Ovid Bell Press v. Director of Revenue
| Citation | 45 S.W.3d 880 |
| Decision Date | 24 April 2001 |
| Docket Number | No. SC 82972,SC 82977.,SC 82972 |
| Parties | The OVID BELL PRESS, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent. Walsworth Publishing Company, Inc., Appellant, v. Director of Revenue, Respondent. |
| Court | United States State Supreme Court of Missouri |
Edward F. Downey, Jefferson City, John P. Barrie, B. Derek Rose, St. Louis, for Appellant in No. SC82972.
Jeremiah W. (Jay) Nixon, Atty. Gen., Alana M. Barragan-Scott, Deputy State Solicitor, Jefferson City, for Respondent in Nos. SC82972 & SC82977.
Lawrence P. Katzenstein, Thompson Coburn, St. Louis, for Amicus Curiae in No. SC82972.
Matthew J. Verschelden, Elizabeth K. Hudak, Kansas City, for Appellant in No. SC82977.
Juan D. Keller, B. Derek Rose, St. Louis, Edward F. Downey, Jefferson City, for Amicus Curiae in No. SC82977.
The Director of Revenue audited Walsworth Publishing Company, Inc ., for sales and use tax on its purchases of materials between 1994 and 1997. Ovid Bell Press, Inc., paid use tax under protest on an out-of-state purchase of film in February 1999. The Director and the Administrative Hearing Commission ruled against both taxpayers. Walsworth and Bell appeal, and the cases are consolidated for opinion. Mo. Const. Art. V, sec. 3. Reversed and remanded.
Ovid Bell Press, Inc., prints magazines and other publications. Bell collects tax on the retail sale of printed materials, unless exempt from sales tax.
Bell buys film out-of-state. Exposing the film, Bell photographs camera-ready paper or electronic files supplied by the customer. These negatives Bell makes for all customers except those providing usable negatives.
Numerous customers request that all negatives be returned to them or sent to other entities, such as other printers. In the absence of a request, Bell stores negatives in its film library at no charge. However, Bell charges a $3.90 "film pick-up fee" to reuse negatives from a previous job. After reuse, negatives are re-filed in the library.
For printing jobs, Bell uses a standard proposal letter, which states:
MATERIAL STORAGE: negatives will be stored for fourteen (14) months after an issue's printing, at which time they will be destroyed unless we are otherwise instructed. Packing and shipping will be charged on the basis of actual cost.
Bell also gives customers a postcard listing the options for negatives, which include returning them to the customer, or forwarding them to another printer.
On invoices, Bell does not itemize the cost of the film it buys, or the sale of negatives to customers. Once the customer pays for a job, the negative is the customer's. Bell cannot use negatives without the customer's permission. The customer controls the ultimate disposition of negatives. After a 14-month period, unless the customer directs otherwise, Bell discards the negatives, by giving or selling them to recyclers.
While the Bell case concerns only film, Walsworth and the Director dispute the taxation of several materials, purchased both in-state and out-of-state. In this part II, the disputed materials are highlighted in italics. In the appendix to this opinion, dollar amounts are listed for each disputed material.
Walsworth produces and prints yearbooks for schools, as well as books and other publications for commercial customers. Walsworth photographs each page of camera-ready paper supplied by the customer. Once exposed, the film becomes a negative, which cannot be exposed for another image. Walsworth then applies a film hardener that physically adheres to the negative.
Negatives often have defects—small holes or unwanted specks—that Walsworth covers with ink from an opaquing pen. Walsworth places the negative for each page on a sheet of clear acetate plastic, by using red litho tape. Atop the acetate plastic, Walsworth puts a sheet of orange-vinyl/masking paper. After printing is complete, negatives are placed in a cardboard folder, closed with filament tape.
The images on each negative transfer to a printing plate that imprints each page. Before 1996, Walsworth sprayed the printing plates with developer, which physically adhered to the plates in order to raise and enhance images. The plates were then scrubbed, rinsed, and given a gum-like finisher, which also physically adhered to the plates.
As for schools, the purchase agreement states:
Film negatives and plates are the property of the customer and will be stored by Walsworth for a period of 30 days. Unless notified differently by the customer, all film negatives and plates will be destroyed after this 30 day period.
