Concord Pub. House, Inc. v. Director of Revenue, State of Mo.

Decision Date20 February 1996
Docket NumberNo. 77894,77894
Citation916 S.W.2d 186
Parties24 Media L. Rep. 1949 CONCORD PUBLISHING HOUSE, INC. f/k/a/ Cape Mississippi Development, Inc., d/b/a Southeast Missourian, Respondent, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Appellant.
CourtMissouri Supreme Court

Petition for Review of a Decision of the Administrative Hearing Commission; Paul R. Otto, Commissioner.

Jeremiah W. (Jay) Nixon, Atty. Gen., Gretchen Garrison, Asst. Atty. Gen., Jefferson City, for appellant.

Lawrence Weltman, Richard Ahrens, St. Louis, for respondent.

William Jay Powell, Columbia, for amici curiae, Missouri Press Association, et al.

PRICE, Judge.

The Director of Revenue appeals the Administrative Hearing Commission ("AHC") decision exempting Concord Publishing Company ("Concord") and Cape Mississippi Development, Inc. ("Cape") from sales and use tax on computers and computer equipment the companies purchased and used to implement changes in the production process and format of the newspaper and to increase the number of newspapers sold. We affirm in part and reverse in part.

I.

Cape and Concord have been under common ownership since 1986. Before 1992, Concord's primary business was commercial printing. One division of Concord operated a printing press which was used to print a number of newspapers, including the Southeast Missourian ("SEMO"). Cape owned and published SEMO. Cape became the owner of the press division sometime in 1990. On July 31, 1992, Cape formally merged into Concord.

Before and during the audit periods Cape used a "tiling", or overlaying process to prepare SEMO for print. Text was entered into computers and printed off on laser printers. It was then manually arranged on a sample page, and a photograph was taken to create a negative. Color photographs were processed manually by aligning separate negatives of the photo for each of the four basic colors. The negatives were sent to Concord's press which used them to print the newspapers Cape sold to the public. Cape entered the cost of the printing as an expense on its books and Concord entered the cost as revenue.

SEMO is now published using the "pagination" process which eliminates much of the manual work involved in creating a layout. Newspaper pages are assembled on a computer network and the negative is electronically produced. Photographs are aligned by computer as well, resulting in sharper images at a lower cost. More color pictures are now used by SEMO and there is a new masthead. Because of pagination, SEMO is assembled more quickly, extending the deadlines for reporters and including more current news. SEMO is now published seven days a week instead of six.

In 1993 the Director audited Concord for the period September 1, 1989 through August 31, 1992, and Cape for the period September 16, 1989 through April 28, 1992. During the audit periods both companies purchased computer equipment that is now used in pagination. The equipment was not purchased to replace old, worn out, or obsolete equipment but to upgrade the publication system in order to implement pagination and expand production.

Because of the significant capital expense involved, the necessary equipment for pagination was purchased over time as finances would allow. A requirement for each item purchased was the capability of working with all other present and future components in the pagination system. Pagination was not implemented until October, 1993. Until then, some of the equipment was used on an interim basis in the tiling process. The Director assessed sales and use tax on the equipment, which Cape and Concord paid under protest. 1

This Court has jurisdiction pursuant to Mo. Const. art. V, § 3 and reviews the AHC's interpretation of revenue law de novo. L & R Egg Co. v. Director of Revenue, 796 S.W.2d 624, 625 (Mo.banc 1990). Factual determinations are upheld if supported by "substantial evidence upon the whole record." Id.; § 621.193, RSMo 1994 2. In accordance with this standard we essentially adopt the factual findings of the AHC. 3

II.

This case involves the assessment of sales and use taxes for items purchased or used in Missouri. § 144.020; § 144.610. Apparently Concord and Cape issued exemption certificates to the sellers of the equipment and are therefore the proper parties to this action. Conagra Poultry Co. v. Director of Revenue, 862 S.W.2d 915, 918 (Mo. banc 1993); § 144.210.1.

