BASF Corp. v. Dir. of Revenue

• Decision Date: 26 February 2013
• Docket Number: No. SC 92446.,SC 92446.
• Citation: 392 S.W.3d 438
• Parties: BASF CORPORATION, Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

392 S.W.3d 438

BASF CORPORATION, Appellant,

v.DIRECTOR OF REVENUE, Respondent.

No. SC 92446.

Supreme Court of Missouri, En Banc.

Dec. 18, 2012.

Rehearing Denied Feb. 26, 2013.

William B. Pugh, Christopher S. Abrams, Joh R. Dedon and Mark A. Olthoff, Polsinelli Shughart PC, Kansas City, Scott A. Browdy, Chicago, and Drew McEwen, Ryan Law Firm LLP, Austin, TX, for Appellant.

Gary Gardner and Deputy Solicitor Jeremiah J. Morgan, Attorney General's Office, Jefferson City, for Respondent.

PER CURIAM.

The issue before this Court is whether an herbicide and pesticide manufacturing plant meets the statutory definition of a “material recovery processing plant” for purposes of the manufacturer qualifying for sales and use tax exemptions provided under sections 144.030.2(4) and 144.030.2(12). ¹ The manufacturer claims that, as a “material recovery processing plant” under section 144.030.2(4), it is entitled to tax exemptions related to its purchases of chemicals, coal, natural gas, and electricity utilized in its manufacturing processes.

The administrative hearing commission determined that the manufacturer's chemical plant at issue in this case did not qualify as a “material recovery processing plant” for purposes of applying the claimed tax exemptions. This Court agrees and affirms the commission's rejection of the manufacturer's claims that it was entitled to tax exemptions related to operation of a “material recovery processing plant.” This Court finds no error in the commission's determinations that the manufacturer's purchases of chemicals, coal, natural gas, and electricity were subject to taxation.

The commission's decision is affirmed.

I. Background

A. Manufacturing processes at issue

BASF operates a chemical manufacturing plant in Hannibal that manufactures “finished molecules” used in herbicides and pesticides. Chemical reactors at the plant contain four “process lines” that are used to manufacture the “finished molecules.” ² At the conclusion of the plant's processes, portions of the component parts, ingredients, and other chemicals used in the processes are recovered. For example, certain chemicals are utilized in the manufacturing processes to achieve necessary chemical reactions, but those chemicals are not included in the “finished molecules” that result from the processes. Solvents are used in the manufacturing process to produce solutions needed to make the chemical reactions in the manufacturing process occur more thoroughly and efficiently. The solvents, however, are removed later in the manufacturing process and do not become a part of the “finished molecules” manufactured at the plant. Similarly, a process at the plant utilizes a gas during the process to make the process's chemical reaction safer, but the gas is not a part of the “finished molecules” produced by the process.

Materials recovered during the manufacturing processes are utilized in subsequent production cycles. Each year, recovered materials—both materials recovered internally during the plant's processes and recovered materials purchased from third-party vendors—account for approximately 42 percent (measured by weight) of the total annual inputs used in the production processes of all “finished molecules” produced by the Hannibal plant.

B. Statutory provisions for “material recovery processing plants”

At issue in this appeal is whether, during various tax periods ranging from 1999 to 2005, BASF's Hannibal plant qualified for sales and use tax exemptions available under sections 144.030.2(4) and 144.030.2(12) for a “material recovery processing plant.” In relevant part, those statutes provided sales and use tax exemptions for:

(4) ... machinery and equipment, and the materials and supplies required solely for the operation, installation or construction of such machinery and equipment, purchased and used to establish new, or to replace or expand existing, material recovery processing plants in this state. For the purposes of this subsection, a “material recovery processing plant” means a facility which converts recovered materials into a new product, or a different form which is used in producing a new product, and shall include a facility or equipment which is used exclusively for the collection of recovered materials for delivery to a material recovery processing plant....

