Manufacturing Sales and Use Tax Exemptions --Who Qualifies?
A recent Missouri court ruling is a good example of how qualifying for a manufacturing sales or use tax exemption is very subjective to a state's interpretation of the law. Often times a non-traditional manufacturer will qualify for a manufacturing sales or use tax exemption. The fact that this Missouri case went all the way to the State Supreme Court should encourage non-traditional manufacturers to investigate the tax exemptions available in their state to determine if they apply to their operations.
The Missouri Supreme Court Case, handed down on April 5, 2016, focused on a use tax exemption for a taxpayer of computer software used in processing debit and credit card transactions. The Missouri Supreme Court determined that the Missouri Director of Revenue's original decision was correct and should not have been reversed.
Summary of Case
The Administrative Hearing Commission overturned the Director of Revenue's audit decision and determined that the credit card company's use of the hardware and software qualified as manufacturing a product. The Director of Revenue petitioned the Court for a review of the Commission's decision. The Court determined that the credit card company did not qualify for the exemption because receiving and analyzing information and relaying the analysis to customers is not part of a manufacturing process.
The software and equipment were used to transmit approvals and disapprovals of credit card transactions and to summarize the credit card transactions every day. It was determined that this activity did not meet the exemption granted to manufacturing because the customer did not use or consume the equipment during the manufacturing of a product as the exemption is defined in Sec. 144.054.2 (IBM Corp. v. Dept. of Revenue, Missouri Supreme Court, No. SC94999, April 5, 2016).
The fact that this case went all the way to the Missouri Supreme Court supports that it may be worth exploring these exemptions for non-traditional manufacturers in your particular state. Understanding the rules may help you avoid the audit challenges and flip flop decisions of an audit assessment.