Ronnoco Coffee v. Director of Revenue

• Decision Date: 14 February 2006
• Docket Number: No. SC 86725.,No. SC 86912.,No. SC 86724.,SC 86724.,SC 86725.,SC 86912.
• Citation: Ronnoco Coffee v. Director of Revenue, 185 S.W.3d 676 (Mo. 2006)
• Parties: RONNOCO COFFEE COMPANY, INC., Respondent, v. DIRECTOR OF REVENUE, Appellant. Rose Coffee Company, Inc., Respondent, v. Director of Revenue, Appellant. Ronnoco Coffee Company, Inc., Respondent, v. Director of Revenue, Appellant.
• Court: Missouri Supreme Court

Page 676

185 S.W.3d 676

RONNOCO COFFEE COMPANY, INC., Respondent, v. DIRECTOR OF REVENUE, Appellant.

Rose Coffee Company, Inc., Respondent, v. Director of Revenue, Appellant.

Ronnoco Coffee Company, Inc., Respondent, v. Director of Revenue, Appellant.

No. SC 86724.

No. SC 86725.

No. SC 86912.

Supreme Court of Missouri, En Banc.

February 14, 2006.

Jeremiah W. (Jay) Nixon, Atty. General, Alana M. Barragan-Scott, Deputy Solicitor, Jefferson City, for appellant.

Edward F. Downey, Jefferson City, B. Derek Rose, St. Louis, for respondent.

MARY R. RUSSELL, Judge.

The Director of Revenue seeks review of the Administrative Hearing Commission's ("AHC") decisions finding that Ronnoco Coffee Company and Rose Coffee Company (collectively "Coffee Companies") were exempt from payment of sales and use tax on their purchases of certain coffee equipment. The AHC's decisions are affirmed.

I. Jurisdiction and Standard of Review

This Court has jurisdiction to review the AHC's decisions pursuant to Mo. Const. art. V, section 3, as the cases involve construction of the state revenue laws. This Court reviews the AHC's interpretation of revenue law de novo. Six Flags Theme Parks, Inc. v. Dir. of Revenue, 102 S.W.3d 526, 527 (Mo. banc 2003). The AHC's factual determinations are upheld if the law supports them and, after reviewing the whole record, there is substantial evidence to support them. Id.

Exemptions for taxation are strictly construed against the taxpayer and, as such, it is the burden of the taxpayer claiming the exemption to show that it fits the statutory language exactly. Id. at 528. It is the Director's burden to show a tax liability. Id. at 529.

II. Background

Coffee Companies sell whole and ground coffee beans, tea, instant coffee products, and condiments to businesses that buy the items for resale or for their customers' use.¹ During the tax periods at issue, Coffee Companies purchased coffee grinding and brewing equipment and parts (collectively "coffee equipment")² from vendors both in and out of Missouri. Coffee Companies paid use tax on their purchases of the coffee equipment from out of Missouri.

They sold the coffee equipment outright to some of their customers. If a customer did not want to buy the coffee equipment outright, however, Coffee Companies executed a "loan agreement" with the customer.

Ronnoco's "loan agreement" provided that its customer could use its coffee equipment for "consideration of $1.00" and waiver of all liability for personal injury and property damage.³ The customer, however, could only use the coffee equipment for making, storing, and distributing Ronnoco's coffee products and only for so long as the customer purchased Ronnoco's coffee products.⁴ The customer could not assign the "loan agreement," and could not encumber, sell, or otherwise dispose of the coffee equipment. The equipment remained Ronnoco's property and Ronnoco could remove it at any time. The "loan agreement" stated that the customer was responsible for maintenance and repair of the coffee equipment. Despite this language, however, Coffee Companies, not customers, purchased all replacement parts and performed all maintenance for the coffee equipment.

Coffee Companies did not charge a separate tax on the customers' use of the coffee equipment under the "loan agreement," but instead charged customers more for purchases of coffee beans and tea. The more the coffee equipment cost Coffee Companies, the more their "loan agreement" customers paid for coffee beans and tea.

III. Procedural History

Because this opinion jointly addresses three cases, it is helpful to outline the procedural history of each case separately.

The Director's first appeal against Ronnoco raises the issue of whether Ronnoco is entitled to a refund of $124,799.85, plus interest, for use tax it paid, from the fourth quarter 1998 through the third quarter 2002, on certain coffee equipment used by its customers. Ronnoco argued it qualified for a refund because it resold the coffee equipment to customers, meriting an exemption under section 144.615(6),⁵ RSMo 2000.⁶ The Director denied Ronnoco's refund claim, and Ronnoco sought review of the Director's decision from the AHC. The AHC granted Ronnoco's refund request, finding that the resale exemption under section 144.615(6) applied because Ronnoco resold the coffee equipment at issue. The Director now seeks review of the AHC's decision granting Ronnoco a refund.

