Dreyer Elec. Co. v. Dir. of Revenue

• Decision Date: 16 June 2020
• Docket Number: No. SC 98007,SC 98007
• Citation: Dreyer Elec. Co. v. Dir. of Revenue, 603 S.W.3d 297 (Mo. 2020)
• Parties: DREYER ELECTRIC CO., LLC, Respondent, v. DIRECTOR OF REVENUE, Appellant.
• Court: Missouri Supreme Court

603 S.W.3d 297

DREYER ELECTRIC CO., LLC, Respondent,

v.DIRECTOR OF REVENUE, Appellant.

No. SC 98007

Supreme Court of Missouri, en banc.

Opinion issued June 16, 2020

The director was represented by Julia E. Rives and Christopher R. Wray of the attorney general's office in Jefferson City, (573) 751-3321.

Dryer was represented by Scott Fetterhoff of Lichteneffer, Weiss & Fetterhoff LLC in Jackson, (573) 243-8463, and Leah Robinson of Mayer Brown LLP in New York City, (212) 506-2799.

Laura Denvir Stith, Judge

The Director of Revenue petitions this Court for review of the decision of the Administrative Hearing Commission (AHC) that equipment purchased by Dreyer Electric Co., LLC, was exempt from sales tax because it was "replacement equipment" "used directly in the manufacturing process," as those terms are used in section 144.030.2(5).¹ For the reasons set forth below, this Court reverses the decision and remands the case for a redetermination of Dreyer's tax liability.

The Director is incorrect in arguing the AHC should have applied the exemption only to replacement equipment used to transform raw materials into a finished product. This Court rejected that test in Floyd Charcoal Co. v. Director of Revenue, 599 S.W.2d 173, 177 (Mo. banc 1980) , and reaffirms its holding today. The AHC correctly applied Floyd Charcoal ’s three-factor "integrated plant" test to determine whether the replacement parts and equipment at issue were "used directly in manufacturing." But the AHC then erred by making specific findings as to some parts and then grouping all the parts together, including those it had not discussed, to find they were collectively integral to the electrical system that powered the machinery. It should have considered whether each type of equipment was independently exempt under the integrated plant doctrine. This Court, therefore, reverses and remands for application of the "integrated plant doctrine" test to each type of replacement part or equipment purchased.

I. FACTUAL AND PROCEDURAL BACKGROUND

B&B Timber Company is a sawmill that manufactures flooring, railroad ties, pallet materials and other timber products using multiple pieces of equipment. Much of this admittedly exempt equipment, such as the debarker, the chain rollers, the saws, and the grinders and chippers, is located in building A and requires electricity to run.

After a fire in August 2016, B&B rebuilt building A and other facilities. B&B hired Dreyer to install a new electrical system for the building. This required Dreyer to buy and install a wide variety of equipment such as wiring, electrical outlets, and safety equipment the electric company required for safe manufacturing. Equipment purchased included "soft starters" that cause the machinery to draw power slowly to avoid a sudden surge of power that could cause other electric customers to experience service disruptions; a 1,200 amp disconnect service that provides circuit breakers for various machines in the event of a malfunction; and a NEMA overload relay to stop the machinery in the case of overheating, as well as all conduits, couplings, ground rods and cables, washers, connectors and disconnectors, and a variety of other equipment. Together these items and systems comprise the "disputed parts."

After Dreyer completed the work, B&B gave Dreyer a tax-exemption certificate describing the equipment installed as "electrical panels, starters, wiring, motors, support material." Describing the disputed equipment as permanent electrical components that direct and manage the electric current to each of B&B's machines used in the manufacturing of its products or to protect the motors used to operate the machinery, Dreyer submitted a claim seeking a refund of the $6,366.61 it had paid in sales tax on the disputed equipment, which it said was replacement equipment used directly in manufacturing B&B's wood products and exempt from tax under section 114.030.2(4).

