Travelhost of Ozark Mountain Country v. Director of Revenue, 71861

• Decision Date: 13 March 1990
• Docket Number: No. 71861,71861
• Citation: 785 S.W.2d 541
• Parties: TRAVELHOST OF OZARK MOUNTAIN COUNTRY, Appellant, v. DIRECTOR OF REVENUE, Respondent. MID AMERICA TRAVELHOST ENTERPRISES, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 541

785 S.W.2d 541

TRAVELHOST OF OZARK MOUNTAIN COUNTRY, Appellant, v. DIRECTOR OF REVENUE, Respondent.

MID AMERICA TRAVELHOST ENTERPRISES, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. 71861.

Supreme Court of Missouri En Banc.

March 13, 1990.

Rehearing Denied April 17, 1990.

John R. Lewis, Mary Lou Martin, Springfield, for appellant.

William L. Webster, Atty. Gen., Mark S. Siedlik, Asst. Atty. Gen., Jefferson City, for respondent.

ROBERTSON, Judge.

The Director of Revenue (the Director) assessed use tax against appellants, Travelhost of Ozark Mountain Country (Travelhost Ozark) and Mid-America Travelhost Enterprises, Inc. (Mid-America). Travelhost Ozark and Mid-America challenged the assessments, claiming an exemption from use taxation under Section 144.034, RSMo 1986. The issue is whether appellants' purchase and distribution of Travelhost magazine on behalf of its advertising customers constitutes the tax-exempt sale of advertising.

The Administrative Hearing Commission (the Commission) found appellants' business activities taxable. Appellants sought review in this Court. Because this case involves the construction of the revenue laws of this State, we have exclusive appellate jurisdiction. Mo. Const. art. V, § 3. The decision of the Administrative Hearing Commission is affirmed in part and reversed in part and remanded with directions.

I.

Travelhost Ozark and Mid-America are licensees of Travelhost Magazine, Inc., of Dallas, Texas (Travelhost Texas). Appellants are advertising agencies in the business of selling advertising and distributing a magazine entitled, Travelhost, which is aimed at tourists and other travelers. Travelhost Texas publishes and prints the Travelhost magazine. The magazine is a controlled-circulation publication, not available by subscription or on newsstands, but only by distribution, free of charge, in hotels, motels and other businesses frequented by tourists and travelers. The sole purpose of the magazine is to serve as an advertising vehicle targeted to the tourist/traveler market.

Each of the appellants has an exclusive right to sell advertising for the Travelhost magazine within the geographic territory of its license. In addition, as part of the obligations imposed by the license, appellants distribute the Travelhost magazine to hotels, motels and other businesses within the territory of their respective licenses.

The magazine itself consists of a national section and a local section. Each of the appellants is solely responsible for the composition of the local section within its territory. Appellants fill their respective local sections by the sale of advertising services to merchants and others who wish to advertise in the Travelhost magazine. Appellants' advertising services, which are made known to their customers through sales personnel, include advice and counseling in advertising, the development of advertising campaigns and the preparation of advertising art work and copy. Appellants forward the advertising art work and copy to Travelhost Texas along with necessary editing instructions for printing the advertisements in the Travelhost magazine.

By virtue of their contracts with Travelhost Texas, appellants are obligated to purchase a minimum of 3,000 Travelhost magazines from Travelhost Texas each week. The price paid by the appellants is determined by the number of pages they reserve for the local section. The magazines are printed in Texas, shipped at appellants' expense by common carrier and delivered to the appellants. Appellants then deliver the magazines to merchants and businesses whose clientele the magazine targets.

II.

Appellants first argue that they were denied due process of law before the Commission because the Commissioner who rendered the decision was not the Commissioner who heard the evidence. During the pendency of this matter before the Commission, Commissioner J. William Campbell, who presided at the hearing, died unexpectedly.

Section 536.080.2, RSMo 1986, provides:

In contested cases, each official of an agency who renders or joins in rendering a final decision shall, prior to such final decision, either hear all the evidence, read the full record including all the evidence, or personally consider the portions of the record cited or referred to in the arguments or briefs.

The decision of the Commission recites "Commissioner Paul R. Otto, having read the record and the briefs filed by the parties, renders the following Findings of Fact, Conclusions of Law and Decision pursuant to Section 536.080.2, RSMo 1986."

