Opinion ID: 1796249
Heading Depth: 2
Heading Rank: 4

Heading: Does vertical services equipment qualify for the exemption?

Text: Director argues that the AHC wrongly concluded that all of Bell's equipment used to provide vertical services [12] qualifies for the manufacturing exemption. She acknowledges Bell I's holding that the various vertical services ... are intangible products that are manufactured, but again asserts that Bell I limits Bell's manufacturing to the transformation of voice to electronic impulses or the creation of tones and other sounds that consumers use. She contends that Bell's vertical services cannot qualify for the manufacturing exemption unless they involve signal transformation or signal tones. She argues that vertical services that merely reproduce, not create, a signal [13] should not be exempt, nor should vertical services that occur only at the central switch and send no signals to customers. [14] Bell I concluded that both basic telephone services and various vertical services are intangible products that are manufactured such that the manufacturing exemption can apply. [15] 78 S.W.3d at 768. Bell's vertical services are not necessary to production of basic telephone service, but Bell I instructs that they are additional intangible products that are manufactured by Bell that can qualify for the manufacturing exemption. As discussed above, Bell I did not confine Bell's manufacturing merely to signal transformation. Director argues, however, that this Court's holding as to intangible vertical services cannot extend to include Bell's vertical billing services, which produce a tangible product in the form of billing reports. She argues that vertical billing services [16] equipment should not be exempt because it is not used directly in manufacturing Bell's products, but is used merely to bill customers for a product manufactured by other equipment. [17] Bell's billing services involve the compilation of information in a format requested by customers  electronically, on paper, or on disk or CD  that provides customers information about their use of Bell's basic and vertical services. [18] The billing services, however, are more than the tool by which Bell collects the money it is owed for providing its services. Like Bell's other vertical services, Bell's vertical billing services have independent value to customers who purchase the services and are taxed on that purchase. If Bell's vertical billing services merely provided the means by which Bell charged its customers for its communication services, they would not qualify for the manufacturing exemption. In this case, however, Bell presented evidence that the vertical billing services themselves are products that are manufactured. See Int'l Bus. Machs., 958 S.W.2d at 557 (organizing information through computer technology is manufacturing; product is an output with a market value, it can be either tangible personal property or a service). The AHC correctly compared Bell's billing services equipment to the computers that were found to qualify for the manufacturing exemption in DST Systems. [19] 43 S.W.3d at 800, 803 (mainframe computers and various other materials used to store, organize, and package for printing information used in transaction confirmation and shareholder reports were used in manufacturing products that were intended to be sold for final use or consumption such that they could be exempted under section 144.030). Director's arguments challenge only that Bell's vertical services are not manufacturing, which are refuted above. After Bell I, all that was left for the AHC to determine was whether Bell's claimed vertical services equipment satisfied the other requirements of section 144.030.2(4) or (5) such that the manufacturing exemption could apply. Director does not argue that the AHC's decision exempting Bell's vertical services equipment is in error as to these other requirements. As such, the AHC did not err in finding that Bell's vertical services equipment is exempt from sales and use tax.