Bridge Data Co. v. Director of Revenue

• Decision Date: 31 July 1990
• Docket Number: No. 72067,72067
• Citation: 794 S.W.2d 204
• Parties: BRIDGE DATA COMPANY, Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 204

794 S.W.2d 204

BRIDGE DATA COMPANY, Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. 72067.

Supreme Court of Missouri En Banc.

July 31, 1990.

Juan D. Keller, Brenda L. Talent, Brian C. Sparks, St. Louis, Mo., for appellant.

William L. Webster, Atty. Gen., Richard L. Wieler, James B. Deutsch, Asst. Attys. Gen., Jefferson City, Mo., for respondent.

BLACKMAR, Chief Justice.

This is another case requiring the application of a statutory framework that first took shape in the thirties and forties to the technology of the eighties and nineties. We have dealt with similar problems in James v. Tres Computer Service, Inc., 642 S.W.2d 347 (Mo. banc 1982); International Business Machines v. Director of Revenue, 765 S.W.2d 611 (Mo. banc 1989); and GTE Automatic Electric Co. v. Director of Revenue, 780 S.W.2d 49 (Mo. banc 1989), with varying results and, sometimes, with sharp divisions. The legislature might help by modernizing the statutes. Until it does, we must work with imperfect molds. Without prejudging the case, we will refer to the appellant as "the taxpayer" for convenience.

The taxpayer is in the business of supplying sophisticated information about securities traded on the public markets, principally to institutional investors. Its tax advisers were of the opinion that its transactions were not subject to Missouri sales or use tax, and so it neither filed returns nor asked the revenue authorities for rulings about the sales and purchases later drawn into question. The Director of Revenue conducted an audit and assessed deficiencies and penalties. The taxpayer sought review before the Administrative Hearing Commission, which sustained portions of the assessment while rejecting others. The taxpayer filed a petition for review in this Court and the director did not. We affirm the decision in part and reverse in part.

1. The Manufacturing Exemption

The taxpayer, during the period covered by the assessment, obtained raw financial data by telephonic and direct satellite transmissions, and by mail. These data were keypunched into the taxpayer's computer system, which consisted of a substantial array of hardware. The taxpayer also placed its own equipment on the premises of each of its customers, so that they could call up the information they wanted, either on a screen or in a printout.

The taxpayer contended that the hardware described above was exempt from Missouri sales and use taxes pursuant to § 144.030.2, RSMo 1986, reading in pertinent part as follows:

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(4) Machinery and equipment, and the materials and supplies solely required for the installation or construction of such machinery and equipment, replacing and used for the same purposes as the machinery and equipment replaced by reason of design or product changes, which is purchased for and used directly for manufacturing or fabricating a product which is intended to be sold ultimately for final use or consumption;

(5) Machinery and equipment, and the materials and supplies solely required for the installation or construction of such 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;

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It argues that, in making information available to its customers, it is engaged in "manufacturing or fabricating a product" within the meaning of those statutory provisions. It cites cases such as Heidelberg Central, Inc. v. Director of Revenue, 476 S.W.2d 502 (Mo.1972), holding that the printing of stationery and forms constitutes manufacturing, and West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140 (Mo.1970), finding that grinding of rock into gravel is manufacturing. See also, Jackson Excavating Co. v. Administrative Hearing Commission, 646 S.W.2d 48 (Mo.1983), holding that the purification of water to render it fit to drink is manufacturing.

The director does not contend that the equipment purchases were not used for replacement or expansion purposes, as required by the statutes. He argues, however, that the taxpayer provides a "service" rather than a product. It relies strongly on GTE Automatic Electric Co. v. Director of Revenue, 780 S.W.2d 49 (Mo. banc 1989), holding that a telecommunications company, in enabling users to project their voices through its system, did not produce a product within the compass of the statutory exemptions. In that sharply divided opinion we gave weight to statutory provisions that distinguished between the furnishing of water, gas and electricity, which were recognized as products, and telephone services, which were not expressly mentioned. That distinction is not helpful in resolving the case before us.

We conclude that the manufacturing exemption should be allowed for the taxpayer's hardware used in collecting financial data and transmitting data to its customers. Here, what comes out of the system is clearly different from what went into it, in contrast to GTE, in which the telephone company purported to transmit, as accurately as possible, the voices of the participants, even though what one learned in theoretical physics might demonstrate that what came out was not really the same as what went in. See dissenting opinion of Robertson, J., 780 S.W.2d at 53. The statute contains no explicit requirement that the product be "tangible" in order for the manufacturing exemption to apply. The taxpayer makes use of complicated and expensive equipment in providing data to its customers. The recognition of the manufacturing exemption represents a reasonable adoption of the statutes to processes which were not known or hardly known, at the time they were enacted.

It is said that the manufacturing exemption exists to encourage the economic development of the state. ¹ The exemption serves to lessen the burden inherent in the purchase of new and replacement equipment. Our holding gives effect to this purpose.

Because of our conclusion as above stated we do not have to reach a decision about the effect of a waiver of the statute of limitations executed by the taxpayer on account of sales tax claims against Bridge Electronics Corporation, which was the seller of some of the purchased equipment and which was later merged into the taxpayer. Nor do we have to reach a decision on the effect of that merger on sales tax liability of a corporation which was not the surviving corporation, although it seems obvious that a corporate merger does not terminate any liability of any component corporation.

2. The Taxpayer's Software Purchases

A distinct segment of the case has to do with the purchase by the taxpayer of computer software for use in its own system. The director claimed that such purchases were subject to Missouri sales or use tax. The Administrative Hearing Commission disagreed as to software delivered by telephone, and by magnetic tape which the taxpayer was obliged to return to the supplier after using it to program its system. It sustained the assessment as to software delivered on magnetic tapes, floppy disks, or punchcards which the taxpayer retained and which the commission found to consist of programs which were "canned" rather than "custom," in that they were held for sale to those who might desire them and were not specially created to meet a particular customer's specifications or requirements.

We believe that the Commission's finding on this portion of the case is supported by substantial evidence on the record as a whole, and sustain its decision. The taxpayer cites James v. Tres Computer Service, Inc., 642 S.W.2d 347 (Mo. banc 1982); and K & A Litho Process v. Director of Revenue, 653 S.W.2d 195 (Mo. banc 1983), which involved custom creations on media of relatively small value. There the Court concluded that the media of transmission, magnetic tape in the former case and color film transparencies in the latter, were of relatively small value and were incidental to the primary purpose of the transaction. These holdings were refined in International Business Machines v. Director of Revenue, 765 S.W.2d 611 (Mo. banc 1989), in which the seller-taxpayer had a stock of computer programs on disk, diskette, tape, and punched cards. The Court held that the sale of these programs was a sale of tangible personal property, even though the programs were sometimes subjected to minor modifications to meet the particular purchaser's needs,...