DST Systems v. Director of Revenue

• Decision Date: 10 April 2001
• Citation: 43 S.W.3d 799
• Parties: (Mo.banc 2001) DST Systems, Inc., Appellant v. Director of Revenue, Respondent. SC82797 0
• Court: Missouri Supreme Court

43 S.W.3d 799 (Mo.banc 2001)

DST Systems, Inc., Appellant v. Director of Revenue, Respondent.

SC82797

Supreme Court of Missouri

04/10/2001

Appeal From: Petition for Review of a Decision of the Administrative Hearing Commission, Hon. Willard C. Reine, Commissioner

Counsel for Appellant: J. Kent Lowry, Matthew D. Turner and Sherry L. Doctorian

Counsel for Respondent: Alana M. Barragan-Scott

Opinion Summary: DST Systems, Inc., claimed a sales and use tax exemption for mainframe computers and various other materials that DST purchased and purportedly used to expand its manufacturing plant and to produce products that were intended ultimately to be sold for final use or consumption. The Director of Revenue denied the exemption based on International Business Machines Corp. V. Director of Revenue.

Court en banc holds: DST established a right to the exemption under section 144.030. DST established that the mainframe computers and the other materials were used in manufacturing products that were intended to be sold ultimately for final use or consumption. In contrast to IBM, there are printed products produced and sold to the consumer by use of the equipment. Though the equipment is not exclusively for the products, it is substantially so and is an integral part, despite that the process occurs at different sites, pursuant to the "integrated plant doctrine." The printed materials are subject to sales tax. Documents supporting its summaries of equipment are in the record.

The case is reversed and remanded for a determination of the specific items directly used in manufacturing, to which the sales tax exemption applies.

Michael A. Wolff, Judge

Price, C.J., Limbaugh, White, Holstein and Benton, JJ., concur. Stith, J., not participating.

DST Systems, Inc.,¹ challenges the director's denial of sales and use tax exemption for mainframe computers and various other materials that DST purchased and purportedly used to expand its manufacturing plant and to produce products that were intended ultimately to be sold for final use or consumption. Section 144.030.2(5).²

Stating that it was bound by our decision in International Business Machines Corp. v. Director of Revenue, 958 S.W.2d 554 (Mo. banc 1997), the administrative hearing commission denied DST's claim for exemption. This action involves construction of the revenue laws; we have jurisdiction. Mo. Const. art. V, section 3. This Court's review of the commission's interpretation of revenue laws is de novo, and the commission's factual determinations are upheld if they are supported by the law and, after looking at the whole record, there is substantial evidence to support them. L & R Egg Co. v. Director of Revenue, 796 S.W.2d 624, 625 (Mo. banc 1990); Section 621.193.

For reasons that follow, DST Systems, Inc., established that the mainframe computers and the other materials were used in manufacturing products that were intended to be sold ultimately for final use or consumption; therefore, it established a right to the exemption under section 144.030. We reverse and remand for determination of the specific items directly used in manufacturing, to which the sales tax exemption applies.

Factual Background

The facts found by the commission are supported by the evidence. They are summarized here. DST has a number of facilities in the Kansas City, Missouri, area, including its Winchester Data Center, which houses mainframe computers. The Winchester facility was expanded over a period of years from six mainframe computers in 1992 to 11 mainframe computers as of the date of the commission's decision. Its facility was expanded from 30,000 square feet to approximately 74,000 square feet between 1994 and 1995.

In 1991, DST formed Output Technologies, Inc., a wholly-owned subsidiary, as a holding company for businesses involved in providing printed output processing services to the mutual fund and financial services industries. Output Technologies acquired Mail Processing Systems, Inc., a financial printing and mailing business with facilities in Connecticut and Massachusetts, and opened seven new locations through a wholly-owned subsidiary, United Micrographics Systems, Inc., a provider of computer process microfilm and microfiche. By the end of 1992, Output Technologies had 29 locations throughout the United States. Support Resources, Inc., is a subsidiary of Output Technologies and prints materials including shareholder reports. DST and Support Resources are separate companies, with separate officers, directors, and accounts. Output Technologies-Support Resources has a complex of buildings in Kansas City, approximately eight or nine miles from the DST Winchester facility.

