Southwestern Bell Tel. v. Director of Rev.
| Decision Date | 11 June 2002 |
| Docket Number | No. SC 83859.,SC 83859. |
| Citation | 78 S.W.3d 763 |
| Parties | SOUTHWESTERN BELL TELEPHONE COMPANY, Appellant, v. DIRECTOR OF REVENUE, Respondent. |
| Court | Missouri Supreme Court |
Juan D. Keller, John P. Barrie, B. Derek Rose, St. Louis, Edward F. Downey, Jefferson City, for Appellant.
Jeremiah W. (Jay) Nixon, Atty. Gen., Alana M. Barragan-Scott, Deputy State Solicitor, Jefferson City, for Respondent.
"This is another case requiring the application of a statutory framework that first took shape in the thirties and forties to the technology of the eighties and nineties." Bridge Data Co. v. Director of Revenue, 794 S.W.2d 204, 205 (Mo. banc 1990).
Southwestern Bell Telephone Company ("Bell")appeals a decision by the Administrative Hearing Commission ("AHC"), denying Bell a refund of use tax paid on machinery used to provide basic and vertical telephone services. GTE Automatic Elec. v. Director of Revenue held in 1989 that telephone services were not products for the purpose of the sales and use tax exemptions. 780 S.W.2d 49 (Mo. banc 1989). The rationale supporting GTE was seriously eroded by Bridge Data, 794 S.W.2d 204, and Concord Pub. House, Inc. v. Director of Revenue, 916 S.W.2d 186, 189 (Mo. banc 1996). International Business Machines Corp. v. Director of Revenue expressly overruled GTE, concluding that "a product is an output with a market value, it can be either tangible personal property or a service." 958 S.W.2d 554, 557 (Mo. banc 1998). In this case, IBM's lead is followed; telephone services constitute the "manufacturing" of "products" for purposes of section 144.030.2, RSMo Supp. 1992, overruling whatever was left of GTE. The AHC decision is reversed, and the case is remanded.
Bell filed claims for a refund of use tax remitted during the second quarter of 1992 on the purchases of machinery and equipment used to produce basic telephone service and vertical telephone products.1 Bell listed numerous items of machinery and equipment, including inventories, computers, electronic analog and digital switching devices, circuit equipment, and various other components involved in transmitting and processing information required for telephone communications and services.
A brief, if simplistic, overview of the mechanics of basic telephone service is useful. When a person picks up a telephone, a dial tone is produced by electrical currents flowing between the telephone and the central office switch.2 Once the customer inputs the desired number, the central switch analyzes the electrical pulses or tones to determine the proper routing of the call. A separate system, called the SS7 signaling system, sends out a data message, which is used by the receiving switch to determine whether the line is free or busy. The caller then hears either the familiar ring or busy signal. If the person on the receiving end picks up the telephone, a voice connection is established. The vibrations of a person's voice are converted by the telephone into an analog signal. Depending on the type of switching office, the signal remains analog as it is transmitted or is converted into a digital signal.
An analog signal travelling over a telephone wire loses strength because of the resistance of the wires. The signal, along with any additional noises on the circuit must be amplified to travel over long distances. If the switching office is analog, the signal is transported across the wire, amplified as necessary and then reconverted into a voice signal for the other listener.
If the switching office is digital, the analog signal is "sampled" at a very high rate into a digital signal.3 This signal goes through the system and is converted into a voice signal on the other end. Instead of being a sound wave, a digital signal is transported as a package of data. Because it is digital data that can be regenerated, instead of being amplified, there is `no risk of other noises being amplified with the voice data.
The vertical services operate in a similar manner. Various electrical signals and data are transported from one telephone, through the network and received by another telephone. Along the way, the information is manipulated by computers to provide various services, such as call-waiting or Caller ID.
