Floyd Charcoal Co., Inc. v. Director of Revenue

Citation599 S.W.2d 173
Decision Date13 May 1980
Docket NumberNo. 61383,No. 1,61383,1
PartiesFLOYD CHARCOAL COMPANY, INC., Respondent, v. DIRECTOR OF REVENUE, State of Missouri, Appellant
CourtUnited States State Supreme Court of Missouri

John Ashcroft, Atty. Gen., Marjorie Haines, Asst. Atty. Gen., Jefferson City, for appellant.

David L. Steelman, Salem, for respondent.

WELBORN, Commissioner.

Department of Revenue assessed Floyd Charcoal Company, Inc., $20,294.87 tax and interest for failure to file correct sales/use tax returns and pay correct amount of tax from January 1, 1971 to November 30, 1973. Taxpayer petitioned for reassessment. After hearing, the assessment was affirmed. Taxpayer appealed to circuit court which reversed the order affirming the assessment. Director of Revenue appealed to this Court because construction of revenue laws is involved. Mo.Const. art. V, § 3.

Floyd is in the business of producing charcoal briquettes of the type commonly used for outdoor barbecuing. Prior to the purchase of the various items of plant equipment involved in this controversy, Floyd produced the product by a so-called "batch system," involving the mixing of ingredients in specified quantities, sufficient to produce a given quantity of briquettes within a given period of time. The equipment here involved permitted operation in a "continuous flow system," in which the ingredients are mixed on a continuing basis and constantly run through the process required to produce the briquettes.

The new equipment increased Floyd's production capabilities and resulted in an improved product in that the new briquettes produce more heat than those manufactured by the "batch" process.

The first question presented is whether or not the items of equipment involved were The items of equipment involved are as follows (The basis of the description is the findings of the hearing officer. No transcript of the hearing was made and the parties agree that his findings may be considered as the evidence presented upon the administrative hearing.):

exempt from sales tax as machinery and equipment directly used in the manufacturing of charcoal briquettes. Also presented is the question of the effect of the condition of exemption that the purchase of the equipment be the result of a product or design change. An issue is also presented regarding the taxability of purchase of pallets used in shipping and of oil used in the manufacturing process.

(A) The Starch System: this particular group of equipment consists of conveyors of storage bins for the purpose of removing starch from railroad cars, storing it temporarily in storage bins and then conveying it from the storage bins to the processing area at the time the material is needed. No change upon the raw material takes place at any time while the starch is conveyed or held in the equipment described;

(B) Twin-Screw Feeders: the feeders are used to mix raw materials and feed them onto a conveyor which moves the raw materials into the press and subsequently into the ovens. The twin-screw feeders mix automatically what previously was mixed under the "batch system;"

(C) The Paddle Mixers: this equipment actually mixes the raw materials with certain starch additives in the "continuous flow system;"

(D) The Briquette Machine or Press: this machine processes the raw materials and presses them into the final shape. The compression of the raw materials is not only to form the briquette but also to remove as much moisture as possible prior to processing the briquette in the oven to remove additional moisture;

(E) Exact Weight Scales: this instrument is used to weigh the charcoal prior to the time that it is put into the sacks. The taxpayer indicated that each 20-pound sack must contain the minimum 20 pounds of charcoal or it may be rejected by some states on the basis that the manufacturer is misrepresenting the amount of goods supplied;

(F) The Sackamatic System and Filter: this equipment is used to sack the finished charcoal product more quickly than the method previously used by the taxpayer. Prior to the purchase of this particular piece of equipment, the sacks were held by hand and, after being filled, they were transferred by hand to another area to complete the sacking process;

(G) The Sewing Heads: the heads are used to sew the sack closed at the top after the briquettes have been put into the sack. The sack is used as the container for the product and is sold with the product to the final consumer;

(H) The Check Weight and Panel: this equipment is used to weigh the sack after the charcoal has been put into it. The purpose is to recheck the final product as sacked to insure that the sack plus the charcoal weighs at least 20 pounds;

(I) The Film Bags: these are plastic bags used by the taxpayer to enclose the original paper sacks which contain the charcoal. The purpose of the plastic bag is to protect the charcoal from moisture during transportation. The bag is usually attached to the final product only upon the request of a customer; an additional charge is made by the taxpayer to the customer for this service. The sacks are removed by the taxpayer's customer upon receipt and are not eventually resold to the consumer in any form;

(J) The Stairways: these are stairways and ramps that are used by the taxpayer's employees to reach the top portion of the paddle mixer and other equipment.