In fact, Walsworth stores yearbook negatives for three months—if not sooner delivered to the customer—rather than the 30 days stated in the agreement.
As for commercial customers, the purchase agreement states:
Film negatives and plates are the property of the customer and will be stored by the printer for a period of one year. Unless notified differently by the customer, all film negatives and plates will be destroyed after this one year period.
Since January 1997, the agreement states that storage is for three years, which was, in fact, the practice before January 1997. After the three-year period, Walsworth contacts the customer regarding disposal of negatives. Walsworth's commercial purchase agreement further states:
CUSTOMER'S PROPERTY
The printer will maintain fire, extended coverage, vandalism, malicious mischief, and sprinkler leakage insurance on all property belonging to the customer, while such property is in the printer's possession; printer's liability for such property shall not exceed the amount recoverable from such insurance. Customer's property of extraordinary value shall be insured through mutual insurance.
In sum, a school or commercial customer may instruct Walsworth to:
Most customers do not request the negatives. In fact, sixty percent are schools, who rarely request negatives (because yearbooks are not reprinted). Some commercial customers request the negatives. Almost one third of commercial customers order reprints. For reprints, Walsworth reuses the negatives without a new charge.
Walsworth separately itemizes the cost of negatives on its estimates for commercial jobs, and the standard price for yearbook sales. These estimates are neither disclosed to customers, nor separately stated on invoices to customers.
If a change by the customer requires additional film, plates or related items, Walsworth charges for such extra costs. Walsworth's computer printouts itemize the cost of negatives-which is not disclosed to customers.
If customers do not request negatives after the storage period, Walsworth sells them to a recycler. Walsworth signs a pick-up receipt, stating that it holds true and lawful title to the materials and is authorized to release them. Over the three-year audit period, Walsworth received $187,000 from film recyclers.
In printing commercial and school orders, Walsworth incorporates photographs from the customer. Walsworth places an adhesive label on the back of each photograph to identify it. From the photograph, Walsworth often creates a color copy "spider print" on color copy paper, in reduced or enlarged form. Upon completing the job, Walsworth delivers all spider prints to the customer, along with the original photographs. Walsworth charges a set fee for each spider print, which is sometimes separately itemized on the invoice, but always included in the total job charge.
If a customer requests, Walsworth creates a four-color "match print" of a page of materials. A match print consists of colored emulsion sheets laminated to match print base paper. Walsworth sends the customer the match print for mark-up or approval. The customer returns the match prints to Walsworth, with changes indicated.
For yearbooks and certain commercial jobs, Walsworth inputs the text into a computer, then prints it on proof correction paper. This paper goes into a proof folder to protect it during shipment to and from the customer, who indicates changes on the proof corrections.
Walsworth keeps the match prints and proof correction papers/folders for about six months after printing, although the customer may request and keep them. Walsworth charges a set fee for each match print or proof correction paper, which is sometimes separately itemized on the invoice, but always included in the total job charge.
None of Walsworth's invoices, contracts, or agreements state that the acetate plastic, red litho tape, orange vinyl, cardboard folders, filament tape, color copy paper, match print base paper, colored emulsion paper, proof correction paper, and proof folders are the property of the customer or purchased by the customer.
Walsworth collects sales tax on the total invoice price on in-state sales to non-exempt customers. Walsworth collects applicable sales tax on the total invoice price on out-of-state sales to non-exempt customers.
Section 144.030.2(2) RSMo 19941 exempts from sales tax:
Materials ... which when used in manufacturing ... become a component part or ingredient of the new personal property resulting from such manufacturing ... and which new personal property is intended to be sold ultimately for final use or consumption...
Section 144.615(3) adopts this exemption for the use tax.
This Court reviews de novo the AHC's interpretation of this statutory exemption. Zip Mail Services v. Director of Revenue, 16 S.W.3d 588, 590 (Mo. banc 2000). As to the first element of the exception, manufacturing includes the process of printing. Heidelberg Central, Inc. v. Director of Revenue, 476 S.W.2d 502, 506 (Mo. 1972).
A material is a component part or ingredient if any part of...
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