Sneary v. Director of Revenue

• Decision Date: 23 November 1993
• Docket Number: No. 75530,75530
• Citation: 865 S.W.2d 342
• Parties: Richard R. SNEARY, d/b/a Sneary Architectural Illustration, Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 342

865 S.W.2d 342

27 A.L.R.5th 959

Richard R. SNEARY, d/b/a Sneary Architectural Illustration, Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. 75530.

Supreme Court of Missouri En Banc.

Nov. 23, 1993.

Rehearing Denied Dec. 21, 1993.

G. William Quatman, Randal L. Schultz, Kansas City, for appellant.

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

John P. Jennings, Jr., Kansas City, for amicus curiae AIA.

COVINGTON, Chief Justice.

This is an appeal from the decision of the administrative hearing commission. Richard R. Sneary, appellant, is an architect licensed by the state of Missouri, doing business as Sneary Architectural Illustration. The director of revenue, respondent, assessed sales tax on Sneary's sales of architectural illustrations that Sneary prepared and sold to architectural firms from May 14, 1987, through February 28, 1991. Sneary challenged the assessment, arguing that the true object of the transactions was the sale of his professional services rather than the illustrations themselves. The administrative hearing commission upheld the assessment, concluding that the transactions involved the sale of tangible personal property and that the assessment was not unexpected. That decision is affirmed.

Architects traditionally prepared architectural illustrations as part of their professional services. Today, however, specialists often prepare these illustrations. Architectural firms either employ specialists in-house or contract the project to third parties such as Sneary.

Architectural firms bring Sneary rough ideas, sketches, and photographs that Sneary refines into three-dimensional illustrations. Sneary often receives little guidance; therefore, he must add details and initiate changes. Sneary presents preliminary sketches for review, then refines them according to client input. The presentation and refinement process may occur several times during a single project, with each sketch becoming more refined. After the design is final, Sneary prepares an illustration in ink and watercolor.

Sneary entered into letter agreements to prepare the illustrations, with price based upon an estimated time to complete an illustration. The price was either set at a lump sum or based upon an hourly rate, not to exceed a lump sum. A representative letter agreement reads:

I am prepared to ... produce one aerial and one spectator view, ink and watercolor, illustration for the [specified] project for an amount not-to-exceed $4,500.00 plus ... expenses....

... A finished ink drawing will be submitted for your approval prior to beginning the finished color work on each illustration. The illustrations will be based on a 15"' X 22"' format with a maximum finished size of 1"' less.

Upon completion, Sneary calculated his labor costs on an hourly basis. If total labor costs exceeded the contract price, he absorbed the difference. Except in one instance, none of the billing statements introduced into evidence specified the number of hours that Sneary expended on an illustration. A representative billing statement requested payment for "one 20"' X 12"' ink & watercolor illustration of [specified project] on a 24"' X 18"' board with a mat." Sneary introduced testimony that when he did not produce a final illustration because of a project change or termination, he would be paid for his work to that point. Each of the transactions in the present case, however, included delivery of a final illustration.

After payment was made, the client took possession of the illustration. The client did not have the right to possess any of the interim drawings. Sneary's clients used the illustrations to support or promote their efforts to obtain contracts for building projects.

The Sales Tax

The primary issue is whether the sales by Sneary to his clients constitute the sales of tangible personal property within the meaning of § 144.020, RSMo 1986, or whether, as Sneary asserts, the transactions are nontaxable performances of a service. This Court will affirm the commission's decision upholding the director's assessment of sales tax if it is:

[A]uthorized by law and supported by competent and substantial evidence upon the whole record, ... and if the approval or disapproval of the exercise of authority in question by the administrative hearing commission does not create a result or results clearly contrary to that which the court concludes were the reasonable expectations of the general assembly at the time such authority was delegated to the agency.

§ 621.193, RSMo 1986. In correcting errors of law, this Court will exercise its independent judgment. Daily Record Co. v. James, 629 S.W.2d 348 (Mo. banc 1982). Taxing statutes and regulations must be strictly construed in favor of the taxpayer. St. Louis Country Club v. Admin. Hearing Comm'n, 657 S.W.2d 614 (Mo. banc 1983).