Similarly, the Director's appeal against Rose raises the issue of whether Rose is entitled to a refund of $135,803.59, plus interest, for use tax it paid, from the fourth quarter 1998 through the third quarter 2002, on certain coffee equipment used by its customers. Like Ronnoco, Rose sought a refund under section 144.615(6), which the Director denied. Rose sought review by the AHC, which concluded that Rose was entitled to a refund. The Director now seeks review of the AHC's decision granting Rose a refund.

The Director's other appeal against Ronnoco differs in that no refund was sought in this case. Instead, this case began when the Director audited Ronnoco and assessed sales tax and use tax⁷ on its purchases of coffee equipment and related items.⁸ Ronnoco disputed the assessments, generally on the basis that the purchases were exempt purchases for resale. The AHC found in Ronnoco's favor, and the Director asks this Court to order Ronnoco to pay the taxes assessed.

In finding in Coffee Companies' favor in each of these cases, the AHC rejected the Director's argument that Coffee Companies' owed tax on the equipment at issue under section 144.020.1(8), which imposes tax on the rental or lease of tangible personal property. The AHC found that Coffee Companies' "loans" of coffee equipment to their customers were not lease transactions subject to section 144.020.1(8), but were instead tax exempt resales.

IV. Issue Presented

The issue presented in each of these three cases is the same: Did the AHC properly conclude that Coffee Companies' purchases of coffee equipment, which it loans to customers who use Coffee Companies' products, are exempt from use and sales tax?

V. Does an exemption exist?

Section 144.610 imposes a use tax on Coffee Companies' storage, use, or consumption within Missouri of any tangible personal property. The sale of property in the regular course of business, however, is expressly excluded from the definition of use and, therefore, from the use tax levy. Section 144.605(13). For purposes of the use tax, section 144.605(7) defines a "sale" 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, and any transaction whether called leases, rentals, bailments, loans, conditional sales or otherwise, and notwithstanding that the title or possession of the property or both is retained for security.

"Tangible personal property held ... solely for resale in the regular course of business" is expressly exempt from use tax. Section 144.615(6) (emphasis added). In determining whether there is a resale such that the resale exemption of section 144.615(6) applies, three elements must be met: (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 consideration paid or to be paid. Aladdin's Castle, Inc. v. Dir. of Revenue, 916 S.W.2d 196, 198 (Mo. banc 1996).

Coffee Companies' costs for the coffee equipment that they provided to "loan agreement" customers was considered when setting the prices those customers were charged for coffee and tea products. The more the equipment cost Coffee Companies, the more Coffee Companies charged customers using that equipment for coffee and tea. The elements required for a resale were met in Coffee Companies' "loan agreement" transactions in that the equipment was transferred to the customer, who had the right to use that equipment, for the consideration of (1) continued purchase of Coffee Companies' products and (2) payment of an increased cost of those products based on the cost of the equipment used.

This Court has repeatedly held that where a business does not charge separately for goods transferred to customers but, rather, factors the cost of the goods into the price of all items sold to the customers, such goods are exempt from the use tax. Aladdin's Castle, 916 S.W.2d at 197 (prizes at arcade were exempt from use tax because were resold in that the cost of prizes was included in price charged for tokens); House of Lloyd v. Dir. of Revenue, 884 S.W.2d 271, 275 (Mo. banc 1994) (packing material was exempt from use tax where it was purchased solely for resale, despite fact that marketer received some incidental benefit from packing material); Sipco, Inc. v. Dir. of Revenue, 875 S.W.2d 539, 542 (Mo. banc 1994) (dry ice used to preserve pork in shipments to customers was exempt from use tax as it was resold in that the value of the dry ice was factored directly or indirectly into the total consideration paid for the pork); King v. Nat'l Super Mkts., Inc., 653 S.W.2d 220, 222 (Mo. banc 1983) (grocery store resold bags to its customers because cost of bags was factored in to cost of groceries), abrogated by Sipco, 875 S.W.2d at 542 (King implied that the holder of goods must show a calculated cost specifically factored into the price for resale to claim the resale exemption, but Sipco held this specific calculation was no longer necessary).

Previous cases have applied the resale exemption in the context of the loan or rental of an item to a customer, rather than an outright transfer of title or ownership.

In Weather Guard, Inc. v. Director of Revenue, 746 S.W.2d 657 (Mo.App.1988), the court⁹ relied on previous decisions of this Court in holding that an insulation wholesaler qualified for the resale exemption on its purchases of insulation installation machines that...