IBM Corp. v. Dir. of Revenue

• Decision Date: 05 April 2016
• Docket Number: No. SC 94999,SC 94999
• Citation: 491 S.W.3d 535
• Parties: IBM Corporation, Respondent/Cross–Appellant, v. Director of Revenue, Appellant/Cross–Respondent.
• Court: Missouri Supreme Court

491 S.W.3d 535

IBM Corporation, Respondent/Cross–Appellant,
v.
Director of Revenue, Appellant/Cross–Respondent.

No. SC 94999

Supreme Court of Missouri, en banc .

Opinion issued April 5, 2016
Rehearing Denied May 24, 2016
Modified on Court's Own Motion May 24, 2016

The director was represented by Deputy Solicitor General Jeremiah J. Morgan and Solicitor General James R. Layton of the attorney general's office in Jefferson City.

IBM was represented by Booker T. Shaw of Thompson Coburn LLP in St. Louis.

James B. Deutsch, Marc H. Ellinger and Stephanie S. Bell of Blitz, Bardgett & Deutsch LC in Jefferson City.

Scott A. Browdy of Ryan Law Firm LLP in Chicago.

Laura Denvir Stith, Judge

The Director of Revenue seeks review¹ of the Administrative Hearing Commission's decision that IBM Corporation is entitled to a use tax refund under section 144.054.2² for its sales of hardware and software to MasterCard International, LLC, for MasterCard's use in processing credit and debit card transactions. Using the MasterCard network, MasterCard communicates information between merchants and banks, including the banks' determination of whether customers' purchases should be approved and whether a bank owes money or fees on the transaction. The Commission found that MasterCard's use of the hardware and software qualified as “manufacturing a product” as that term is used in the use tax exemption set out in section 144.054.2. This Court reverses.

IBM is not entitled to an exemption from use tax because MasterCard's use of the hardware and software does not qualify as the “manufacturing of any product” under section 144.054.2, which provides an exemption from sales or use tax for “equipment[ ] and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product....” Interpretation of the word “manufacturing” (and of its near synonym, “processing”) as used in this statute is governed by the well-established principle that an exemption must be narrowly and strictly interpreted against the taxpayer according to its plain and ordinary meaning.³

While IBM is correct that the organization and creation of intangible products such as computer data can constitute manufacturing, it does not follow that the term “manufacturing” should be broadly interpreted to include MasterCard's use of computers to transmit financial information between its customers, who are the issuing and acquiring banks, and merchants. This expansive reading of “manufacturing” goes too far. Products, whether tangible or intangible, still must undergo “the alteration or physical change of an object or material in such a way that produces an article with a use,

491 S.W.3d 537

identity, and value different from the use, identity, and value of the original,” Galamet, Inc. v. Dir. of Revenue, 915 S.W.2d 331, 333 (Mo. banc 1996), to be manufactured.

Here, IBM does not create or transform a product; it provides equipment that allows merchants to check their customers' credit information while completing and approving a purchase. If such transmission of information is manufacturing, then so is the use of any computer to answer a customer's query. If the legislature wished to exclude from the use tax all computers used by financial institutions to provide credit information, or all computers used to answer customer queries, it could have done so. Cf. Utilicorp United, Inc. v. Dir. of Revenue, 75 S.W.3d 725 (Mo. banc 2001). But it did not.

I. STATEMENT OF FACTS AND PROCEDURAL HISTORY

MasterCard purchased computer hardware and software from IBM for use in providing various financial services to its customers. The core services it provided are what it calls its “ACS” services—authorization, clearing, and settlement of transactions made with bank-issued credit and debit cards which use the MasterCard logo.⁴

During “authorization,” when a customer presents a credit or debit card to a merchant to make a purchase, the merchant sends information concerning the transaction to the merchant's bank, called the “acquiring bank.” The acquiring bank sends that information to MasterCard, which sends it to the bank that issued the credit or debit card to the customer, called the “issuing bank.” The issuing bank decides whether to accept or decline the transaction and sends its decision to through MasterCard's network to the acquiring bank, which forwards it to the merchant. In “clearing,” merchants send periodic data concerning their transactions to their acquiring banks, which communicate the data to MasterCard. MasterCard aggregates the data received from acquiring banks and calculates the sums due from each issuing bank to each acquiring bank based on how much the acquiring bank has loaned to its customers—the merchants. The net amount of funds owed by or to a particular bank is called a “settlement position.” In “settlement,” MasterCard communicates the settlement positions it calculated to each issuing bank. If the issuing bank owes money, it remits the amount owed to MasterCard's settlement bank, which remits the money owed to each acquiring bank that is owed money, after deducting its fee.

In 2012, IBM filed a use tax return on behalf of MasterCard for purchases of computer hardware and software. IBM claimed that the equipment it sold to MasterCard was exempt from use tax because MasterCard's activities qualify as “manufacturing” under section 144.054.2, which exempts “equipment[ ] and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product....” The Commission found against the Director and granted IBM a refund, finding that MasterCard's activities could not be distinguished from cases in which the Commission believed this Court broadly construed the manufacturing exemption, especially Southwestern Bell Tel. Co. v. Dir. of Revenue, 182 S.W.3d 226 (Mo. banc 2005) (“Bell II ”), in which this Court held that the transmission of a voice over telephone lines qualified

491 S.W.3d 538

as “manufacturing.” The Director seeks review.

II. STANDARD OF REVIEW

Because this case involves the construction of a revenue law of this state, this Court has exclusive appellate jurisdiction. Mo. Const. art. V, § 3. This Court reviews the Commission's interpretation of a revenue statute de novo. Fred Weber, Inc. v. Dir. of Revenue, 452 S.W.3d 628, 629–30 (Mo. banc 2015). The Commission's decision will be “upheld when authorized by law and supported by competent and substantial evidence upon the whole record, if a mandatory procedural safeguard is not violated” so long as the Commission's decision is not contrary to what the Court concludes were the reasonable expectations of the legislature. § 21.193.

“Tax exemptions are strictly construed against the taxpayer.” Ben Hur, 452 S.W.3d at 626. “A taxpayer must show by ‘clear and unequivocal proof’ that it qualifies for an exemption, and all doubts are resolved against the taxpayer.” Fred Weber, 452 S.W.3d at 630. This Court interprets statutes in a way that is not hypertechnical but instead is reasonable and logical and gives meaning to the statute and the legislature's intent as reflected in the plain language of the statute at issue. Id.

III. MASTERCARD'S ACTIVITIES ARE NOT THE “MANUFACTURING OF A PRODUCT” UNDER SECTION 144.054.2

To qualify for the use tax exemption under section 144.054.2, IBM must show: (1) that MasterCard sold equipment or materials used or consumed (2) during the manufacturing, processing, compounding, mining, or producing (3) of a product. Fred Weber, 452 S.W.3d at 630. The taxpayer has the burden of proof. Id. If IBM fails to meet any of these three criteria, it does not qualify for the exemption under section 144.054.2. Id. IBM's failure to meet the second requirement is dispositive here.

IBM argues that MasterCard's activities qualify as “manufacturing a product” under section 144.054.2 and, therefore, it is entitled to an exemption from use tax for the computer hardware and software it sold to MasterCard. IBM claims...