DST performs accounting and transfer agent functions for approximately 3,000 mutual funds with some 50 million mutual fund accounts. A transfer agent performs record keeping and servicing functions for the funds, which may include taking calls from customers, opening accounts, processing mail, and processing purchases and sales of mutual fund shares. DST performs all of these functions for some mutual funds and employs approximately 1,500 persons who perform these functions.

DST's related companies, Output Technologies and Support Resources, perform package production operations for mutual funds and other DST customers. Package production operations include the production of printed materials such as transaction confirmations and quarterly and annual reports to shareholders.

The package production of such reports, including printing, is done at the Output Technologies-Support Resources facilities, which are connected to the DST mainframe computers of the Winchester facility by specialized telecommunications transmission lines. The mainframes at the Winchester facility are essential to the printing operation at Output Technologies-Support Resources.

Output Technologies-Support Resources uses approximately 15 to 20 percent of the computer capacity at Winchester, and another 20 to 25 percent of the Winchester capacity is maintained by DST as a buffer to accommodate unpredicted increases. Not all of the DST's customers use the services of Output Technologies-Support Resources. Approximately 10 to 15 percent of DST's mutual fund customers do not use the printing production. Output Technologies-Support Resources sometimes services customers other than those of DST. However, Output Technologies-Support Resources still must rely on the mainframes at the Winchester facility for such work. After the reports are printed, DST does not store the information on its mainframe computers, but stores quarterly report information on direct access storage devices for purposes of archiving.

The growth in the mutual fund industry created the need for increasing DST's computer capacity, and in the 1990's, DST expanded its capacity by approximately 30 percent annually. Output Technologies-Support Resources experience peak periods when they must send reports to the mutual funds shareholders; for quarterly reports, these related companies must send 8 to 9 million packages (approximately 30 million pages) in a five day-period. For annual reports, Output Technologies-Support Resources must send 30 million packages (approximately 90 million pages) in 20 days.

Output Technologies-Support Resources remit sales tax on printed materials. Through an arrangement with the department of revenue, Output Technologies-Support Resources calculates the sales tax on the printed materials based on the percentage of each mutual fund's shareholders who live in Missouri. The director of revenue has agreed that Output Technologies-Support Resources is a manufacturer.

While all of the printed material produced through the combined efforts of DST and Output Technologies-Support Resources is subject to sales tax, approximately three to five per cent of the printed material is directed to shareholders in the state of Missouri, upon which the tax is collected. From 1989 through 1998, Output Technologies-Support Resources remitted $3,159,653.23 in sales tax to the state.

The Exemption Claim

DST paid sales and use tax under protest on purchases of items that DST claims were exempt because the items were used for plant expansion. The tax periods and the amounts claimed were as follows:

Tax Period Tax Amount Interest Additions

9/95-12/97 $5,499,978.45 500,372.15 -

10/92-8/95 $5,200,000.00 $1,800,000 -

2/98 $33,032.95 - -

1/98 $93,843.47 $33.30 $519.44

3/98 $44,622.36 - -

4/98 $4,239.82 - -

5/98-6/98 $29,876.84 - -

7/98 $22,504.39 - -

The items upon which DST claimed an exemption included mainframes, direct access storage devices, and scanners. DST also claimed an exemption for air conditioning equipment and for raised flooring, including carpet tiles, necessary to maintain the temperature-controlled environment at the Winchester facility. Additionally, it claimed an exemption on purchases of software and payment of software license fees.

The foregoing exemption claims also include materials other than those used in mainframe processing and other than those used at Winchester. The DST exemption claim includes equipment located at the DST mail center and equipment such as desktop computers and telephones located at employee work stations. The claim also includes equipment used in the DST image data center. The DST energy center, which assures DST of an uninterruptable power supply, has batteries and backup generators that are part of the DST exemption claim.

DST claims that...