Aquila Foreign Qualifications Corp. v. Dir. of Revenue

• Decision Date: 06 March 2012
• Docket Number: No. SC 91784.,SC 91784.
• Citation: Aquila Foreign Qualifications Corp. v. Dir. of Revenue, 362 S.W.3d 1 (Mo. 2012)
• Parties: AQUILA FOREIGN QUALIFICATIONS CORPORATION, Respondent, v. DIRECTOR OF REVENUE, Appellant.
• Court: Missouri Supreme Court

362 S.W.3d 1

AQUILA FOREIGN QUALIFICATIONS CORPORATION, Respondent,

v.DIRECTOR OF REVENUE, Appellant.

No. SC 91784.

Supreme Court of Missouri, En Banc.

March 6, 2012.

Jeremiah J. Morgan, Deputy Solicitor General, Attorney General's Office, Jefferson City, for the Director.

Bruce Farmer, Oliver Walker Wilson LLC, Columbia, for Aquila.

MARY R. RUSSELL, Judge.

The issue before this Court is whether a convenience store is exempt from sales and use tax for the electricity it purchases for its food preparation operations.Although section 144.054.2¹ provides a tax exemption for the “processing” of products, this Court holds that the legislature did not intend the term “processing” to include retail food preparation in section 144.054.2.The decision of the administrative hearing commission (“commission”) is reversed.

I.Background

Casey's Marketing Company d/b/a Casey's General Stores is a convenience store engaged in the retail sale of gas, grocery items, various nonfood items, and prepared foods.Aquila Foreign Qualifications Corporation is a utility company selling electricity to residential and commercial customers, including Casey's.Casey's filed a refund claim with the director of revenue for one month's tax paid for a portion of electricity Aquila sold to two Casey's locations in Grain Valley and Greenwood.The director denied the claim.At Casey's request, Aquila filed a complaint challenging the director's final decision denying Casey's refund claim for state sales and use tax paid.The commission, in reversing the director's final decision, decided that a portion of Casey's purchased electricity is exempt from state sales and use tax under section 144.054.2.The commission held that the language of section 144.054 was intended to exempt a broad range of activities, and Casey's food preparation operations are “processing” within the meaning of 144.054.2.The director appeals.²

Casey's food preparation operations are minimal.Many of its food products are pre-cooked and only require reheating before consumption.³A few items are frozen raw and are required to be heated to temperature before the items are ready for consumption.⁴A few more items require the addition of water along with the application of heat or the freezing of water before the items are ready for consumption.⁵

Casey's serves two food products that require additional preparation steps beyond the addition of water or the application of heat.Pizzas are prepared by mixing water and pre-measured flour in a mixer.The resulting dough is cut into portions, weighed, and rolled into a flattened shape.A pizza pan is sprayed with nonstick cooking spray, and the dough is placed on the pan.Sauce, cheese, and other toppings are placed on top of the dough, and the pizza is baked in the oven.The pizza is then placed in a warmer and is either sold whole or by the slice.

Cake donuts also require a few additional steps beyond the addition of water or the application of heat.First, the cake donut flour is measured and mixed in a mixer with water to form cake donut dough.The dough is placed into a hopper, and then a cutter cuts, forms, and drops the dough into a fryer.The donuts are flipped once during the frying process and are then dropped onto a donut tray.Once the donuts are cooled, they are iced, topped, and placed in a display case for sale.

In this appeal, the director contends Casey's is not exempt from state sales and use tax on the portion of electricity it purchases for its food preparation operations under section 144.054.2.Casey's, however, claims it is exempt from sales and use tax on its purchases of electricity under section 144.054.2 because it engages in “processing” as defined by section 144.054.1(1).

II.Standard of Review

To determine whether Casey's is entitled to a tax exemption, this Court must interpret a revenue statute.As statutory interpretation is a question of law, this Court reviews the commission's interpretation of section 144.054.2de novo.Brinker Mo., Inc. v. Dir. of Revenue,319 S.W.3d 433, 435(Mo. banc 2010).Tax exemptions are strictly construed against the taxpayer.Id. at 436.Exemptions are only allowed on clear and unequivocal proof, with the burden of proof falling on the taxpayer claiming the exemption.Id. at 437.Any doubt is resolved in favor of taxation.Id.

III.Analysis

At issue in this case is whether the electricity Casey's purchases for the preparation of certain food items qualifies for a tax exemption.Section 144.054.2 exempts from state sales and use tax “electrical energy and gas ... used or consumed in the manufacturing, processing, compounding, mining, or producing of any product....”

