Unitog Rental Services, Inc. v. Director of Revenue

• Decision Date: 14 November 1989
• Docket Number: No. 71457,71457
• Citation: 779 S.W.2d 568
• Parties: UNITOG RENTAL SERVICES, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 568

779 S.W.2d 568

UNITOG RENTAL SERVICES, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. 71457.

Supreme Court of Missouri En Banc.

Nov. 14, 1989.

Douglas L. Carter, James M. Matthews, Kansas City, for appellant.

William L. Webster, Atty. Gen., Ronald C. Clements, Richard L. Wieler, David G. Edwards, Asst. Attys. Gen., Jefferson City, for respondent.

CARL R. GAERTNER, Special Judge.

The sole question presented on appeal is whether equipment used to launder garments is "used in manufacturing", entitling appellant to an exemption from the sales and use tax.

The facts are undisputed. In 1987, respondent assessed $12,249.56 in Consumer Use Tax against appellant for its in-state use of eight pieces of equipment purchased from out-of-state vendors. The assessments were based on respondent's position that appellant was not engaged in "manufacturing" for the purposes of § 144.615 and § 144.030.2(4, 5). ¹ On appeal, the Administrative Hearing Commission found that appellant was not liable for assessments on two of the eight pieces of equipment because those machines were used in "manufacturing" and thus were entitled to the Consumer Use Tax exemption. Section 144.030.2(4, 5).

Appellant is in the business of furnishing industrial grade uniform clothing and ancillary items to various businesses pursuant to written rental agreement contracts. Under these contracts appellant agrees to furnish garments for the employees of its customer. The style, quantity, quality, color and enhancements of these garments are selected by the customer, who agrees to rent them for the duration of the contract, typically 36 months. Appellant "custom fits" each garment according to the measurements of each of the customer's employees, adds requested logos or company emblems, company and individual employee names, and delivers a supply of garments to the customer. On a cyclical basis, usually once per week, appellant picks up soiled garments and provides fresh ones. The soiled articles are cleaned, decontaminated, treated, dried, pressed and repaired for the next cycle. Appellant's customers are predominantly engaged in the type of business that causes the employees' garments to become thoroughly infiltrated with industrial soil and, in some instances, toxic contamination. Appellant contends the used garments are utterly useless and of no value until subjected to the particularized processing required to remove whatever type of soil or contaminant may be present.

The Administrative Hearing Commission found that two of the eight pieces of equipment assessed by respondent, a label-making machine and a label-sealing machine, used in the "customizing" process, were used in manufacturing and thus qualified for the exemption. The Commission upheld the assessments on the following machines used in the cleaning process: a steam tunnel, a sleeve press, a tumble dryer, a chemical pump, and two washers. Appellant appeals the Commission's decision concerning these items.

Section 621.193 provides the standard of review of decisions of the Administrative Hearing Commission. Such decisions are upheld when:

authorized 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.

Section 144.030.2 exempts the following from the use tax:

"(4) Machinery and equipment, ... used for the same purpose 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 ..., 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." (Emphasis added)

Tax exemptions are strictly construed against the taxpayer. Missouri Public Service Co. v. Director of Revenue, 733 S.W.2d 448, 449 (Mo. banc 1987).

This Court has employed two different definitions of "manufacturing" within the context of the sales and use tax exemptions. In West Lake Quarry & Material Co., Inc. v. Schaffner, 451 S.W.2d 140 (Mo.1970), we held the process of grinding and crushing rock to various sizes was manufacturing. The Court adopted the Kentucky Court of Appeals' interpretation of the word "manufacturing" in City of Louisville v. Howard, 306 Ky. 687, 208 S.W.2d 522, 527 (Ct.App.1947):

... if a process takes something practically unsuitable for any common use and changes it so as to adapt it to such common use, then such a process may be legally considered as manufacturing within the meaning of the tax exemption statutes.

Heidelberg Central, Inc. v. Director of Revenue, 476 S.W.2d 502 (Mo.1972), offered another definition. There the Court found the printing of items such as business cards, stationery, advertising, business forms, and church bulletins to be manufacturing for the purposes of § 144.030. The Court concluded the printers "... did produce new and different articles by the use of machinery, labor and skill, and they produced products for sale which had an intrinsic and merchantable value and were in forms suitable for new uses." 476 S.W.2d at 506. Further, "... there may be more than one manufacturer in the production processes of many products." Id.

In Wilson & Co., Inc. v. Department of Revenue, 531 S.W.2d 752 (Mo.1976), we found the conversion of live hogs into food fit for human consumption to be manufacturing for the purpose of the sales and use tax exemption. The West Lake Quarry and Heidelberg definitions both conformed to the Wilson facts. It takes something "... practically unsuitable for any common use and change[s] it so as to adapt it to such common use," and produces from raw material a new and different item salable for different use.

Finally, in Jackson Excavating Co. v. Administrative Hearing Commission, 646 S.W.2d 48 (Mo.1983), the Court again followed the lead of the Kentucky courts in finding the processing of "raw" water into potable water to be manufacturing. Even though both the beginning and ending products were still...