Krispy Kreme Doughnut Corp. v. Dir. of Revenue

• Decision Date: 03 May 2016
• Docket Number: No. SC 95181,SC 95181
• Citation: 488 S.W.3d 62
• Parties: Krispy Kreme Doughnut Corporation, Appellant, v. Director of Revenue, Respondent.
• Court: Missouri Supreme Court

488 S.W.3d 62

Krispy Kreme Doughnut Corporation, Appellant,

v.Director of Revenue, Respondent.

No. SC 95181

Supreme Court of Missouri, en banc .

Opinion issued May 3, 2016

Krispy Kreme was represented by Edward F. Downey and Carole L. Iles of Bryan Cave LLP in Jefferson City, (573) 556–6622.

The director was represented by Deputy Solicitor General Jeremiah J. Morgan of the attorney general's office in Jefferson City, (573) 751–3321; and Roger Freudenberg of the department of revenue in Jefferson City.

Zel M. Fischer

, Judge

Krispy Kreme Doughnut Corporation petitions for review of the Administrative Hearing Commission's decision ruling that Krispy Kreme is not entitled to a refund of sales tax paid on food items sold from its stores between April 2003 and December 2005. The Commission ruled Krispy Kreme failed to prove, by a preponderance of the evidence, that not more than 80% of its food products were sold for immediate consumption on or off the premises of the establishment; therefore, the lower tax rate authorized by § 144.014¹ did not apply to Krispy Kreme's food sales. Krispy Kreme argues the Commission's decision is contrary to the only evidence in the record and conflicts with the reasonable interpretation of § 144.014.2. Because Krispy Kreme's petition involves the construction of a revenue law of this state, this Court has jurisdiction pursuant to article V, section 3 of the Missouri Constitution

. The Commission's decision is affirmed.

Factual and Procedural History

This Court previously summarized much of the relevant background in Krispy Kreme Doughnut Corp. v. Dir. of Revenue (Krispy Kreme I ), 358 S.W.3d 48 (Mo. banc 2011)

, a decision that remanded the case to the Commission. After remand and subsequent disposition by the Commission, the case has returned to this Court. The relevant pre-remand background is provided, again, for full context.

Krispy Kreme owns and operates stores in Missouri that are engaged primarily in the production and retail sale of donuts. The stores offer “dine-in” accommodations on their premises and alert potential customers when freshly-made donuts are available with a “HOT DOUGHNUTS NOW” sign. In addition to donuts, the stores sell related food products, such as bagged coffee beans and ground coffee, coffee and related coffee drinks, hot chocolate, milk, bottled water, bottled juices, and other soft drinks. Between April 2003 and December 2005 (the relevant tax periods), Krispy Kreme collected and remitted sales tax from its retail sales based on the 4% rate imposed by § 144.020. However, in 2006, Krispy Kreme took notice of § 144.014, which imposes only a 1% sales tax rate “on all retail sales of food.” Subsection 2 of § 144.014 adds further qualifications:

For the purposes of this section, the term “food” shall include only those products and types of food for which food stamps may be redeemed pursuant to the provisions of the Federal Food Stamp Program as contained in 7 U.S.C. Section 2012

, as that section now reads or as it may be amended hereafter, and shall include food dispensed by or through vending machines. For the purpose of this section, except for vending machine sales, the term “food” shall not include food or drink sold by any establishment where the gross receipts derived from the sale of food prepared by such establishment for immediate consumption on or off the premises of the establishment constitutes more than eighty percent of the total gross receipts of that establishment, regardless of whether such prepared food is consumed on the premises of that establishment, including, but not limited to, sales of food by any restaurant, fast food restaurant, delicatessen, eating house, or cafe.

Arguing the 1% tax rate under § 144.014 was applicable, rather than the 4% tax rate under § 144.020, Krispy Kreme sought a refund for sales tax it had remitted on retail sales of donuts, non-hot beverages, juices, milk, coffee beans, and ground coffee during the relevant tax periods. It did not seek a refund for sales tax remitted on retail sales of hot drinks. Krispy Kreme's original refund claim totaled $324,237.33. The director of revenue denied this claim. After conceding it was not entitled to a refund on dine-in sales, Krispy Kreme reduced its claim to $277,992.20 and sought review of the director's decision by the Administrative Hearing Commission.

