Odorite of America, Inc. v. Director of Revenue

• Decision Date: 01 August 1986
• Docket Number: Nos. 67652,67653,s. 67652
• Citation: 713 S.W.2d 833
• Parties: ODORITE OF AMERICA, INC., Petitioner-Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 833

713 S.W.2d 833

ODORITE OF AMERICA, INC., Petitioner-Appellant, v. DIRECTOR OF REVENUE, Respondent.

Nos. 67652, 67653.

Supreme Court of Missouri En Banc.

Aug. 1, 1986.

James R. Schurman, Kansas City, Solbert M. Wasserstrom, Kansas City, for petitioner-appellant.

William L. Webster, Atty. Gen., Melodie A. Powell, Asst. Atty. Gen., Jefferson City, for respondent.

HIGGINS, Chief Justice.

Odorite of America, Inc., seeks reversal of a decision upholding consolidated assessments of sales tax, including interest and penalties, made by the Department of Revenue for the years 1972 through 1976 and years 1977 and 1978. Petitioner asserts: its sales are exempt from retail sales tax under 144.030.3(1), RSMo 1978, because the sales are for resale and not for the use and consumption by its distributors; assessments for the period prior to October 27, 1975, are barred by the two-year statute of limitations; penalties should not have been assessed because it is not guilty of neglect, evasion or fraudulent intent; and if accountable for sales tax, the assessments for the years 1977 and 1978 should be limited to sales made within Missouri.

A decision of the Commission can be upheld only to the extent authorized by law and supported by competent and substantial evidence upon the whole record. Fostaire Harbor, Inc. v. Director of Rev., 679 S.W.2d 272 (Mo. banc 1984). The decision is affirmed in part and reversed in part and remanded for further proceedings.

Odorite, a Missouri corporation, is engaged in the business of manufacturing air deodorant machines and deodorant chemicals which are sold to distributors. The deodorizers are placed in service by distributors, each of whom has an exclusive territory under a written Distributorship Agreement. The distributors install the deodorizing machines in customers' restroom areas, and make periodic visits to replenish chemicals in the deodorizing machines and to clean the urinals and toilets.

In 1970, Odorite relocated to Kansas City, Missouri. Robert Demming, its vice president, applied to the Missouri Department of Revenue for a sales tax number. The application form was completed on August 26, 1970. In response to Question 8: "Kind of Business," the answer was "Manufacturer of Deodorants." In response to Question 11: "Do you sell at retail, wholesale or both?", the answer was "Wholesale." In a letter dated September 17, 1970, Mr. Norris Gale, Supervisor of the Sales and Use Tax Unit of the Department of Revenue responded:

In accordance with the information provided on your application form, the manufacturer's code number which appears in the above caption has been assigned to you. This number may be filed with your suppliers as evidence that materials which become a component part of your manufactured product may be purchased tax exempt.

This number is not to be used for purchasing as tax exempt any expendable item used to conduct your business but is for the sole purpose as set forth above.

Accordingly, Odorite filed no sales and use tax returns.

On October 18, 1974, Odorite received an inquiry from the Department seeking current information on its tax status, together with an application identical to the one sent in 1970. Odorite answered Questions 8 and 11 as before. In response to this updated application, Odorite received a new manufacturer's code number and was instructed that it would be necessary to file quarterly sales and use tax returns for informational purposes.

Odorite thereafter filed a return for the fourth quarter of 1974 showing gross sales of $131,547.95 and an offsetting deduction for the same amount, listing the sales as "sales for resale." Therefore, the return showed zero taxable income. However, Mr. Demming received a billing for sales tax due from the Department for the fourth quarter. On April 18, 1975, Odorite's secretary and attorney, Mr. I.I. Ozar, responded to the billing:

Please be advised that I represent Odorite of America, Inc. which business is the manufacturing of deodorant chemicals which are distributed and sold for use in servicing deodorizing equipment located throughout the United States and South America. None of the products manufactured and distributed by my clients are ever sold for retail purposes and are used strictly by Odorite Distributors in deodorizing devices which are placed in restrooms and licensee manufacturers in export trade to foreign countries.