As to items A (the starch system), E (the exact weight scales), F (the sackamatic system), G (the sewing heads), H (the check weight and panel), I (the film bags), and J (the stairways and ramps), the hearing officer concluded that they were not exempt under Section 144.030.3(3) and (4) because The circuit court made a general finding reversing the assessment without elaboration. The court did enter judgment against the taxpayer for $152.19 tax admitted by taxpayer to be owing.

they are not used directly in the manufacturing of charcoal briquettes. As to items A (the starch system), B (the twin screw-feeders), C (the paddle mixers), and D (the briquette machine), the hearing officer found that they were not exempt under Section 144.030.3(3) because they were not replacing machines for the same purpose by reason of design or product changes and that they were not exempt under Section 144.030.3(4) because they were not purchased to expand an existing plant or to establish a new plant.

Involved on this appeal are exemptions from sales provided by subsections .3(3) and (4) of Section 144.030, RSMo 1969, as follows:

"(3) 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) 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;"

(A 1977 amendment of these provisions inserted after the words "Machinery and equipment," the language "and the materials and supplies solely required for the installation or construction of such machinery and equipment" in each of the subsections. Laws of Mo.1977, p. 328.)

Section 144.615(3) makes these exemptions applicable also to the use tax.

Appellant asserts that, as to the items which the hearing officer concluded were not "used directly in manufacturing a product * * *," the trial court's overturning of such findings was based upon an erroneous construction of the exemption statute and that the hearing officer correctly found such items subject to tax.

This contention brings to this Court for the first time the meaning of the language "used directly in manufacturing a product." Previous cases have considered what "manufacturing" includes. See Wilson & Co., Inc. v. Department of Revenue, 531 S.W.2d 752 (Mo. banc 1976) (pork processing), and West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140 (Mo.1970) (rock quarrying).

The exemption found in the Missouri statute is not unique. Sales and use tax laws of other states contain similar provisions which have produced considerable litigation and two rather clearly defined lines of authority. The appellant espouses the somewhat stricter view which has been followed by some appellate courts, particularly of Ohio and Georgia. That view limits the exemption to machinery and equipment which perform a function involving a change of the raw material involved into the finished product and excludes machinery and equipment used in preparation for manufacturing or after completion of the manufacturing process. See Ohio Stove Co. v. Bowers, 171 Ohio St. 484, 172 N.E.2d 295 (1961); Canton Malleable Iron Co. v. Porterfield, 30 Ohio St.2d 163, 283 N.E.2d 434 (1972); Southwire Co. v. Chilivis, 139 Ga.App. 329, 228 S.E.2d 295 (1976); Hawes v. Custom Canners, Inc., 121 Ga.App. 203, 173 S.E.2d 400 (1970).

The rationale of these cases appears to be the oft-repeated rule that exemptions from taxation are to be strictly construed against the taxpayer and any doubt is resolved in favor of application of the tax.

Relying upon such construction, appellant asserts that the starch system moves and stores raw materials prior to the processing but that no change occurs in the raw materials while they are in the starch system and therefore it is not used directly in the manufacturing of the briquettes. He further asserts that the exact weight scales Respondent supports what is known as the "integrated plant" theory of construction of an exemption such as this. This nomenclature appears to have originated with Niagara Mohawk Power Corp. v. Wanamaker, 286 App.Div. 446, 144 N.Y.S.2d 458 (1955), a case in which the court considered a sales tax...

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