Galamet, Inc. v. Director of Revenue

• Decision Date: 20 February 1996
• Docket Number: No. 78064,78064
• Citation: 915 S.W.2d 331
• Parties: GALAMET, INC., and Rig Industries, Inc., Appellants, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 331

915 S.W.2d 331

GALAMET, INC., and Rig Industries, Inc., Appellants, v. DIRECTOR OF REVENUE, Respondent.

No. 78064.

Supreme Court of Missouri En Banc.

Feb. 20, 1996.

Petition for Review of a Decision of the Administrative Hearing Commission; Honorable Edward F. Downey, Commissioner.

William B. Prugh, Dean Kuckelman, Kansas City, for appellants.

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

LIMBAUGH, Judge.

Galamet, Inc., and Rig Industries, Inc., ("Galamet") appeal two decisions by the Administrative Hearing Commission ("AHC"), one upholding an assessment against Galamet of unpaid sales tax on purchases of machinery and equipment and the other denying Galamet a refund of sales tax paid on purchases of electricity. Because this appeal involves the construction of revenue statutes, this Court has jurisdiction. Mo. Const. art. V, § 3. We reverse the decision upholding the assessment of unpaid sales tax and affirm the decision denying the refund of sales tax.

I.

Galamet produces shredded steel for use by steel mills. For the production of this shredded steel, Galamet obtains useless scrap metal called "inputs." The inputs consist of automobile bodies, old pipes, "white goods" (e.g., refrigerators, water heaters) and other materials, which vary in size, shape, source, use, and metallurgical content and which are unsuitable for use by steel mills and foundries. Galamet's cranes and conveyors feed the inputs into a five-story mill, where the inputs are crushed and chopped into fist-size pieces by a series of bell-shaped hammers powered by a 2,500 horsepower electric motor. The resulting shreds are then sent through a system of cyclones and blowers to remove dirt, foam, and other nonmetal material called "fluff". Finally, Galamet uses a series of electromagnets to remove ferrous metal from the nonferrous. The end results are small pieces of steel, known in the industry as "shredded auto scrap," which meet industry requirements for size and metallurgical content. Steel mills and foundries may specify the requisite size and shape of the steel shreds necessary for their particular operation. The mills and foundries that purchase Galamet's steel shreds melt them down and use them to manufacture various steel products, such as grinding balls, steel pipe, tie rod bars, etc. In the marketplace, a ton of shredded auto scrap is worth about three times the value of a ton of inputs.

From October 1, 1989 through September 30, 1992, Galamet purchased machinery and equipment in order to expand its operations. To avoid paying sales tax on these transactions, Galamet presented its vendors with a certificate asserting that Galamet qualified for the manufacturing plant expansion exemption under § 144.030.2(5), RSMo. That statute exempts from sales tax purchases of machinery and equipment acquired to expand existing manufacturing operations. The Director of Revenue ("Director"), upon conducting a sales tax audit, determined that Galamet did not qualify for the exemption and assessed unpaid sales taxes, interest and additions totaling over $100,000.

Galamet also applied for an electrical energy direct pay authorization for the calendar year 1991 so that it could avoid paying sales tax to Kansas City Power & Light Company ("KCP & L") and instead report and remit sales tax on electricity purchases directly to the Director. The Director denied Galamet's application, determining that the total cost of electrical energy for Galamet's operation did not exceed 10% of its total cost of production, as required by § 144.030.2(12), RSMo. Therefore Galamet paid sales tax on all electricity purchases in 1991 directly to KCP & L.

Galamet challenged both of the Director's decisions, and the matters were consolidated for hearing before the AHC. With regard to the sales tax exemption on the machinery purchases, the AHC found that Galamet did not engage in "manufacturing" as contemplated by § 144.030.2(5) because the shredded steel was not a product intended to be sold ultimately for final use or consumption. Therefore, Galamet did not qualify for the sales tax exemption. ¹

On the second claim, the AHC ruled that Galamet did qualify for the electrical energy direct pay authorization. However, no refund was ordered because the AHC determined that only KCP & L--the party that actually remitted the tax to the Director--had standing to claim a refund.

This Court will affirm the decisions of the AHC if they are authorized by law and supported by competent and substantial evidence upon the whole record. § 621.193, RSMo 1994.

