DI Supply I, LLC v. Dir. of Revenue

• Decision Date: 17 March 2020
• Docket Number: No. SC 97932,SC 97932
• Citation: DI Supply I, LLC v. Dir. of Revenue, 601 S.W.3d 195 (Mo. 2020)
• Parties: DI SUPPLY I, LLC and Its Individual Members, Appellants, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

601 S.W.3d 195

DI SUPPLY I, LLC and Its Individual Members, Appellants,

v.DIRECTOR OF REVENUE, Respondent.

No. SC 97932

Supreme Court of Missouri, en banc.

Opinion issued March 17, 2020

Rehearing Denied June 2, 2020

Application for Transfer to Supreme Court Denied June 2, 2020

DI Supply was represented by Carol L. Iles of Bryan Cave Leighton Paisner LLP in Jefferson City, (573) 556-6621, and B. Derek Rose of Bryan Cave Leighton Paisner LLP in St. Louis, (314) 259-2529.

The director was represented by Emily A. Dodge of the attorney general's office in Jefferson City, (573) 751-3321, and Christopher R. Fehr of the department of revenue in Jefferson City.

W. Brent Powell, Judge

DI Supply I, LLC, and its individual members (collectively DI Supply) petition this Court for review of a decision from the administrative hearing commission, which determined that DI Supply's room furnishing sales to the Drury Hotels are not exempt from sales tax under the resale exemption in section 144.010.1(11).¹ This Court affirms.

Factual and Procedural History

The material facts of the case are not in dispute. At all relevant times, Drury Hotels Company, LLC, ("DHC") owned DI Supply and managed several dozen hotels in Missouri ("Drury Hotels"). DI Supply sells furnishings and supplies (collectively room furnishings) to the hotels managed by DHC. A department of revenue audit for the period of March 2012 through February 2015² determined DI Supply failed to remit sales tax on more than $11 million in taxable sales of room furnishings to Drury Hotels during the audit period. DI Supply contested this tax liability before the administrative hearing commission arguing these items of tangible personal property were purchased for resale to hotel guests and not subject to Missouri local sales or use tax. The lengthy roster of items involved in these transactions included linens, mattresses, chairs, desks, trash receptacles, DVD players, soap dispensers, wall art, and irons. The commission upheld $613,159.38 of the assessment for sales tax and interest. DI Supply now petitions this Court for review.

Jurisdiction and Standard of Review

Because this case involves construction of Missouri's revenue laws, this Court has exclusive jurisdiction. Mo. Const. art V, § 3 ; see also § 621.189. This Court reviews the commission's interpretation of revenue laws de novo. Brinker Mo., Inc. v. Dir. of Revenue , 319 S.W.3d 433, 435 (Mo. banc 2010). This Court upholds the commission's decision if it is authorized by law, is supported by competent and substantial evidence, does not violate mandatory procedural safeguards, and "is not clearly contrary to the General Assembly's reasonable expectations." Bus. Aviation, LLC v. Dir. of Revenue , 579 S.W.3d 212, 215 (Mo. banc 2019) ; § 621.193. This Court strictly construes tax exemptions against the taxpayer. TracFone Wireless, Inc. v. Dir. of Revenue , 514 S.W.3d 18, 21 (Mo. banc 2017). A taxpayer must demonstrate that an exemption applies by "clear and unequivocal proof." Id. Any doubt regarding the applicability of an exemption is resolved in favor of taxation. Aquila Foreign Qualifications Corp. v. Dir. of Revenue , 362 S.W.3d 1, 3 (Mo. banc 2012).

Analysis

Section 144.020.1(1) imposes sales tax on the "retail sale in this state of tangible personal property." A retail sale is defined by the term "sale at retail" in section 144.010.1(11) as "any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property , for valuable consideration." (Emphasis added). Sales of tangible personal property sold for the purpose of reselling to another customer in the regular course of business are, therefore, exempt from sales tax by section 144.010.1(11). This Court has explained the "underlying reason for the resale exemption in the Missouri tax code is avoiding double taxation...." ICC Mgmt., Inc. v. Dir. of Revenue , 290 S.W.3d 699, 702 (Mo. banc 2009), abrogated on other grounds by § 144.018, RSMo Supp. 2010. DI Supply contends the room furnishings sold to Drury Hotels are exempt from sales tax under the section 144.010.1(11) resale exemption because Drury Hotels include the cost of the room furnishings into the nightly rate for a hotel room. DI Supply argues this means Drury Hotels are reselling the room furnishings to the hotel customers, so the exemption applies to the disputed transactions between DI Supply and Drury Hotels. This Court, therefore, must determine if DI Supply sold room furnishings to Drury Hotels for resale to hotel guests as defined by the resale tax exemption provided in section 144.010.1(11).

