International Business Machines Corp. v. Director of Revenue

• Decision Date: 23 December 1997
• Docket Number: No. 79681,79681
• Citation: 958 S.W.2d 554
• Parties: INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 554

958 S.W.2d 554

INTERNATIONAL BUSINESS MACHINES CORPORATION, Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. 79681.

Supreme Court of Missouri,

En Banc.

Dec. 23, 1997.

Rehearing Denied Jan. 27, 1998.

Laurence R. Tucker, Stuart K. Shaw, Kansas City, for Appellant.

Jeremiah W. (Jay) Nixon, Atty. Gen., Evan J. Buchheim, Asst. Atty. Gen., Jefferson City, for Respondent.

BENTON, Chief Justice.

In 1990, 1991 and 1992, International Business Machines Corporation sold mainframe computers, document scanners, direct storage devices, tape drives and printers to DST Systems, Inc., for $21,456,387.56. IBM remitted sales tax on these items to the Director of Revenue, but later claimed a refund of $1,388,870.38 based on the exemption in section 144.030.2(5) RSMo Supp.1990. ¹ The Director and the Administrative Hearing Commission denied the refund. IBM appeals. Mo. Const. art. V, sec. 3. Affirmed.

I.

DST designs and operates software in order to process information for the mutual fund, insurance, securities transfer, pharmaceutical, banking and real estate industries (though most of DST's customers are mutual funds, or mutual fund service companies). Specifically, DST receives financial data by telephone, satellite, facsimile, mail and various electronic means. DST performs transactions with the information, which include the buying and selling of mutual fund shares, purchasing securities from mutual funds, valuing portfolios for mutual funds, pricing mutual funds, and updating shareholder records, on a daily basis. DST thus manipulates the data to create forms of output such as balance, control and exception reports, super sheets (reports of daily activity for each fund), ad hoc reports and statements, account confirmation statements, dividend and redemption checks, tax information forms, and net asset values. The output information is (mostly) transmitted to mutual fund companies, shareholders, and the public media (as appropriate). It reaches the customer by various means including hard copy, electronic transmission, optical storage, tape storage, microfiche/film, direct access storage, and downloading to personal computers.

II.

In order for IBM to receive a refund, DST's use of the machinery and equipment must meet the requirements of section 144.030.2(5), which exempts from sales tax:

Machinery and equipment ... purchased and used ... to expand existing manufacturing ... plants in the state if such machinery and equipment is used directly in manufacturing ... a product which is intended to be sold ultimately for final use or consumption

In determining the meaning of a statute, the starting point is the plain language of the statute itself. L & R Egg Co. v. Director of Revenue, 796 S.W.2d 624, 625 (Mo. banc 1990).

The Director concedes that DST used the machinery and equipment to expand an existing plant. On the next relevant element of the statute--contrary to the position of the Director and the concurring opinion--it is "established that organizing information through computer technology is 'manufacturing.' " Concord Publishing House, Inc. v. Director of Revenue, 916 S.W.2d 186, 191 (Mo. banc 1996). The remaining issue is whether DST makes a "product which is intended to be sold ultimately for final use and consumption."

The term "product" has been defined in recent cases as "an output with a market value." Mid-America Dairymen, Inc. v. Director of Revenue, 924 S.W.2d 280, 283 (Mo. banc 1996); see also McKinley Iron, Inc. v. Director of Revenue, 888 S.W.2d 705, 707 (Mo. banc 1994). These recent cases call into question the discussion in GTE Automatic Electric v. Director of Revenue, 780 S.W.2d 49, 50-52 (Mo. banc 1989), which was principally relied on by the Administrative Hearing Commission in this case. There this Court stated that the term "product" does not include outputs defined as a "service." Id. at 51. However, as the dissent there noted--and the recent cases say--the sales tax law does not limit the term "product" to tangible personal property. Id. at 54 (citing Webster's Third International Dictionary, 1810 (1976)). Because a product is an output with a market value, it can be either tangible personal property or a service. To the extent inconsistent with this opinion and the recent cases, GTE's discussion of the term "product" should no longer be followed. 780 S.W.2d at 50-52. ²

Section 144.030.2(5), however, does not exempt sales of machinery and equipment used directly to manufacture any product. The statute does not end with the word "product." Rather, section 144.030.2(5) exempts sales of machinery and equipment used directly to manufacture a product "which is intended to be sold ultimately for final use or consumption."