To determine whether Casey's is entitled to a sales and use tax exemption on electricity purchased for its food preparation operations, this Court must determine whether Casey's engages in “processing” under section 144.054.2.Although section 144.054.1(1) provides a statutory definition of “processing,” the definition itself is ambiguous.

“A statute is ambiguous when its plain language does not answer the current dispute as to its meaning.”Derousse v. State Farm Mut. Auto. Ins. Co.,298 S.W.3d 891, 895(Mo. banc 2009).Section 144.054.1(1) provides that “processing” is “any mode of treatment, act, or series of acts performed upon materials to transform or reduce them to a different state or thing ....”(emphasis added).Section 144.054 offers no further guidance as to what it means “to transform or reduce” materials.Because the definition of “processing” provided in section 144.054.1(1) is unclear as to the scope of the activities it encompasses, this Court must construe the statute to resolve the ambiguity.⁶

This Court resolves ambiguities in statutes by determining the intent of the legislature and by giving effect to its intent whenever possible.Derousse,298 S.W.3d at 895.In determining legislative intent, no portion of a statute is read in isolation, but rather is read in context to the entire statute, harmonizing all provisions.Util. Serv. Co., Inc. v. Dep't of Labor & Indus. Relations,331 S.W.3d 654, 658(Mo. banc 2011).This Court may apply rules of statutory construction to resolve any ambiguities if the legislative intent is undeterminable from the plain meaning of the statutory language.Derousse,298 S.W.3d at 895.Further, construction of a statute should avoid unreasonable or absurd results.Akins v. Dir. of Revenue,303 S.W.3d 563, 565(Mo. banc 2010).

There is little precedent analyzing section 144.054, but this Court has interpreted a related exemption under similar facts.In Brinker, a restaurant conglomerate argued that kitchen equipment, silverware, chairs and other furniture purchased for use in its restaurants were exempt from state sales and use tax under sections 144.030.2(4)–(5).⁷319 S.W.3d at 435.Section 144.030.2(5) provides a sales and use tax exemption on machinery and equipment “purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption....”⁸Brinker found that restaurants are not “plants” exempt from taxation under sections 144.030.2(4)–(5) because restaurants do not “fabricate,”“manufacture,” or “mine” products to be sold ultimately for final use or consumption.319 S.W.3d at 436.Instead, Brinker held that restaurants “prepare,”“furnish,” or “serve” food to the public at retail.Id. at 438.

Essential to Brinker's holding was the lack of the terms “restaurant,”“preparation,”“furnishing,” or “serving” in section 144.030.2.Id. at 438.Had the legislature intended to exempt those activities from taxation, it would have included those terms in the statute.Id.Pursuant to Brinker, restaurants are not exempt from sales and use tax under sections 144.030.2(4)–(5).Id.

Casey's notes sections 144.030.2(4)–(5), which were at issue in Brinker, differ from the statute at issue here in that the Brinkerstatutes do not include an exemption for “processing.”Casey's contends the inclusion of “processing” in section 144.054.2 brings it within the sales and use tax exemption.Further, Casey's argues that the inclusion of both the term “processing” in the statute here and the statutory definition of “processing” provided in section 144.054.1(1) make Brinker's interpretation of other revenue statutes inapposite to the interpretation of section 144.054.

Although this Court recognizes that neither the term “processing,” nor its statutory definition, appear in sections 144.030.2(4)–(5), Brinker is still instructive as to the analysis of section 144.054.As Brinker stated, if the legislature intended to exempt “restaurants” from sales and use tax on electricity purchased to “prepare,”“furnish,” or “serve” food, it would have included language in the statute to indicate that intent.⁹For example, the legislature enacted section 144.020.1(6) to tax the sale of meals at a restaurant by imposing sales tax on “meals and drinks furnished at any ... restaurant, eating house, drugstore, ... or other place in which ... meals or drinks are regularly served to the public.”(emphasis added).In contrast, section 144.054 contains no reference to “restaurants” and no reference to “preparing,”“furnishing,” or “serving” food.Instead, the legislature exempted from sales and use tax electrical energy and gas used or consumed in “manufacturing,”“processing,”“compounding,”“mining,” or “producing.”Section 144.054.2.

Further, this Court's interpretation of “processing” is guided by the statutory maxim of noscitur a sociis—a word is known by the company it keeps.Pollard v. Bd. of Police Comm'rs,665 S.W.2d 333, 341 n. 13(Mo. banc 1984).It is “often wisely applied where a word is capable of many meanings in order to avoid the giving of unintended...