House of Lloyd, Inc. v. Director of Revenue, State of Mo.

• Decision Date: 25 February 1992
• Docket Number: No. 73468,73468
• Citation: 824 S.W.2d 914
• Parties: 17 UCC Rep.Serv.2d 759 HOUSE OF LLOYD, INC., Appellant, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent.
• Court: Missouri Supreme Court

Page 914

824 S.W.2d 914

17 UCC Rep.Serv.2d 759

HOUSE OF LLOYD, INC., Appellant, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent.

No. 73468.

Supreme Court of Missouri En Banc.

Feb. 25, 1992.

Gretchen Garrison, Craig S. O'Dear, Kansas City, for appellant.

William L. Webster, Atty. Gen., Carole L. Iles, Asst. Atty. Gen., Jefferson City, for respondent.

FOREST W. HANNA, Special Judge.

The appellant, House of Lloyd, Inc., filed its petition for review from a decision of the Administrative Hearing Commission (AHC) following an evidentiary hearing. This appeal is from that part of the AHC's decision that was adverse to the appellant, House of Lloyd, and involved taxes, interest, and penalties of sales tax in the amount of $58,861.94 and use tax totalling $257,653.55 paid under protest by the appellant. Those taxes covered the period of July 1985 through June 1986. The taxpayer now seeks recovery of those amounts, which the AHC determined the Director of Revenue could lawfully retain. The refund ordered by the AHC is not an issue on this appeal.

Article V, § 3 of the Missouri Constitution provides this Court the exclusive appellate jurisdiction to construe Missouri revenue laws. Where a question of law is involved, it is a matter for the independent judgment of the reviewing court. Jackson Excavating Co. v. Administrative Hearing Comm'n, 646 S.W.2d 48, 49 (Mo.1983); L & R Egg Co. v. Director of Revenue, 796 S.W.2d 624, 625 (Mo. banc 1990); and § 621.193, RSMo 1986 provides the applicable standard of review of a final decision of the AHC decided pursuant to § 621.050, RSMo 1986. We must affirm the decision of the AHC "if supported by the law and competent and substantial evidence on the whole record, and ... not clearly contrary to the reasonable expectations of the General Assembly." L & R Egg Co., 796 S.W.2d at 625, quoting G.T.E. Automatic Elec. v. Director of Revenue, 780 S.W.2d 49, 50 (Mo. banc 1989). See also § 621.193, RSMo 1986.

This case concerns sales and use tax on machinery, equipment, and supplies purchased and used by the taxpayer at its principal place of business in Grandview, Missouri. The following are the five points of error raised by appellant in its petition for review. They constitute the disputed items which were taxed:

1) Machinery and equipment used to sort and package sample merchandise into boxes referred to as "demonstrator kits" and other merchandise orders;

2) Styrofoam "peanuts" used in packing the merchandise and the machinery and equipment used to produce those peanuts;

3) Polypropylene strapping material used to seal cartons for shipping and the machinery and equipment used to apply the strapping;

4) Machinery and equipment used to bale scrap cardboard for recycling; and

5) Conveyors used in its operation. Appellant claims these were fixtures and not taxable personal property.

A description of appellant's operation includes reference to some of the major items of equipment and machinery at issue in this lawsuit. All the merchandise appellant sells arrives at its facility in "containers," which are metal structures resembling semi-trailers. The merchandise is packed in large cardboard cartons and placed in the containers for shipping from the manufacturer's place of business. The containers are unloaded and the products are brought in on pallets owned by appellant. The pallets are taken by a forklift and placed into an inclined rack. These racks are referred to as "flow through racks." During the peak times the overflow of merchandise is stored in rented trailers.

The merchandise is eventually removed from the manufacturers' cardboard box and loaded by hand into the "side dispensers" or "side assembly conveyors" of a "Robo Pic," which is a unit over 600 feet in length. At the direction of a computer, the Robo Pic selects merchandise from 900 different side dispensers and drops the items into plastic bins that pass beneath it. A conveyor system moves the bins, which transport the merchandise to a packing area. At this point the merchandise undergoes final inspection and is readied for re-packaging. The merchandise is then hand-packed into a cardboard box which is filled with the styrofoam peanuts and taped with the polypropelene strapping material.

