McDonnell Douglas Corp. v. Director of Revenue

• Decision Date: 27 May 1997
• Docket Number: No. 79258,79258
• Citation: 945 S.W.2d 437
• Parties: McDONNELL DOUGLAS CORPORATION, Respondent, v. DIRECTOR OF REVENUE, Appellant.
• Court: Missouri Supreme Court

Page 437

945 S.W.2d 437

McDONNELL DOUGLAS CORPORATION, Respondent, v. DIRECTOR OF REVENUE, Appellant.

No. 79258.

Supreme Court of Missouri En Banc.

May 27, 1997.

Jeremiah W. (Jay) Nixon, Attorney General, John R. Munich, Deputy Chief County for Litigation, James R. McAdams, Tina M. Crow Halcomb, Assistant Attorneys General, Jefferson City, for Appellant.

Carol Lewis Iles, John Barrie, St. Louis, for Respondent.

LIMBAUGH, Judge.

In this case, we determine whether respondent, McDonnell Douglas Corporation, is entitled to a refund for use taxes it paid on tangible personal property purchased to fulfill its contracts with the United States Government. The Administrative Hearing Commission (AHC) concluded that respondent was entitled to the refund for the claim period at issue. The Director of Revenue filed a petition for review in this Court. We have jurisdiction because this case involves construction of the revenue laws of this state. Mo. Const. art. V, sec. 3. We now affirm the decision of the AHC.

On August 22, 1994, McDonnell Douglas Corp. (MDC), an aerospace manufacturing company with its corporate headquarters in St. Louis, Missouri, filed a complaint challenging the Director of Revenue's (the Director) denial of a refund claim for use tax paid for the period of July 1990 through September 1993. During this time period, MDC entered into contracts with the United States Government (the government) for the manufacture of military aircraft and missiles. In the performance of these contracts, MDC purchased overhead materials and supplies for which it paid use tax to Missouri. In presenting its request for a refund to the Director, MDC claimed that the purchases were exempt from use tax because they were purchases for resale under sec. 144.615(6), RSMo 1986. ¹ After the Director denied the request, the AHC determined that MDC's transfer of overhead property to the government qualified for the resale exemption. The Director now challenges this determination. We review the decision of the AHC to determine if it is "authorized by law and supported by competent and substantial evidence upon the whole record." Sec. 621.193, RSMo 1994.

At the hearing before the AHC, MDC presented evidence that the government entered into two types of contracts with MDC during the claim period. One is a fixed price contract under which the government negotiates a fixed price for the product to be manufactured by MDC. When using this type of contract, the government agrees to make progress payments during the course of contract performance to MDC, and these payments are then offset against the fixed sum that is due under the contract. The other type of contract is a cost reimbursable contract under which the government agrees to reimburse MDC for the costs it incurs in performing the contract. Both types of contracts incorporate certain provisions of the Federal Acquisition Regulations (FAR), and in particular, either FAR 52.232-16, 52.245-2, 52.245-5, or language that is identical in all material respects to these regulations. The FAR regulations provide that title to property purchased by a contractor, such as MDC, shall vest in the government. ²

In general, the Missouri Compensating Use Tax Law, secs. 144.600 to 144.761, is designed to tax out-of-state purchases of tangible personal property by Missouri residents who use the property within the state. See II Mo. Taxation Law and Practice, sec. 9.45 (Mo. Bar 3d ed.1996). Under sec. 144.610 a use tax "is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property purchased" from a vendor. Section 144.615 provides a resale exemption to the levy of the use tax. This exemption applies to "[t]angible personal property held by processors, retailers, importers, manufacturers, wholesalers, or jobbers solely for resale in the regular course of business." Sec. 144.615(6).

The term "resale" as it is used in sec. 144.615(6) is accorded the same meaning as the term "sale" in the Missouri Compensatory Use Tax Law. Smith Beverage Co. of Columbia v. Reiss, 568 S.W.2d 61, 64 (Mo. banc 1978). Sale, and accordingly resale, is defined as "any transfer, barter or exchange of the title or ownership of tangible personal property, or the right to use, store or consume the same, for a consideration paid or to be paid...." Sec. 144.605(7), RSMo Supp.1992. Thus, the elements of the resale exemption are: (1) a transfer, barter or exchange, (2) of the title or ownership of tangible personal property or the right to use, store or consume the same, (3) for a consideration paid or to be paid. Aladdin's Castle, Inc. v. Director of Revenue, 916 S.W.2d 196, 198 (Mo. banc 1996).

MDC takes the position that it transferred title and ownership of the property in question for consideration to the government by virtue of the title vesting provisions and contract payments included in the federal defense contracts. The Director disagrees for several reasons. First, she contends that even if MDC transferred title to the overhead materials, it did not transfer its ownership interest and thus it is still liable for use tax on the ownership interest. Under the use tax statutory scheme, however, a resale is any transfer of the "title or ownership of tangible personal property." See sec. 144.605(7) (emphasis added); Smith Beverage, 568 S.W.2d at 64. The statutory language necessarily means that a resale of personal property takes place if either of the taxable interests in the property is transferred to the end purchaser. Cf. State ex rel. Thompson-Stearns-Roger v. Schaffner, 489 S.W.2d 207, 215 (Mo.1973) (holding that a sales transaction takes place if either title or ownership is transferred). Thus, even if MDC retained an ownership interest in the overhead materials after a resale to the federal government took place, MDC is still entitled to the resale exemption if they did in fact transfer title to the property.

The Director also asserts that MDC could not have resold the overhead supplies and materials because it used or consumed them in the performance of its contractual obligations. On this point, the Director relies on City of St. Louis v. Smith, 342 Mo. 317, 114 S.W.2d 1017 (1937), and Overland Steel, Inc. v. Director of Revenue, 647 S.W.2d 535 (Mo. banc 1983), in which this Court held that "materials purchased by a contractor for use in meeting contractual obligations for the improvement of real property are used or consumed by the contractor; they are not resold." Overland Steel, 647 S.W.2d at 538 (citing City of St. Louis v. Smith, 342 Mo. 317, 114 S.W.2d 1017 (1937)). The key difference between Smith and Overland Steel and the case at hand is that in the former cases, the contracts did not contain any title vesting provisions, and the only contractual obligation was to construct the end product. In contrast, the contracts at issue in this case specifically provide for the vesting of title in the government of the property purchased by MDC for the performance of the contracts before the property was used or consumed. On the facts of the present case, the Director's point has no merit.

The Director next argues that the title vesting provisions in the contract do not actually transfer title to the government. In support, the Director cites Marine Midland Bank v. U.S., 231 Ct.Cl. 496, 687 F.2d 395 (1982), cert. denied, 460 U.S. 1037, 103 S.Ct. 1427, 75 L.Ed.2d 788 (1983), for the proposition that the federal title vesting provisions transfer only a security interest in the property at issue. In Marine Midland, the Court of Claims determined that the title vesting provision in the federal contracts at issue in that case was intended to secure the progress payments made under the contracts, and thus that the interest transferred under this provision was more analogous to a lien than actual title. Id. at 401. The court noted that a literal interpretation of title vesting clauses was required until 1958, because before that time the government was prohibited by statute from advancing public money. Id. at 400-01. "The government's title vesting program was developed as the answer, conditioning progress payments on the vesting of title, on the theory that there was no 'advance' of public money if the government took something of value for its...