II.

For its first point, Galamet contends that it qualifies for the tax exemption under § 144.030.2(5) because it engages in manufacturing. The sales tax exemption is only allowed, however, if the machinery and equipment purchased "is used directly in manufacturing ... a product which is intended to be sold ultimately for final use or consumption." Id. The contention that Galamet is not entitled to the exemption rests upon two separate grounds. One, as propounded by the Director in the briefs, is that Galamet does not engage in manufacturing as this Court has previously defined the term because Galamet does not produce a product substantially different from the input material. The other ground, on which the AHC based its decision, is that steel shreds are not "products ... intended to be sold ultimately for final use or consumption," and hence, the production of steel shreds is not manufacturing.

A.

We first address whether Galamet's operations constitute manufacturing as we have defined that term in previous cases. The meaning and application of the word "manufacturing" vary somewhat with the factual settings in which it is used. L & R Egg Co. v. Director of Revenue, 796 S.W.2d 624, 626 (Mo. banc 1990). This Court, in West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140 (Mo.1970), defined manufacturing by setting forth the following language from a Kentucky decision: "[I]f a process takes something practically unsuitable for any common use and changes it so as to adapt it to such common use, then such a process may be legally considered as manufacturing within the meaning of the tax exemption statutes." Id. at 143 (citing City of Louisville v. Howard, 306 Ky. 687, 208 S.W.2d 522, 527 (1947)). Two years later, this Court addressed the question again and determined that commercial printers that purchased printing presses were manufacturers of stationery products because they produced "new and different articles from raw materials" and made "products for sale which had an intrinsic and merchantable value, and were in forms suitable for new uses." Heidelberg Central Inc. v. Director Dept. of Rev., 476 S.W.2d 502, 506 (Mo.1972). Relying on these two definitions, this Court in Jackson Excavating v. Admin. Hearing Com'n, 646 S.W.2d 48, 51 (Mo.1983), found the treatment and purification of water to constitute manufacturing because the process caused "a substantial transformation in quality and adaptability ... [creating] an end product quite different from the original." More recently, this Court has defined the manufacturing process as one that "requires the manipulation of an item in such a way as to create a new and distinct item, with a value and identity completely different from the original." House of Lloyd v. Director of Revenue, 824 S.W.2d 914, 918 (Mo. banc 1992).

Although each of the above definitions has its own nuances, the basic concept of what constitutes manufacturing remains the same: Manufacturing consists of the alteration or physical change of an object or material in such a way that produces an article with a use, identity, and value different from the use, identity, and value of the original.

Applying this definition, or for that matter any of the others, we conclude that Galamet does engage in manufacturing. Galamet begins with automobile bodies and old appliances that are unsuitable for any practical use. Galamet's operation then rends the auto bodies, etc. into steel shreds. Steel shreds are a new article in appearance and composition. Steel shreds have a new value from basic scrap metal, as evidenced by the price each garners on the open market. Most importantly, steel shreds have a new and different use from auto bodies and other scrap metal in that steel mills and foundries can smelt the steel shreds and form new steel products. Thus, the shredded steel that Galamet produces has a new use, value, and character from the auto bodies and metal scrap with which Galamet begins.

The Director argues that Galamet's operation produces no real change in the input material because Galamet essentially begins and ends with metal scrap. In Jackson Excavating, the Director took a similar position, arguing that both the beginning and end product of a water purification plant was water and, thus, a new article was not produced. Jackson Excavating, 646 S.W.2d at 50. In rejecting this argument, this Court noted that in our previous cases, the same argument could have been made. In West Lake Quarry, the quarry began with rock and ended with rock; in Heidelberg, the printers began and ended with paper. Rather than overrule those cases, this Court found that the deciding factor in the previous cases, and in the case before it, was that the process in question resulted in an end product different in quality and adaptability from the original. Id. at 51. In other words, the end product was suitable for new uses. In Jackson Excavating, the end result was potable water; in West Lake Quarry, rock suitable for use in making road beds; and now, in Galamet's case, steel shreds suitable for use by steel mills.

The Director also contends that this case is like L & R Egg Co., where this Court held that the process of cleaning and culling eggs did not constitute manufacturing. The separation of the non-ferrous metal and fluff from the ferrous metal,...