Lincoln Industrial v. Director of Revenue

• Decision Date: 26 June 2001
• Citation: Lincoln Industrial v. Director of Revenue, 51 S.W.3d 462 (Mo. 2001)
• Parties: (Mo.banc. 2001) Lincoln Industrial, Inc., Appellant, v. Director of Revenue, Respondent. SC83208 0
• Court: Missouri Supreme Court

51 S.W.3d 462 (Mo.banc. 2001)

Lincoln Industrial, Inc., Appellant, v. Director of Revenue, Respondent.

SC83208

Supreme Court of Missouri

06/26/2001

Appeal From: Petition for Review of a Decision of the Administrative Hearing Commission

Counsel for Appellant: Edward F. Downey, John P. Barrie and B. Derek Rose

Counsel for Respondent: Alana M. Barragan-Scott

Opinion Summary: St. Louis manufacturer Lincoln Industrial, Inc., claims use tax refunds for purchases made from October 1996 through September 1997 for replacement machinery and equipment. The Administrative Hearing Commission denied the refunds, finding the purchases were not exempt from the use tax. Lincoln Industrial appeals.

Court en banc holds: In a case of first impression, replacement "machinery," as used in section 144.030.2(4), is defined to include items that are combinations of parts that work together as a functioning unit, even though they are subordinate elements of more complex machinery. The case is remanded to the AHC to determine whether each of the particular items purchased by Lincoln Industrial is a mere part, or a combination of parts that work together as a unit, under the new definition.

Price, C.J., Limbaugh, White, Wolff and Benton, JJ., and Rahmeyer, Sp.J., concur. Stith, J., not participating.

John C. Holstein, Judge

Lincoln Industrial, Inc. (Lincoln) appeals from an order of the Administrative Hearing Commission (AHC) denying its claim for a use tax refund based upon purchases Lincoln made from October 1996 through September 1997. Lincoln claims an exemption for replacement machinery and equipment. This Court has jurisdiction of the appeal. Mo. Const. art. V, sec. 3. Because this Court finds that the word "machinery," as used in the statute, encompasses at least some of the components at issue, the decision of the AHC is reversed and the cause remanded.

I.

Lincoln operates a factory in St. Louis, Missouri. It manufactures hydraulic pumps and small machines that dispense liquids like lubricants, ink, or glue. Between October 1996 and September 1997, the company purchased replacement items for some of its manufacturing machines because the existing components had broken or worn out. The majority of the purchases were from out-of-state vendors, and Lincoln paid use tax on these items. Lincoln also inadvertently paid use tax on some in-state purchases.

Lincoln sought a use tax refund of $4,954.49, claiming that certain components purchased out-of-state were nontaxable "machinery and equipment." The director of revenue (director) agreed that the company was entitled to a refund of $1,092.86 because some parts were exempt from tax. Lincoln then filed a claim for the remaining refund it claimed due, $3,861.63. On February 23, 1999, the director issued a final decision denying Lincoln's refund claim. The director's position was that the disputed items are parts and not "machinery and equipment" so as to qualify for a use tax exemption. Later, the parties settled with respect to some claims. Lincoln now claims that it is due $2,767.09.

The replacement items for which Lincoln seeks an exemption are varied and highly specialized. The items were used to refurbish eleven different pieces of equipment: a Davenport production machine, a vibrating feed machine, a Hydromat machine, an AccuCut hone machine, a Zagar drill press, a Weber screwdriving machine, a Bracker machine, a computer numeric controlled (CNC) machine, a screw machine, a sander, and a grinder machine.

Some appear to be individual parts, such as belts, hex nuts, set screws, and the like. Others items are not individual parts, instead appearing to be a combination of components that perform a function in the manufacturing process. By illustration, for the Davenport machine Lincoln purchased and replaced components of the "pickoff spindle." The pickoff spindle grasps parts in the manufacturing process and drops them into a tube. A slide, two lever position burrings, and several pin cam levers and hex nuts are all elements of the pickoff spindle, and all were purchased on January 7, 1997. These component parts, even though separately itemized on the invoice, appear to be a functioning unit with multiple parts.