Cape and Concord, now merged as Concord, argue that the computer equipment should be exempt from sales tax under § 144.030.2(4) and (5). These exemptions also apply to use taxes. § 144.615(3). We find the purchases are governed by § 144.030.2(4) and (5) which exempt the following:

(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; 4

(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;

Neither sales nor use tax is due on machinery and equipment (1) used directly (2) in manufacturing (3) a product which is intended to be sold ultimately for final use or consumption (4) if the machinery or equipment was purchased (a) to replace existing equipment by reason of design or product changes or (b) to expand existing manufacturing. These statutes were enacted by the legislature to encourage the production of items ultimately subject to sales tax and to encourage the location and expansion of industry in Missouri. Bridge Data Co. v. Director of Revenue, 794 S.W.2d 204, 206 (Mo. banc 1990); State ex rel. Ozark Lead Co. v. Goldberg, 610 S.W.2d 954, 957 (Mo.1981); Floyd Charcoal Co. v. Director of Revenue, 599 S.W.2d 173, 177 (Mo.1980); Heidelberg Central, Inc. v. Director of Dept. of Revenue, 476 S.W.2d 502, 506 (Mo.1972); West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140, 142 (Mo.1970).

The Director does not contest that the listed items are machinery and equipment. Nor does she dispute that the newspaper is a product intended to be sold for final use or consumption and on which sales tax is properly collected. The Director, however, claims that the computers purchased and used in the publication of SEMO (1) were not used in manufacturing the newspaper, (2) the computers were not used in "directly" manufacturing the newspaper, (3) the changes in the post-pagination SEMO were not a "product change", (4) even if there was a "product change", the change did not occur until after the audit period, (5) increased production volume is not expanded manufacturing, (6) the taxpayers provided insufficient proof of the exemption, and (7) Concord could not claim the exemption for the equipment it purchased but Cape used in an exempt manner.

III. Used Directly in Manufacturing
(A) Manufacturing

The Director claims that the computer equipment was not used directly in manufacturing SEMO. Although she concedes that printing presses, or presumably other equipment that involve the printing of words and pictures on the actual paper sold, are used in manufacturing a newspaper, she claims that gathering, storing, and arranging the information printed is not manufacturing. We disagree.

Newspaper publication involves the mechanical processing of words and pictures. It begins when words are put into the network. Manufacturing occurs as those words are manipulated and finally affixed onto a printed page, creating a new edition "through the use of machinery, labor and skill." Heidelberg Central, 476 S.W.2d at 506. 5

We have already established that organizing information through computer technology is "manufacturing." Bridge Data Co., 794 S.W.2d at 206. In Bridge Data, we held that the hardware in the taxpayer's computer system, used to collect raw financial data and transmit the data to customers, qualified for an exemption even though the final product was intangible. We concluded that "what comes out of the system is clearly different from what went into it"; therefore, the computers were involved in "manufacturing." Id.

We find the present case indistinguishable from Bridge Data. The computer layout system here is also used to process data and convey information to customers. The final product is clearly different from what is put into the system. The present case is even stronger because the computer network produces a tangible, taxable product, a newspaper. 6

The Director's argument that the only manufacturing that occurs in the publishing of a newspaper is the process of putting ink on paper is artificially limited. It ignores the labor, skill, and complex machinery required to generate daily newspapers and the transformation that took place when the taxpayers adopted the pagination system. We hold that the computers in the present case were used in "manufacturing" a newspaper. 7

(B) Directly Used

The Director claims that even if the pagination system is considered manufacturing, it does not directly manufacture the newspaper, which is the item intended to be "sold ultimately for final use or consumption." The Director makes four arguments. First, she claims the computer equipment is used merely to produce a negative which is not sold and has no retail value. Second, she claims that the "integrated plant doctrine" does not apply between separate corporate entities. Third, the Director argues that because the newspaper is produced in two different...

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