Before the Commission, Krispy Kreme argued its products, other than hot drinks, qualified as “food” under § 144.014.2 and that its retail sales were not disqualified from the lower tax rate by § 144.014.2's “80/20 test” because not more than 80% of its gross receipts were derived from “food prepared ... for immediate consumption.” Because most sales were attributable to donuts, whether Krispy Kreme derived more than 80% of its gross receipts from food prepared for immediate consumption depended on the characterization of its donuts. Krispy Kreme argued that, while its donuts were often consumed immediately, not all of its donuts should count toward the 80% threshold because not all were prepared for immediate consumption. It asserted that any or all of the following should not count as food prepared for immediate consumption: (1) donuts that were not purchased within an hour of being prepared and ready to eat; (2) donuts sold by the dozen; and (3) donuts that customers did not eat at the store or in transit. If any of these categories of donuts did not count toward the 80% threshold, Krispy Kreme was not disqualified from § 144.014's lower tax rate by the 80/20 test. The director argued that all of Krispy Kreme's donuts should count as food prepared for immediate consumption because they were all capable of being eaten without further preparation by the customers.

Both sides filed cross-motions for summary decision. The Commission sustained the director's motion for summary decision, overruled Krispy Kreme's motion, and denied Krispy Kreme's refund. The Commission ruled that although Krispy Kreme's products qualified as “food” under the Federal Food Stamp Program's definition, the director's interpretation of § 144.014.2 yielded a more reasonable result when considering the 80/20 test; therefore, Krispy Kreme failed to carry its burden of showing that not more than 80% of its gross receipts were derived from the sale of food prepared for immediate consumption. Krispy Kreme then petitioned for review in this Court.

In Krispy Kreme I,

this Court rejected both the director's and Krispy Kreme's interpretations and, instead, provided the following interpretation of § 144.014.2:

The proper interpretation of the 80/20 test becomes apparent when all of the words “food prepared by such establishment for immediate consumption on or off the premises of the establishment” are given their full effect. Of particular importance are the words “on or off the premises,” which modify “immediate consumption,” clarifying that “immediate consumption” is not an abstract concept (food that could be consumed immediately) but a concrete event (actual consumption at the time of purchase or within the time necessary to travel to another location “off the premises”). Accordingly, “food prepared ... for immediate consumption on or off the premises” means all food that is eaten at the place of preparation and purchase, or while traveling to, or immediately upon arrival at another location without any further preparation.”

358 S.W.3d at 53

(emphasis added). This Court held, therefore, neither party was entitled “to a favorable decision based on a correct understanding of the substantive law,” reversed the Commission's decision sustaining the director's motion for summary decision, and remanded the case. Id. at 53.

Following remand, Krispy Kreme attempted to produce evidence of its customers' actual consumption habits during the relevant tax period. It conducted an online survey between September and November 2012 that asked its customers where they eat the donuts they purchase from a Krispy Kreme store and when they eat such donuts after arriving at the place of consumption. Based on the results, Krispy Kreme concluded that if “immediate consumption” meant consumed within 60 minutes, then enough of its donuts were not immediately consumed for it to be disqualified by the 80/20 test. That is, those donuts that were, in actuality, not consumed within an hour of arriving at the place of consumption were not donuts prepared for immediate consumption and, therefore, did not count toward the 80% threshold.

Understanding that the results of its survey were based on customers' responses in 2012, rather than during the relevant tax periods, Krispy Kreme offered evidence attempting to show the 2012 survey results were equally applicable to the relevant tax periods. Both Alison Holder, the vice president of brand development for Krispy Kreme, and Mike Parker, manager of the Missouri stores, testified that customer behavior had not materially changed from 2003 to 2012; therefore, the survey results also reflected customer behavior during the relevant tax periods. Krispy Kreme also offered several other past surveys tending to show that customers' motivations for purchasing Krispy Kreme donuts had remained largely unchanged over the years. The director did not offer any evidence, but objected to the admission of the 2012 survey.

The Commission again denied Krispy Kreme's refund. The Commission ruled the 2012 survey was admissible, but found the survey did “not establish, by a preponderance of the evidence, that it reflects [Krispy Kreme customers'] consumption habits during the tax periods.” The Commission explained that Krispy Kreme's witnesses and other past surveys failed to address the key issue—“when customers eat their doughnuts.” The Commission further noted a conundrum it perceived created by this Court's interpretation in Krispy Kreme I

:

We recognize that our conclusion raises the question: given the Supreme Court's framing of the issue in this case, how can a

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