Another example of a replaced component with multiple parts is the control box on the vibrating feed machine. The vibrating feed machine releases parts down a track. The control box regulates the speed of the vibrating feed machine and, thus, the rate at which the parts move down the track to another machine. A photograph of the box was included in the record. The control box has an outer housing, two switches or lights, two dials, and cables or wires that connect the control box to the vibrating machine.

It is unclear from the record whether certain other items are individual parts or a combination of parts that perform a specific function. For example, the item referred to as the "spindle change gears" contains gears that determine the number of RPMs at which the machine will run. Another such example is the poppet valve replaced on a Roper pump, which provides coolant to the Davenport machine. These would seem to be, but may not be, a combination of parts that were replaced.

The AHC did not distinguish between individual parts replaced and combinations of components that perform a function. The AHC concluded that none of these components are "machinery and equipment" entitling Lincoln to an exemption. This appeal followed.

II.

Section 144.610, RSMo Supp. 1996, imposes a use tax for the "privilege of storing, using or consuming [in Missouri] any article of tangible personal property" purchased out-of-state. Section 144.030.2(4), RSMo Supp. 1996, applicable during the tax periods at issue (October 1996 through September 1997), provided a sales and use tax exemption for "machinery and equipment . . . replacing and used for the same purposes . . . as the machinery and equipment, which is purchased for and used directly for manufacturing or fabricating a product which is intended to be sold ultimately for final use or consumption." The director does not dispute that the replaced items at issue are directly used in manufacturing a product that is intended to be sold for final use or consumption.

Accordingly, the issue on appeal is whether the items noted above qualify as "machinery and equipment." This question is one of statutory construction, which is strictly a matter of law. Delta Airlines, Inc. v. Director of Revenue, 908 S.W.2d 353, 355 (Mo. banc 1995). This Court's review of the findings of law of the AHC is de novo. Gammaitoni v. Director of Revenue, 786 S.W.2d 126, 128 (Mo. banc 1990).

A.

Initially, the Court examines the meaning of the word "machinery," as it is used in sec. 144.030.2(4), RSMo Supp. 1996. Lincoln argues vigorously that the plain meaning of "machinery" extends to each and every component it claims as exempt. The company notes that even if some ambiguity exists, courts give statutes a reasonable construction in light of the legislative objective rather than a strained, narrow or absurd construction. State ex rel. Rowland Group, Inc. v. Koehr, 831 S.W.2d 930, 931 (Mo. banc 1997). Lincoln argues that absence of the word "parts" from the exemption is of no consequence, and that a later amendment expressly extending the exemption to "parts" was only a clarification.¹

The director argues with equal vigor that component parts are not included in the dictionary definition of "machinery." Moreover, the director points out that the word "parts" is not used in subsection (4) of sec. 144.030.2, but is present elsewhere in the same statute. See sec. 144.030.2(2), RSMo Supp. 1996. The director also argues that any ambiguity in a statute providing a tax exemption is to be strictly construed against the taxpayer. David Ranken Jr. Technical Inst. v. Boykins, 816 S.W.2d 189, 191 (Mo. banc 1991).

The director's position is not entirely consistent with its past letter rulings issued pursuant to section 536.021.10, however. In those, the director has found that such diverse replacement items as a slicer blade, control cables, assemblies and controls, brakes, bushings, filters, bus plugs, motors, pumps, tanks, filters and airflow controllers all qualify for the exemption. At the same time it has found that nuts and bolts, drill bits and filters, and printing blankets were not exempt.

In the more than thirty years that has passed since the term "machinery" found its way into sec. 144.030, no case has undertaken to define the word. But Concord Publ'g Co. v. Director of Revenue, 916 S.W.2d 186 (Mo. banc 1996), is instructive. There, on an appeal of the decision of the AHC to this Court, the director did not contest the AHC finding that certain listed computer components were machinery or equipment. Id. at 190. The items included a computer CD ROM drive, a floppy disk drive, and keyboard, all of which were found by the AHC to be tax exempt. Id. at 195, n. 3. Though the parties cite numerous other cases, none directly resolve the question. See Noranda...