McKinley Iron, Inc. v. Director of Revenue, State, 76638

• Decision Date: 20 December 1994
• Docket Number: No. 76638,76638
• Citation: 888 S.W.2d 705
• Parties: McKINLEY IRON, INC., Appellant, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent.
• Court: Missouri Supreme Court

Page 705

888 S.W.2d 705

McKINLEY IRON, INC., Appellant, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent.

No. 76638.

Supreme Court of Missouri,

En Banc.

Dec. 20, 1994.

Carole Iles, John P. Barrie, Juan D. Keller, St. Louis, for appellant.

Jeremiah W. (Jay) Nixon, Atty. Gen., Gretchen Garrison, Asst. Atty. Gen., Jefferson City, for respondent.

LIMBAUGH, Judge.

McKinley Iron, Inc. (McKinley) seeks a ruling that its scrap metal processing business qualifies under § 144.030.2(12), RSMo Supp.1993, for an "electrical energy direct pay authorization" and an exemption from sales tax on its purchases of electricity. The Director of Revenue and, in turn, the Administrative Hearing Commission (AHC) determined this issue adversely to McKinley, which then sought review in this Court. Because resolution of the case requires construction of § 144.030.2(12), a revenue law, this Court has exclusive jurisdiction. Mo. Const. art. V, § 3. Appellate review is governed by § 621.193, RSMo 1986, which states that "the decision of the administrative hearing commission shall be upheld when authorized by law and supported by competent and substantial evidence upon the whole record...." The decision of the AHC is affirmed.

I.

McKinley operates a scrap metal processing plant in the City of St. Louis. It processes raw scrap metal into densified scrap metal which can then be sold to customers who remelt it to make new metal products. This process begins when McKinley purchases scrap metal from numerous sources, including manufacturers, fabricators, salvage yards and contractors. Scrap metal for processing includes materials remaining after manufacturing processes, materials such as clippings, leftover stampings and the aluminum skeletons remaining after can lids are punched out of aluminum sheets. It also includes materials such as old automobiles, appliances and railroad cars that are obsolete or unusable.

After McKinley receives the scrap metal, it is weighed, screened for radioactivity, inspected to ensure that it contains no undesirable materials, segregated based on the type of metal it contains, and sorted by grade. Some of the scrap metal is cut by hand into smaller, more manageable pieces. After these processing steps, collectively referred to as sorting, grading and cutting, approximately 10-20% of the scrap metal is sold. According to the record, that 10-20% of the scrap metal need only be sorted, graded and/or cut to be sold as densified scrap metal suitable for remelting. McKinley then utilizes five electric-powered machines to transform the size and density of the remaining 80-90% of the scrap metal. After this "densifying" process, this scrap metal is also sold as densified scrap metal suitable for remelting.

In April 1992, McKinley applied to the Director of Revenue for an electrical energy direct pay authorization pursuant to § 144.030.2(12), which provides an exemption from sales tax for purchases of:

Electrical energy used in the actual primary manufacture, processing, compounding, mining or producing of a product, or electrical energy used in the actual secondary processing or fabricating of the product, if the total cost of electrical energy so used exceeds ten percent of the total cost of production, either primary or secondary, exclusive of the cost of electrical energy so used.

§ 144.030.2(12). The application and work sheet submitted by McKinley did not include the amount McKinley paid for the scrap metal in the "total cost of production." As a matter of internal accounting procedures, McKinley does not consider the cost of scrap metal to be part of its cost of production because scrap metal prices are subject to wide fluctuation beyond McKinley's control.

The Director, finding that the total cost of electricity used did not exceed ten percent of total cost of production, denied McKinley's application. In calculating that amount, the Director included the amount paid by McKinley for raw, unprocessed scrap metal. If, however, the cost of that scrap metal had been excluded, McKinley would have qualified for the exemption.

II.

McKinley's first point is that the cost of the scrap metal should not be included in determining its "total cost of production." In support, McKinley sets forth three arguments: first, that it engages in two discrete stages of processing, that the cost of the scrap metal should only be included in the first stage, and therefore, the second stage qualifies for the tax exemption; second, that even if it engages only in one stage of processing, it is secondary processing for which the cost of the material to be processed should never be included in the "total cost of production;" and third, that the term "total cost of production" as used in the scrap metal industry does not include the cost of materials.

A.

For its first argument, McKinley relies on State ex rel. Union Electric v. Goldberg, 578 S.W.2d 921 (Mo. banc 1979), where this Court, construing § 144.030.3(11), RSMo 1969 (the predecessor to § 144.030.2(12)), stated that the language of the statute clearly shows an intention to exempt electrical energy used in either a primary or a secondary stage of production. Goldberg, 578 S.W.2d at 923. In Goldberg, this Court determined that taxpayer Meramec Mining Company engaged in two discrete stages of production, a primary stage of mining iron ore and a secondary processing stage of extracting the iron from the mined ore. In determining eligibility for the exemption, this Court held that each stage of production has its separate "total cost of production" against which the use of electrical energy is measured. Id. at 923-24. Because the cost of obtaining the ore was attributed to the "total cost of production" in the primary stage, the taxpayer was not required to include that cost a second time in the secondary stage. Therefore, the taxpayer qualified for the exemption under the secondary stage. Id.

McKinley contends, like the taxpayer in Goldberg, that it is engaged in two discrete stages of production, primary and secondary processing. Thus, McKinley argues that the cost of the scrap metal should be included only in the primary stage and that it is entitled to exempt electrical energy used in its secondary stage. According to McKinley, its first stage of processing occurs when the scrap metal is sorted, graded and cut, which by its account, enhances the value of the scrap metal and produces a product for which there is a market. At this point in the operation, McKinley states that it sells 10-20% of the product. The second stage of processing, McKinley contends, consists solely of "densifying" by use of the five electric-powered machines.

The question of whether McKinley is engaged in one or two stages of processing turns on whether sorting, grading and cutting the scrap metal constitutes a separate and independent stage of processing apart from the "densifying." Processing has been defined by this Court as "a mode of treatment of certain materials to produce a given result. It is an act, or a series of acts, performed upon the subject matter to be transformed and reduced to a different state or thing." Goldberg, 578 S.W.2d at 924. Although most processing consists of a "series of acts," any one of which may, technically speaking, transform the material to a "different state or thing," it is not each transformation of the material that, in and of itself, constitutes processing. Instead the parameters of processing are determined by the "given result" or the "different state or thing" sought to be produced. Indeed, processing is not complete until the end product is produced.

In this case, the end product sought for the scrap metal originally...