(12) Electrical energy used in the actual primary manufacture, processing, compounding, mining or producing of a product, or electrical energy used in the actual secondary processing or fabricating of the product, or a material recovery processing plant as defined in subdivision (4) of this subsection, in facilities owned or leased by the taxpayer, if the total cost of electrical energy so used exceeds ten percent of the total cost of production, either primary or secondary, exclusive of the cost of electrical energy so used or if the raw materials used in such processing contain at least twenty-five percent recovered materials as defined in section 260.200....Sections 144.030.2(4) and 144.030.2(12) (underlined emphasis added).³

By its reference to section 260.200, section 144.030.2(12) incorporates an environmental statute defining “recovered materials.” Section 260.200(31),⁴ a solid waste management provision, provides that “recovered materials” are “those materials which have been diverted or removed from the solid waste stream for sale, use, reuse or recycling, whether or not they require subsequent separation or processing[.]”

C. Exemption claims at issue

The tax exemption issues presented in this case originated after the director of revenue performed a sales and use tax audit of BASF's Missouri operations. The director issued BASF use tax assessments on its chemical purchases for the Hannibal plant that covered tax periods from July 1, 2000, through December 31, 2001. BASF appealed the assessments to the commission, maintaining that it was entitled to tax exemptions available to a “material recovery processing plant.”

The director also issued BASF partial audit billings for use tax on natural gas purchases it made related to the Hannibal plant during tax periods from 1999 through 2004. BASF remitted payment for those billings and then filed a refund claim. The director denied the refund claim, and BASF appealed the denial of its refund request to the commission.

BASF also filed a refund claim for use tax it had remitted related to its purchases of coal used in its Hannibal plant operations. The use tax related to coal purchases in tax periods from 2002 through 2004 and from February 1, 2005, through September 30, 2005. The refund claim was denied, and BASF also appealed that refund denial to the commission.

BASF further sought a refund of sales tax it had paid related to its purchases of electricity used in the Hannibal plant operations. The electricity sales tax refund request covered sales tax payments made during tax periods from September 1, 2001, through December 31, 2003. This sales tax refund claim was denied, and BASF also appealed that denial to the commission.

D. The commission's findings

The commission found in favor of the director, finding that BASF was not entitled to its claimed “material recovery processing plant” exemptions. The commission initially found that the Hannibal plant was not a “material recovery processing plant” for purposes of applying the provisions of section 144.030.2(4) because its operations did not fulfill the definition of “recovered materials” pursuant to section 260.200(31). In so finding, the commission articulated that the definition of “recovered materials” in section 260.200(31) is the definition to be used in the section 144.030 tax exemption provisions. The commission determined that the materials recovered by BASF were not “recovered materials” for exemption purposes because they were not shown to be solids. It found the Hannibal plant was not a section 144.030.2(4) “material recovery processing plant” because “[t]he chemicals BASF reclaims are not [‘]recovered materials[’] because they are not solid waste and are not diverted or removed from the solid waste stream.”

The commission additionally highlighted that the chemicals at issue were “supplies” for purposes of section 144.030.2(4) but were not tax-exempt supplies insofar as they were not shown to be “required solely for the operation” of the plant's exempt machinery or equipment. Although the parties had entered a joint stipulation that provided the chemicals at issue were required solely for the operation of BASF's machinery or equipment, the commission found that this stipulation wrongly sought to inject a legal conclusion that was the province of the commission. The commission found that the facts of BASF's plant operations showed that the chemicals at issue merely acted “in concert with other chemicals and the operation of the machine [to] produce desired chemical reactions and products[, b]ut they do not ‘share in the operation of the machine’ in the ordinary meaning of the word “operation.” The commission articulated that the machines used in BASF's plant could operate without the chemicals at issue. Moreover, the commission determined that BASF failed to show that the chemicals at issue were exempt because they could not show that they were used solely to operate new or replacement machinery and equipment that would qualify for a section 144.030.2(4) exemption.

In addition to rejecting BASF's exemption claims for chemicals, the commission also rejected BASF's assertions that it was entitled to exemptions for its purchases of natural gas and coal. The commission decided that, pursuant to regulations promulgated by the director, coal and natural gas may be exempt as supplies under section 144.030.2(4). The commission found, however, that BASF had failed to carry its burden to show that the purchases of coal and natural gas for which it claimed tax exemptions were purchases of supplies “required solely for the operation” of “qualified”...