The term "sold" has a statutory definition to which this Court must give effect. Jones v. Director of Revenue, 832 S.W.2d 516, 517 (Mo. banc 1992). "Sold" is a verb form of the noun "sale." "Sale" means

any transfer, exchange or barter, conditional or otherwise, in any manner or by any means whatsoever, of tangible personal property for valuable consideration and the rendering, furnishing or selling for a valuable consideration any of the substances, things and services herein designated and defined as taxable under the terms of sections 144.010 to 144.510

"Sale" thus includes both selling tangible personal property and rendering taxable services. By the use of the term "sold" in section 144.030.2(5), the General Assembly intended that exemption to apply to machinery and equipment that generate sales of tangible personal property or taxable services.

III.

Section 144.030.2(5) implements the general purpose of the sales tax law, made explicit in section 144.021 RSMo 1986:

The purpose and intent of sections 144.010 to 144.510 is to impose a tax upon the privilege of engaging in the business, in this state, of selling tangible personal property and those services listed in section 144.020.

The exemption in section 144.030.2(5) encourages the development of enterprises that produce products that are within the scope of the sales tax law. West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140, 142 (Mo.1970).

IBM argues that the purpose of the statute is to encourage economic development, whether or not there is a "sale." IBM, however, effectively ends its analysis of section 144.030.2(5) at the word "product" and ignores the rest of the statute, which requires that the product be "sold" within the statutory definition of that term.

IBM particularly relies on Bridge Data v. Director of Revenue, which states: "It is said that the manufacturing exemption exists to encourage the economic development of the state." 794 S.W.2d 204, 206 (Mo. banc 1990). For support, Bridge Data cites to Heidelberg Central, which in fact exaggerates to the contrary:

One purpose of the statute clearly was to promote manufacturing business in the State of Missouri by exempting manufacturers from sales taxes on the equipment which they purchased; this was done, presumably, in view of the fact that sales taxes would be paid on all of their finished products when sold.

Heidelberg Central Inc., v. Director of Dept. of Revenue, 476 S.W.2d 502, 506 (Mo.1972) (emphasis added).

Bridge Data also cites State ex rel. Ozark Lead Co. v. Goldberg, 610 S.W.2d 954, 957 (Mo.1981), which states: "An equally important object of such [manufacturing] exemption is the furtherance of industrial development in the state, regardless of whether the products involved might become subject to the Missouri sales tax." As shown in section II above, the issue is whether the ultimate aim is a "sale." Thus, the overall purpose of the sales tax law is implemented in section 144.030.2(5), to encourage the sale of machinery and equipment that have the aim or end ultimately to generate a sale within the meaning of the sales tax laws.

IV.

The decisive point then is whether DST's products are "sold." Selling computer printouts or computer output is defined by statute not to be "the sale of tangible personal property." Sec. 144.010.8(ii). Further, selling computer printouts or computer output is not one of the services listed as taxable in the sales tax laws. Sec. 144.010(8); 144.020 RSMo 1986. Therefore, the exemption in section 144.030.2(5) is not available for machinery and equipment used to manufacture computer printouts, and computer output on microfiche or microfilm--which include several of DST's products.

DST's outputs are also transmitted to customers on various storage devices such as optical and tape storage. There is no evidence in the record that DST transfers to customers the title to these storage devices, which is required for a "sale." See Dean Machinery, 918 S.W.2d at 246. Nor is there evidence that the storage devices are the "true object" or "true essence" of the transaction. See Sneary v. Director of Revenue, 865 S.W.2d 342, 345 (Mo. banc 1993); IBM Corp. v. Director of Revenue, 765 S.W.2d 611, 613-14, (Mo. banc 1989); James v. Tres Computer Systems, Inc., 642 S.W.2d 347, 349 (Mo. banc 1982).

DST's outputs are also transmitted to customers electronically. A "sale" requires transferring tangible personal property or rendering a taxable service. Sec. 144.010.1(7); sec. 144.010(8); sec. 144.020.1 RSMo 1986. DST's electronic transmission of information does not qualify as a "sale."

None of DST's products are intended ultimately to be "sold." Thus, the exemption in section 144.030.2(5) does not apply to DST's purchase of machinery and equipment from IBM.

V.

IBM argues that DST's outputs "squarely" resemble Bridge Data's, which were held to justify the exemption. See Bridge Data, 794 S.W.2d at 206. The Bridge Data opinion, however, has little analysis of the statutory language, and no analysis of the critical phrase "product which is intended to be sold...." In fact, Bridge Data is founded on the premise that this Court's function is to update the sales tax laws:

The recognition of the...