This Company has never been subject to sales and use tax for the reason above stated; that all products manufactured are never sold for retail sales, and are sold only to distributors.

We are enclosing herewith combined sales and use tax for the period covering October 31, through December, 1974, and January to March, 1975. My clients were sent a bill alleging sales tax due. I would appreciate it if you would review your files, and, if necessary, we will furnish you any affidavits or further information necessary to establish our exemption from sales and use tax.

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On August 1, 1975, the Department cancelled the billing based on the information presented.

Prior to August 1, 1975, Odorite had filed its return for the first quarter of 1975 showing sales of $137,707.37, with an equal offsetting deduction based on "sales for resale." Again, the Department billed Odorite for sales tax due. Mr. Demming returned the billing together with copies of the earlier correspondence cancelling the earlier billing. On September 8, 1975, the Department cancelled the second billing.

Odorite continued to file sales tax returns. Each of those returns listed gross sales, but claimed an equal offsetting deduction based on "sales for resales."

Mr. Demming was also the owner of an Odorite distributorship, Midstate Odorite Company. In 1976, the Department audited Midstate on the theory it was making retail sales to its customers. During the audit Mr. Demming explained to the Department that the distributorship did not resell any products purchased from Odorite, but that these products are used and consumed in connection with services rendered to customers. The Department concluded that Midstate Odorite was not subject to Missouri sales tax and the assessment for sales tax against the distributorship was cancelled.

Shortly after the conclusion of the Midstate audit, the Department began an audit of Odorite. The audit resulted in a determination that Odorite owed sales tax on all sales made to Odorite distributorships for the years 1972 through 1976 in the amount of $12,110.34 together with penalties and interest to October 31, 1977, a total assessment of $17,635.03. At the reassessment hearing, the Department found that Odorite owed $20,088.37, including penalty and interest to June 30, 1979.

While the assessment for 1972 through 1976 was under review, the Department audited Odorite for the tax years 1977 and 1978. An assessment was made showing total tax on gross sales and interest due of $45,342.70; no penalty was assessed.

Odorite appealed both assessments to the Administrative Hearing Commission and the Commission affirmed the assessments. In a consolidated appeal, the Commission concluded: section 144.020.1, RSMo 1978, imposes a tax upon all sellers for the privilege of engaging in the business of selling tangible personal property at retail in Missouri; the deodorizers and chemicals have not been sold for resale, but are sold to distributors for their use in servicing their customers and are therefore subject to tax under section 144.020.1; the Department is not barred by the two-year statute of limitations in section 144.220, RSMo 1978, because (1) Odorite consciously refused to file a return during the tax years 1972 and 1973 and the first three quarters of 1974, and (2) for the period October 1, 1974, through 1978, Odorite's returns as filed contained misrepresentations of fact and were fraudulent in that sales were reported as "sales for resales" when they were actually sales to Odorite's distributors for use in their businesses; and, section 144.030.1, RSMo 1978, which provides exemptions of sales in interstate commerce, has no application in this case because the sales contained in these assessments are sales made and delivered in Missouri.

I.

The first question is whether Odorite sells deodorizers and chemicals at retail for the use and consumption by its distributors and not for resale in any form. Appellant contends that the purpose of its merchandising program is the promotion and sale of its deodorant chemicals, and that within the meaning of the phrase "for resale in any form," the distributors' customers are the ultimate consumer of the products. Respondent asserts that Odorite's sales to its distributors constitute retail sales because the distributors use the merchandise in the performance of services to customers.

Section 144.020.1 provides: "A tax is hereby levied and imposed upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state."

Section 144.010.1(8), RSMo 1978, defines "Sale at retail" as: "any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration...."

The "Standard Distributorship Agreement for Odorite Service" between Odorite and its distributors provides, in pertinent part:

WHEREAS, Odorite is established and has had 40 years of experience in the business of deodorizing, germ, pest control, and bacteria control, air pollution and sanitation services;

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PART I

(1) APPOINTMENT AND TERRITORY: Odorite hereby confers upon the Distributor the exclusive right to dispense and render its Odorite Service for deodorizing, germ, pest control, and bacteria control, air pollution and sanitation services (all or anyone of which...