The AHC concluded that basic telephone and vertical services were "products" within the meaning of sections 144.030.2(4) and (5). However, it concluded that telephone service is not manufacturing. Bell claims that the purchases and machinery and equipment are used to manufacture products within the meanings of those sections.4
This Court has jurisdiction pursuant to Mo. Const. art. V, section 3 and reviews the AHC's interpretation of revenue law de novo. Concord Pub. House, Inc. v. Director of Revenue, 916 S.W.2d 186, 189 (Mo. banc 1996). The AHC's factual determinations are upheld if they are supported by the law and, after reviewing the whole record, there is substantial evidence to support them. DST Systems, Inc. v. Director of Revenue, 43 S.W.3d 799, 800 (Mo. banc 2001); section 621.193, RSMo 2000.
Bell claims that its purchases, which include both new and replacement machinery and equipment, fall under section 144.030.2, which provides sales and use tax exemption for:
(4) Machinery and equipment, and the materials and supplies solely required for the installation or construction of such machinery and equipment, replacing and used for the same purposes as the machinery and equipment replaced by reason of design or product changes, which is purchased for and used directly for manufacturing or fabricating a product which is intended to be sold ultimately for final use or consumption (5) Machinery and equipment, and the materials and supplies solely required for the installation or construction of such machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining or fabricating a product which is intended to be sold ultimately for final use or consumption;
The Director contends that Bell did not satisfy the three elements common to both subsections, that exemptions will only be given for (1) machinery and equipment (2) used directly in manufacturing (3) a product that is intended to be sold ultimately for final use or consumption.6
Over the last few decades, the growth of modern information and communication technologies has challenged lawmakers and courts to keep pace with, modern industry. One area of specific difficulty in Missouri has been the application of the manufacturing sales and use tax exemptions to intangible products or services. Two somewhat interrelated issues, the definitions of "product" and "manufacturing", have been at the heart of this jurisprudence.
Missouri first considered the exemption status of basic telephone service in GTE Automatic Elec. v. Director of Revenue, 780 S.W.2d 49 (Mo. banc 1989). In a 4-3 decision, GTE held telephone service companies were not entitled to an exemption under the statutes. The decision rested on two related rationales. First, GTE squarely held that voice transmission was a "service," not a "product," and that section 144.030.2 limited the exemption to products. As the Director concedes, this issue was dispositive.7 Second, the Court also touched on the issue of whether telecommunications constitutes "manufacturing", which is discussed below.
The very next year, Bridge Data substantially undercut the "product" centered rationale of GTE. 794 S.W.2d 204. In Bridge Data, the Court allowed an exemption for equipment used to collect, process and transmit financial data, holding that "[t]he statute contains no explicit requirement that the product be `tangible' in order for the manufacturing exemption to apply." 794 S.W.2d at 206.
The next decision in this line was Concord Pub. House, Inc. v. Director of Revenue, 916 S.W.2d 186, 189 (Mo. banc 1996). In that case, the Court reaffirmed the holding and rationale of Bridge Data that "organizing information through computer technology is `manufacturing'" and that the exemption applied to electronic equipment "even though the final product was intangible." 916 S.W.2d at 191.
Finally, the "product" holding of GTE was expressly overruled in International Business Machines Corp. v. Director of Revenue, 958 S.W.2d 554, 557 (Mo. banc 1998). IBM allowed an exemption for equipment used to analyze financial data and to transmit this data to customers, either in hard copy or electronic form. IBM specifically stated: 958 S.W.2d at 557.
Though only squarely holding that telephone service is not a "product", GTE also touched on the issue of whether telecommunications constitutes "manufacturing". Primarily, the Court determined that because telephone service was not a product, it could not be manufactured. The Court also discussed the manufacturing issue in terms of other non-communications cases. A brief review of those cases is helpful.
Manufacturing has been described both as a process that "takes something practically unsuitable for any common use and changes it so as to adopt it to such common use." GTE, 780 S.W.2d at 51, quoting West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140, 143 (Mo.1970), and as the production of raw materials into "products for sale which [have] an intrinsic and merchantable value." GTE, 780 S.W.2d at 51, quoting Heidelberg Central, Inc. v. Director of Dept. of Revenue, 476 S.W.2d 502, 506 (Mo.1972).
Manufacturing cases can essentially be divided into two categories. L & R Egg Co. v....
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