The styrofoam peanuts are manufactured from pellets that appellant purchases from an outside source. A device called an "expander" is used to treat the pellets with steam. The pellets are treated, allowed to cure in large bags, and then retreated. This process is repeated several times to create the finished packing material.

The scrap cardboard that remains once the merchandise is removed from the manufacturer's cartons is transported by conveyor to a bailing machine where it is baled and eventually sold to Batliner Paper Stock Company for recycling.

The conveyor items that appellant uses in its operation were purchased and shipped to its plant. The appellant's purchase order stated that the transaction was to be governed by the Uniform Commercial Code. The conveyors were installed at the Grandview facility by the vendors according to specifications devised by appellant's engineering staff.

The business of appellant is selling merchandise such as Christmas decorations, toys and other gift items, which it markets through a "party plan." Appellant claims that it does not market the sale of individual items but rather markets a party plan operation where a "hostess" invites potential customers, usually friends and relatives, to "her" home for a party, and the customers are encouraged to place orders for the merchandise.

At the party, a "demonstrator" (an independent contractor who receives assistance and encouragement from the appellant's district managers) displays certain selected merchandise and, at the same time, distributes a catalog that offers many other items for sale. Appellant contends the selected merchandise displayed at the parties is part of a "demonstrator kit" it produces at its plant. The choice of items included in that selection is made by appellant. The kits are sold to demonstrators for $150.00. The demonstrator provides each hostess with a kit and, in turn, the hostess is responsible for taking orders, collecting money and sending both to the company.

POINT I

An exemption from sales and use tax exists under § 144.030.2(5), RSMo 1986, when machinery or equipment is purchased "... to expand existing manufacturing, mining, or fabricating plants ... 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." Appellant contends that the equipment and machinery used to sort and package the merchandise it receives from other manufacturers, including that required to fill the boxes with the styrofoam peanuts and seal the boxes with the strapping material, should be exempt from taxation. Appellant claims this process constitutes "fabrication" of the demonstrator kit, which appellant argues is a "product" intended to be sold ultimately for final use or consumption within the meaning of § 144.030.2(5).

According to appellant, the demonstrator kit includes the cardboard box, the packing material (peanuts), the strapping used to seal the boxes and the merchandise to be sold. Appellant concedes that the demonstrator kit is not manufactured. Instead, it concentrates its argument on the definition of "fabricating" and claims that the term indicates a process distinct from "manufacturing", otherwise the legislature would not have included both terms in the statute. This entire argument, and appellant's exemption, hinges on whether the distinctions between "manufacturing" and "fabricating" proffered by appellant are consistent with the intent of the legislature and, if so, whether appellant's repackaging process fits within the intended scope of the statute.

Neither the taxing statute, Missouri regulations, nor Missouri case law has defined "fabricating" within the context of the statute. It should be defined in order to carry out the intention and purpose of the statute consistent with the expectations of the General Assembly. It is not logical to define the words "manufacturing" and "fabricating" as synonymous within the context of § 144.030.2(5), since to do so would render one of them surplusage. See Staley v. Director of Revenue, 623 S.W.2d 246, 250 (Mo. banc 1981). However, while these terms have meanings and applications that may differ, they are often, in their broadest sense, interchangeable in meaning, and the definition in any particular instance must depend upon the environment of the particular use of either. Union Wire Rope Corp. v. Atchison, T. & S.F. Ry. Co., 66 F.2d 965, 970 (8th Cir.1933).

The common thread running throughout all of the cases in which this court has defined "manufacturing" is the production of an article with a new use different from its original use. Unitog Rental Serv. v. Director of Revenue, 779 S.W.2d 568, 570 (Mo. banc 1989). We have examined the term "fabrication" as it has been defined in several other jurisdictions. ¹ Although some of these definitions appear applicable to appellant's position, it is difficult to distinguish between the terms "manufacturing" and "fabricating" in the environment of this case. Whether the process is "manufacturing" or "fabricating", each process 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.

The AHC determined that "fabricating" meant "the assembly of a finished, merchantable product from pre-fabricated parts." A distinction between "manufacturing" and "fabricating" suggested by the AHC and adopted by the parties is that "fabricating" is the process of uniting pre-manufactured components into a single unit, while "manufacturing" concerns the process of creating a useful item from raw materials. Although this...