DI Supply contends the elements of a "resale" are precisely the same as the elements of a sale, which are "(1) [a] transfer, barter or exchange (2) of title or ownership of tangible personal property or the right to use , store or consume the same (3) for a consideration paid or to be paid." Aladdin's Castle v. Dir. of Revenue , 916 S.W.2d 196, 198 (Mo. banc 1996) (emphasis added); Sipco , 875 S.W.2d at 542 ; Kansas City Royals Baseball Corp. v. Dir. of Revenue , 32 S.W.3d 560, 562 (Mo. banc 2000). Because hotel customers had the "right to use" the room furnishings, DI Supply argues renting a hotel room constitutes a resale of the room furnishings to the hotel customers. But as DI Supply acknowledges, the elements of "resale" as set forth in Aladdin's Castle, Sipco, and Kansas City Royals derive from the definition of "sale" as found in the use tax statutes, sections 144.600 through 144.746, not the sales tax statutes, section 144.010 through 144.527. Assuming DI Supply's position were reasonable based on this Court's history of applying use tax definitions in sales tax cases, such a mixing of statutory definitions was in error. The sales tax and use tax resale exclusions derive from separate and distinct statutes requiring independent analysis, and application of the statutorily correct exemption requires application of the sales tax exemption to this sales tax case.

Use Tax Exemption

Out-of-state purchases are subject to a use tax for the privilege of storing, using or consuming within the state tangible personal property. § 144.610, RSMo 2000. A notable use tax exemption is tangible personal property that is purchased out of state solely for resale. The use tax resale exemption is a creation of statute. Section 144.615(6) specifically exempts [t]angible personal property held by processors, retailers, importers, manufacturers, wholesalers, or jobbers solely for resale in the regular course of business from use tax."

The definition of "resale" as used in the use tax resale exemption is derived from the definition of "sale" found in section 144.605(7). King v. Nat'l Super Markets, Inc. , 653 S.W.2d 220, 221 (Mo. banc 1983) (citing Smith Beverage Co. v. Reiss , 568 S.W.2d 61, 64 (Mo. banc 1978) ), overruled on other grounds by Sipco, Inc. v. Dir. of Revenue , 875 S.W.2d 539, 541-42 (Mo banc. 1994).

Section 144.605(7) defines "sale" as

"any transfer, barter or exchange of the title or ownership of tangible personal property, or the right to use, store or consume the same, for a consideration paid or to be paid, and any transaction whether called leases, rentals, bailments, loans, conditional sales or otherwise, and not withstanding that the title or possession of the property or both is retained for security."

(Emphasis added). Under this statute, a transfer of the right to use constitutes a "sale" for purposes of the resale exemption. For the use tax resale exemption, the elements of a resale set forth in Aladdin's Castle , Sipco , and Kansas City Royals, relied on by DI Supply, provide a taxpayer qualifies for the use tax resale exemption if the taxpayer can show a subsequent transaction that meets these three elements: "(1) [a] transfer, barter or exchange (2) of the title or ownership of tangible personal property or the right to use, store or consume the same (3) for a consideration paid or to be paid." Aladdin's Castle , 916 S.W.2d at 198.

Sales Tax Exemption

"Retail sales" that occur within the state are subject to a sales tax. § 144.020.1(1). As with the use tax, there is a resale exemption from sales tax. The resale exemption from sales tax has a different derivation than does the resale exemption from use tax. The sales tax exemption "is derived from the text of the statutory definition of ‘sale at retail’ .... A ‘sale at retail,’ which is by this definition a sale ‘not for resale,’ is subject to tax under section 144.020.1 ..., and by implication, a sale for resale is excluded from tax." Westwood Country Club v. Dir. of Revenue, 6 S.W.3d 885, 889-90 (Mo. banc 1999). "Sale at retail means any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration...." § 144.010.1(11).

Under this definition, sales of tangible personal property sold for the purpose of reselling to another party in the regular course of business are exempt from sales tax. The definition of "sale at retail," however, requires the transfer of title or ownership for the purchaser's use or consumption, and anything that does not involve the transfer of title or ownership is not a sale at retail. Absent from this definition is any reference to the "right to use, store or consume" found in the use tax statute. In other words, to be exempt from sales tax, the resale must include the transfer of title or ownership, not merely the transfer of the right to use, store or consume the property.³ Mirroring the elements test from Aladdin's Castle , Sipco , and Kansas City Royals , to constitute a sale at retail for purposes of the sales tax resale exemption, a transaction must meet three elements: (1) a...