Appellants argue that the second Commissioner "could not be a fair fact finder without hearing the testimony in order to determine the credibility of witnesses." We find nothing in the record or in appellants' written or oral arguments that even remotely suggests that the credibility of witnesses is at issue here. Appellants' arguments contend no more than that they are advertising agencies that provide a complete package, including sales, creative assistance, printing and distribution of advertising through the magazine, and that their activities are exempt from use tax under Section 144.034. The Director agrees that appellants are advertising agencies, but argues that the purchase of materials, in this case the magazine, used in producing advertising by an advertising agency is a taxable event.

This is a legal, not factual dispute; the question is whether appellants' purchases of the magazines from Travelhost Texas are taxable. This is not a case of two or more witnesses contradicting one another. Under these circumstances, we think that compliance with Section 536.080 provides all of the process appellants are due here. Dittmeier v. Missouri Real Estate Commission, 316 S.W.2d 1, 4-5 (Mo. banc 1958); Schrewe v. Sanders, 498 S.W.2d 775, 778 (Mo.1973); Phil Crowley Steel Corp. v. King, 778 S.W.2d 800, 804 (Mo.App.1989). The point is denied.

III.

We come now to the substantive issue. Section 144.610.1 imposes a compensating use tax "for the privilege of storing, using or consuming within this state any article of tangible personal property...." The use tax is calculated at the same percentage as the sales tax. A "sale at retail" is a sale "to the purchaser, for use or consumption and not for resale in any form as tangible personal property...." Section 144.010.1(8), RSMo 1986. This definition applies to both sales and use taxes. Southwestern Bell Telephone Co. v. Morris, 345 S.W.2d 62, 67 (Mo. banc 1961). Exemptions granted under the sales tax apply to the use tax. Id. Statutes permitting exemptions from taxation are strictly construed against the taxpayer. Missouri Public Service Co. v. Director of Revenue, 733 S.W.2d 448, 449 (Mo. banc 1987).

Appellants take a McLuhanesque tack, arguing that the medium is the message. They say that the payment of printing costs to Travelhost Texas is "advertising sales activity in that the magazine was the medium utilized to distribute the advertising and therefore the cost of printing is not subject to Missouri use tax." Appellant relies on the definition of "advertising" promulgated by the Director pursuant to his authority under Section 144.270, RSMo 1986, to show that the medium through which the advertising is distributed is part of the service that is sold to the advertiser. The regulation states:

Advertising is the expression of an idea created and produced for reproduction and distribution through the media, which is designed to promote sales of a particular product or service or otherwise affect consumer behavior.

12 C.S.R. 10-3.590(1)(A).

The Director contends that the purchase of the magazines by appellants from Travelhost Texas is the purchase of tangible personal property for use in producing advertising. Appellants' acquisition of the magazine is therefore taxable under the clear language of Section 144.034, the Director concludes.

Section 144.034 advises that "[t]he sales of advertising by ... advertising agencies ... shall be considered the sale of a service and not the sale of tangible personal property...." However, "[p]urchases of tangible personal property which are for use in producing advertising by [advertising agencies] ... shall be deemed to be purchases for use or consumption and not for resale...." Id.

Section 144.034 refers to two distinct activities: the statute exempts sales of advertising from taxation; the statute permits the collection of sales or use tax on purchases made by advertising agencies of tangible personal property for use in producing advertising. By clear language, the General Assembly has exempted sales of advertising from taxation. There is no claim in this case that the Director has attempted to tax sales made by appellants.

Also by clear language, the legislature has determined that purchases made by advertising agencies of tangible personal property for use in advertising are subject to sales/use taxation. Section 144.010.1(8), RSMo 1986, defines a "sale at retail" as a transfer of the title to, or ownership of, tangible personal property "for use or consumption and not for resale in any form as tangible personal property...." We believe that the "purchase" language in Section 144.034 exists to pretermit claims by advertising agencies that their purchases of tangible personal property are not for their final use and consumption, are not "sales at retail" and are not taxable. Instead, Section 144.034 unambiguously provides for taxation of purchases of tangible personal property by advertising agencies.

There is a prescience in Section 144.034 not often found in the statutes. The General Assembly apparently understood that the tangible personal property used in advertising is often of insignificant value when compared to the creative services an advertising agency sells its customer. The creative service provided by an advertising agency is an idea; ideas are born in the cerebrum, but are of marketable value...