Sipco, Inc. v. Director of Revenue

• Decision Date: 26 April 1994
• Docket Number: No. 76165,76165
• Parties: SIPCO, INC., d/b/a Monfort Pork, Appellant, v. DIRECTOR OF REVENUE, State of Missouri, Respondent.
• Court: Missouri Supreme Court

Page 539

875 S.W.2d 539

SIPCO, INC., d/b/a Monfort Pork, Appellant, v. DIRECTOR OF REVENUE, State of Missouri, Respondent.

No. 76165.

Supreme Court of Missouri,

En Banc.

April 26, 1994.

John P. Barrie, St. Louis, for appellant.

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

PRICE, Judge.

Sipco, Inc. appeals from a decision of the Administrative Hearing Commission (AHC), upholding assessments of Missouri use tax, additions to tax, and interest issued by the Director of Revenue (Director) for the taxable period beginning September 1, 1988, and ending June 30, 1991. The questions before the Court are: whether use tax may be assessed against Sipco's purchases of dry ice to preserve pork products during delivery to customers; whether use tax may be assessed against Sipco's purchases of natural gas used to singe the hair off hog carcasses during processing; and whether Sipco was willfully negligent in failing to pay use tax. We hold that the dry ice purchases are exempt from use tax as purchases for resale; the natural gas purchases are subject to use tax because the gas did not become a component part or ingredient of new manufactured property; and certain of the penalties and additions assessed against Sipco are set aside.

I.

Sipco is a corporation in the business of butchering hogs. During the taxable period, Sipco used various methods to package the resulting pork products. In order to comply with United States Department of Agriculture (USDA) regulations and to maintain wholesomeness during delivery as required by its customers, Sipco used dry ice in packaging its fresh pork products.

Sipco's product prices depended upon the type of product being sold and the type of packaging. In determining the base price for any given pork product, Sipco used the USDA daily market quotes. A premium was added to cover the cost of more expensive packing techniques such as cry-o-vac vacuum sealing or gas flushing when requested by customers. No specific determination was made to indicate the cost of dry ice in relation to the total product cost.

The butchering process involved use of a natural gas fired singer. The hog carcasses were passed through a singer box where they were enveloped in natural gas flames that loosened or removed hair.

During the taxable period, Sipco purchased the dry ice and natural gas from out-of-state vendors and paid no Missouri sales or use tax on the purchases. The Director assessed use tax of $2,367.08 on the dry ice purchases and $4,833.32 on the natural gas purchases. Sipco contests the assessment of use tax on these purchases, except for 50% of the natural gas. Subsequent to the hearing before the AHC, Sipco stipulated that amount of natural gas was used outside of the singer.

II.

Missouri has adopted a system of taxation of tangible personal property focused upon sales "at retail". Sales that occur within the State of Missouri are subject to a sales tax. § 144.020. ¹ Out of state purchases are subject to a compensating use tax. § 144.610. Both the sales and use tax statutes contain exclusions and exemptions that eliminate taxation of the sale or use of property which is to be resold. § 144.010(8); § 144.605(10); § 144.615(6). These sections avoid multiple taxation of the same property as it passes through the chain of commerce from producer to wholesaler to distributor to retailer.

In the present case, Sipco purchased its dry ice out of state and the use tax is at issue. Sipco argues that its purchases of the dry ice are not subject to the use tax because the ice was held for resale. Section 144.615(6) exempts from use tax "[t]angible personal property held by processors, retailers, importers, manufacturers, wholesalers, or jobbers solely for resale in the regular course of business." ² For present purposes:

The definition of resale in this section is interchangeable with the definition of 'sale' found in section 144.605(5).

King v. National Supermarkets, Inc., 653 S.W.2d 220, 221 (Mo. banc 1983) (citing Smith Beverage Co. v. Reiss, 568 S.W.2d 61, 64 (Mo. banc 1978)). A "sale" is defined as:

[A]ny 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 ...

§ 144.605(5).

It is clear from the record that dry ice is tangible personal property that Sipco transferred to its customers in boxes of fresh pork products. The Director contends, nevertheless, that the dry ice transfers were not "sales," because no consideration flowed from the customers to Sipco as required by § 144.605(5). ³ The Director's argument is based upon two decisions of this Court that, although consistent on their facts, contain somewhat inconsistent dicta.

In King v. National Super Markets, Inc., 653 S.W.2d 220 (Mo. banc 1983), we held that a grocery store's purchases of grocery bags were not subject to use tax, because the bags were "sold" by the store to customers in the regular course of business. Although customers were not charged independently for the bags each time they bought groceries, the store introduced evidence that the cost of the bags was factored into the overall price customers paid for groceries. Evidence showed that the charge for bags amounted to approximately .35 percent of the total price customers paid for groceries. Id. at 221. See also Smith Beverage Co. of Columbia v. Reiss, 568 S.W.2d 61 (Mo. banc 1978) (holding purchase of bottles by a soft drink bottler exempt from use tax, because bottler sold bottles containing its product to customers).

On the other hand, in House of Lloyd v. Director of Revenue, 824 S.W.2d 914 (Mo. banc 1992), the Court imposed a use tax upon strapping material and styrofoam packing peanuts used in the packing process. House of Lloyd primarily determined that the packing process was not "fabrication" and thus not exempt from use tax under § 144.030.2(5). The Court also briefly noted, however To the extent that National Super Markets and House of Lloyd imply that the holder of goods must show a calculated cost specifically factored into the price for resale to take advantage of the resale exemption, they are misleading and should no longer be followed. Neither § 144.615(6) nor § 144.605(5) require such a specific allocation. Instead, § 144.605(5) merely directs our attention to whether there was: (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. The statute indicates the elements that are controlling.

                that these items were not exempt from use tax as goods held for sale because there was no evidence that a separate charge was assessed for the items or that a charge was factored into the price of the merchandise.  House of Lloyd, 824 S.W.2d at 920.   In fact, House of Lloyd's vice president and controller testified that the items were not sold to anybody but were used "entirely by the House of Lloyd."  Id
                

The record before us establishes that Sipco packed its pork products in dry ice for shipping to its purchaser. Sipco neither retained the dry ice, nor consumed it for purposes other than to transfer it to the customer. ⁴ The purchaser received the dry ice along with the pork and was free to use or discard the dry ice as it saw fit. While there was no extra or explicitly stated charge for the dry ice, one need not be an accountant to understand that the value of the dry ice was factored directly or indirectly into the total consideration paid for the pork. Accordingly, the dry ice that Sipco purchased for transfer to its customers and that was used for that purpose ⁵ is exempt from use tax as property held for resale. ⁶ This is so regardless of whether the consideration received by Sipco is specifically allocated between the pork and the dry ice or is stated simply as a total price for the product as received. The decision of the AHC is reversed as to the assessment of use tax against Sipco's purchases of dry ice.

III.

Next, we consider whether the natural gas used in Sipco's gas fired singer became a component part or ingredient of new manufactured property and was therefore exempt from use tax under §§ 144.030.2(2) and 144.615(3). Sipco's processing of live hogs into marketable pork products constituted manufacturing. See Wilson and Co., Inc. v. Department of Revenue, 531 S.W.2d 752 (Mo.1976). It is also true that Sipco's products were "intended to be sold ultimately for final use or consumption" as required by § 144.030.2(2). Nevertheless, the natural gas...