry engage in business themselves as retailers selling tangible personal property, they ... are subject to the sales tax on their sales. 12 CSR 10-3.070(3). Clearly, then, service-oriented industries are not categorically exempt from sales tax. When a service-oriented business sells tangible personal property, as does Sneary, the sale is subject to sales tax. Sneary asserts further that Missouri law recognizes a distinction between transactions involving architects and transaction involving manufacturers of goods. In support, Sneary cites Chubb Group of Insurance Cos. v. C.F. Murphy & Associates., Inc., 656 S.W.2d 766 (Mo.App.1983), in which plaintiffs sued an architect, among others, under a theory of strict products liability for the collapse of an arena roof. The court of appeals, in discussing the policy underlying strict products liability, distinguished architects from those who mass produce and sell goods, noting that the relationship between architect and client is markedly different [from that of consumer and mass producer].... Architects and clients normally enjoy a one-to-one relationship and communicate fairly extensively during the course of the relationship. Id. at 780 (quoting City of Mounds View v. Walijarvi, 263 N.W.2d 420, 425 (Minn.1978)). Chubb Group does not address the issue presented in this case. The policy considerations underlying strict products liability are irrelevant in the sales tax context. Appellant also cites Blaske v. Smith & Entzeroth, Inc., 821 S.W.2d 822 (Mo. banc 1991), which involved an equal protection claim challenging different statutes of limitations for architects and materialmen. This Court held that a rational basis existed to distinguish architects from materialmen when establishing statutes of limitations due to the unique and complex problems that architects face in every project, contrasted with materialmen who typically mass produce standardized products. Blaske does not address the issue at bar. Whether a rational basis exists to distinguish between architects and materialmen in setting different statutes of limitations involves considerations altogether inapplicable to the sales tax statute, under which sales of tangible personal property are subject to the sales tax regardless of the unique or complex problems one faces in producing the property sold. Sneary repeats his argument that the architectural illustrations are not taxable as tangible personal property because the illustrations are merely incidental to the skilled service his clients purchase. In this instance, he cites a Georgia court of appeals case, Hawes v. Dimension, Inc., 122 Ga.App. 190, 176 S.E.2d 602 (1970), in which the court reversed an assessment of sales tax on the transfer of architectural illustrations. Hawes was decided on a Georgia sales tax statute that exempts professional, insurance, or personal service transactions which involve sales as inconsequential elements for which no separate charges are made. Id. 176 S.E.2d at 603; Ga.Code Ann. § 48-8-3(22) (1982). The Georgia court found that the architect engaged in the business of supplying personal and professional services by taking his clients' ideas and concepts and transforming them into illustrations. The court noted that the illustrations' material components represented only 3% to 4% of the total price charged, the balance being charged for the service provided. Id. at 604. Missouri does not have a statutory exemption similar to Georgia's. As noted, § 144.010.1(3) defines gross receipts, against which the sales tax is imposed, as the total amount of the sale price of the sales at retail including any services ... that are part of such sales. § 144.010.1(3), RSMo Supp.1992 (emphasis added). Furthermore, contrary to Georgia's exemption, this Court has repeatedly held that Missouri's sales tax scheme does not contain a de minimis exemption for sales of tangible personal property where services dominate and material components constitute only a small percentage of the total sales price. Kilbane v. Director of Revenue, 544 S.W.2d 9, 12 (Mo. banc 1976) (We find nothing in the Sales Tax Act which indicates that whether sales tax is due depends on the respective percentages of labor and materials in the product sold.). Odorite of America v. Director of Revenue, 713 S.W.2d 833, 839 (Mo. banc 1986) (This argument that sales tax due depends on the respective percentages of labor and material sold was rejected by this Court in Kilbane ....); Universal Images v. Missouri Dep't of Revenue, 608 S.W.2d 417 (Mo. banc 1980) (applying Kilbane to Missouri's use tax). The fact that Sneary's production of architectural illustrations demands substantially more labor than materials is not, therefore, a consideration when deciding whether the illustrations are tangible personal property under the sales tax statute. None of Sneary's arguments is sufficient to persuade the Court that the architectural illustrations are not the object of the sale. In the words of Travelhost of Ozark Mountain Country v. Director of Revenue, 785 S.W.2d 541, 545 (Mo. banc 1990), the illustration is the sine qua non of the service rendered by Sneary. It is the purpose of the agreements with the clients. The commission's decision upholding the director's assessment of sales tax is affirmed.