The Director denied the claim, believing the items were not replacement equipment directly related to manufacturing. Dreyer petitioned the AHC for review. Dreyer presented evidence that most of the items were used either to provide power to the machines manufacturing B&B's products, or to safely disconnect them in the event of a problem, and that they were needed to safely power the manufacturing machinery. The AHC determined the "disputed items" were replacement equipment "because they are a combination of parts that work together to create an electrical system designed specifically for B&B's manufacturing machinery" and were "necessary in order for B&B to manufacture its products." The AHC also found the disputed items "were physically and causally close to B&B's manufacturing machinery." It rejected the Director's argument that equipment used to distribute or transmit electricity cannot be used directly in manufacturing, finding unpersuasive the Director's analogy to Emerson Electric Co. v. Director of Revenue, 204 S.W.3d 642 (Mo. banc 2006) , and Utilicorp United, Inc. v. Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001) . In Emerson Electric , the equipment was used only to prepare for, or as a prelude to, manufacturing. 204 S.W.3d at 646 . In Utilicorp, this Court determined electricity was not being used as part of the manufacturing process itself. 75 S.W.3d at 730 . Here, the AHC found B&B used the electrical equipment directly in manufacturing products to "ensure that the machine motors operate, are protected from electrical spikes, do not overheat, and are directly wired into machine motors."

Based on this assessment, the AHC held all of the electrical equipment was directly related to manufacturing and found in Dreyer's favor for the full amount of the claimed exemption. The Director seeks this Court's review. This Court has exclusive jurisdiction in all appeals involving the construction of Missouri's state revenue laws. Mo. Const. art. V, § 3 . "A ‘revenue law’ is [a state law] that imposes, amends, or abolishes a tax or fee."

Armstrong-Trotwood, LLC v. State Tax Comm'n, 516 S.W.3d 830, 834 (Mo. banc 2017) .

II. STANDARD OF REVIEW AND BURDEN OF PROOF

"This Court will affirm a decision of the AHC if it: (1) is authorized by law; (2) is supported by competent and substantial evidence on the whole record; (3) does not violate mandatory procedural safeguards; and (4) 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 ; Mo. Const. art. V, § 18 . This Court does not uphold a decision of the AHC if it is "arbitrary, capricious, unreasonable, unlawful, or in excess of jurisdiction." Myron Green Corp. v. Dir. of Revenue, 567 S.W.3d 161, 164 (Mo. banc 2019) . This Court reviews the AHC's legal decisions de novo. Id. "This Court is not bound by the [AHC]’s interpretation and application of the law." Gervich v. Condaire, Inc., 370 S.W.3d 617, 620 (Mo. banc 2012) .

"Taxing statutes must be strictly construed in favor of the taxpayer and against the taxing authority." Bartlett Int'l, Inc. v. Dir. of Revenue, 487 S.W.3d 470, 472 (Mo. banc 2016) . "Tax exemptions or exclusions, on the other hand, must be strictly construed against the taxpayer, and any doubt must be resolved in favor of the application of the tax." Id.

III. DISPUTED PARTS MUST BE ANALYZED INDIVIDUALLY

At issue is whether some or all of the replacement equipment Dreyer purchased for B&B qualified for a tax exemption under section 144.030.2(5). When the items were purchased in 2016, the statute exempted from sales tax:

Replacement machinery, equipment, and parts and the materials and supplies solely required for the installation or construction of such replacement machinery, equipment and parts, used directly in manufacturing ... a product....

In the proceedings before the AHC, the Director contended the disputed items were not replacement equipment or parts, and, even if they were, they were not used directly in manufacturing a product. In this Court, the Director contends only that the equipment and parts were not "used directly in manufacturing." It is to the meaning of the latter phrase, therefore, that this Court turns.

The Director contends the phrase should be interpreted according to the dictionary definition of "direct" to include only items used in the actual machines that transform the wood into products. It should not, the Director argues, apply to equipment that allows the machines to operate safely and that provides power to them because:

Some of these items work to deliver and control power to the manufacturing machinery; other items are required by the electric company solely for safety reasons and are not necessary to power the equipment. The items that work to deliver and control power, while necessary, are causally one step removed from the actual manufacturing process itself and thus are not exempt under the manufacturing statute.

Relying on cases decided by states such as Georgia and Ohio, the Director argues such equipment and parts should not be exempt because they are not "directly involved in the alteration of the graded logs into the final products that B&B produces" and "do not cause a change to any raw materials and are not a part of the production line."

As the Director recognizes elsewhere in his brief, however, the meaning of "used directly in manufacturing" is determined not by separating out and defining each word of the phrase independently but by looking at the statutory language as a whole in light of its legislative purpose. Undertaking just such an analysis, this Court expressly rejected in Floyd Charcoal an argument nearly identical to the one the Director makes today. The issue in Floyd Charcoal was how to determine whether replacement parts and equipment used in manufacturing charcoal came within the definition of "used directly in manufacturing." 599 S.W.2d at 176 . In Floyd Charcoal , as here, the Director relied on the laws of Georgia...