Section 144.020 imposes a sales tax upon every retail sale in Missouri of tangible personal property. § 144.020.1(1), RSMo 1986. Sale at retail is defined in § 144.010.1(8) as "any transfer made by any person engaged in business ... of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption ... for a valuable consideration." The sales tax is imposed on gross receipts: "[T]he total amount of the sales price of the sales at retail including any services ... that are part of such sales." § 144.010.1(3), RSMo Supp.1992.

The transfer of ownership of the tangible architectural illustrations in this case for valuable consideration falls in the literal sense within the sales tax statute. This Court has recognized, however, that the "true object" or "essence of the transaction" determines whether to treat a transaction as a taxable transfer of tangible personal property or the nontaxable performance of a service. The test focuses on the essentials of the transaction to determine the real object the buyer seeks. James v. TRES Computer Sys., Inc., 642 S.W.2d 347 (Mo. banc 1982); K & A Litho Process, Inc. v. Director of Revenue, 653 S.W.2d 195 (Mo. banc 1983). Under the test, this Court has recognized a class of transactions in which tangible personal property serves exclusively as the medium of transmission for an intangible product or service. The intangible component is the true object of the sale; the tangible component is of little utility and may even be discarded after the buyer has used it to obtain access to the intangible component. In such transactions, the intangible object of the sale does not assume the taxable character of the tangible medium, TRES Computer, 642 S.W.2d at 349, or the tangible medium is inconsequential and nontaxable, K & A Litho, 653 S.W.2d at 197.

The decision in this case is dictated by evidence that reflects that the architectural illustrations are the objects of the transactions between Sneary and the architectural firms. The evidence shows that the architectural firms retained Sneary to provide illustrations. No mention was made of other architectural services. The architectural firm's purpose was to obtain an attractive example of what the firm could do for a proposed project so as to persuade a project owner to use the firm's services. Sneary's billings evidence that the object of the transactions were the illustrations. Both the letter agreements and billing statements describe transfers of the illustrations and detail their specific sizes and layouts, reflecting that the buyers placed importance on the tangible illustrations. The fact that Sneary used ink and watercolor only on the final illustrations further reflects that the clients placed importance on the illustrations. Testimony in the record also reveals that Sneary's clients desired and used the illustrations. Sneary's contracts involved the sale of tangible personal property subject to the sales tax.

Sneary contends, nevertheless, that the assessed transactions are within the excluded class because he uses his significant architectural talents and training to interact with the rest of the architectural team to produce a definitive expression of their design concepts in his final illustration. He argues that the architectural illustrations were not the object of the transactions; they merely served as a medium to convey architectural information to clients. Since books, video tapes, audio tapes, maps, and mass produced computer programs ¹ can serve as a medium to convey information, yet be subject to the sales tax, Sneary must distinguish his transactions to avoid the sales tax. He seeks to distinguish the sales in his case by reliance on James v. TRES Computer Service., Inc., 642 S.W.2d 347 (Mo. banc 1982), and K & A Litho Process, Inc. v. Director of Revenue, 653 S.W.2d 195 (Mo. banc 1983).

Neither TRES Computer nor K & A Litho supports Sneary's position. TRES Computer involved the sale of $135,000 worth of custom data and computer programing (program) sold on computer tapes worth fifty dollars. The parties stipulated that the program itself was intangible, but that the tapes were tangible personal property. The tapes were subject to the sales tax. The issue was whether the program lost its intangible nature when transferred to and sold on the tapes. If the program lost its intangible nature, then the seller was liable for sales tax on the combined value of the tapes and the program. This Court held that the program did not lose its intangible nature; therefore, the taxpayer was liable for sales tax only on the fifty dollar tapes.

In TRES Computer this Court emphasized that the intangible program was the ultimate object of the sale, not the tangible tapes; the tapes served merely as a conduit to convey the program, and once the program was transferred to a computer, the tapes were no longer of value to the buyer. The program was not sold as a finished product since the buyer had to enter it into a computer where it would be translated into computer...