Utilicorp United v. Director of Revenue

• Decision Date: 18 December 2001
• Docket Number: No. SC 83599.,SC 83599.
• Citation: 75 S.W.3d 725
• Parties: UTILICORP UNITED, INC., d/b/a Missouri Public Service Company, Sho-Me Power Electric Cooperative, Inc., and NW Electric Power Cooperative, Inc., Appellants, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

75 S.W.3d 725

UTILICORP UNITED, INC., d/b/a Missouri Public Service Company, Sho-Me Power Electric Cooperative, Inc., and NW Electric Power Cooperative, Inc., Appellants, v. DIRECTOR OF REVENUE, Respondent.

No. SC 83599.

Supreme Court of Missouri, En Banc.

December 18, 2001.

Rehearing Denied January 22, 2002.

Edward F. Downey, Jefferson City, Juan D. Keller, John P. Barrie, B. Derek Rose, St. Louis, for Appellant.

Jeremiah W. (Jay) Nixon, Atty. Gen., Todd Iveson, Sp. Asst. Atty. Gen., James R. Layton, State Sol., Jefferson City, for Respondent.

MICHAEL A. WOLFF, Judge.

Missouri's sales and use tax law offers an exemption from sales or use tax for purchases of equipment directly used in manufacturing. The parties agree that the production of electricity is within the definition of manufacturing under Missouri's sales and use tax law. The question presented here is whether transformers, voltage regulators, and other equipment used between the electric generators and the place where the electricity is delivered to the customer are used directly in manufacturing within the meaning of section 144.030.2(4) and (5).¹

The utilities seeking the sales tax exemption bear the burden of proving their entitlement to the exemption. While a plausible, if somewhat strained, argument might be made that the manufacturing process for electricity continues up to the point of delivery to the customer, the argument for treating the equipment as part of the transmission process is more compelling. The question is whether the utilities have shown entitlement to the exemption; this Court holds that they have failed to carry their burden.

The administrative hearing commission held that the utilities do not qualify for the exemption. This Court has jurisdiction of the appeal. Mo. Const. art. V, section 3. The Commission's decision is affirmed.

Facts

The facts are stipulated. Utilicorp United, Inc., NW Electric Power Cooperative, Inc., and Sho-Me Electric Cooperative, Inc., are Missouri electric utilities that sell electricity to their customers.² Utilicorp, a for-profit corporation, and Sho-Me, an electric cooperative formed under chapter 394, have generating facilities where they produce electricity. They also buy electricity from other utilities, which they sell to their customers. NW Electric Power Cooperative, also a chapter 394 cooperative, does not have generating facilities and buys all of its electricity from Associated Electric Cooperative, Inc. Though Sho-Me has a hydroelectric plant, it buys most of its electricity from Associated Electric Cooperative.

During the tax period in question, Utilicorp had approximately 246,000 customers in western Missouri in four different groups: commercial, residential, retail and wholesale. Sho-Me had 27 customers in south-central Missouri and elsewhere, and its customers were electric cooperatives, municipalities and one industrial customer. NW had seven electric-cooperative customers in northwest Missouri and elsewhere.

All three utilities have substations and other equipment sites throughout their service areas for delivering electricity to their customers. Electric utilities recognize three stages in providing electricity to customers production, transmission, and distribution.

Production refers to the generation of electricity by converting the potential of coal, nuclear fuel, or dammed water into electricity. Production also refers to the purchase of electricity, generated by someone else, for resale to a utility's own customers.

Transmission involves the transfer of electricity from generating sources to local distribution systems. Transformers, regulators, and other equipment are used to change the voltage, amperage, or power factor of electricity to facilitate its transmission across various distances within the utility's system.

Distribution involves transfer of electricity to the customers. Distribution also utilizes various devices and equipment, some of which change the voltage, amperage, or power factor of electricity to meet the customers' demands or regulatory standards.

The equipment purchases for which the utilities claim a tax exemption include:

(1) Step-down transformers: transformers used to reduce the voltage and increase amperage, predominately at substations or on poles or transformer pads near the customers' meters. These purchases constitute most of the tax money claimed. Utilicorp's claim is for $35,188.09; Sho-Me's claim is for $77,131.00; and NW's claim is for $42,710.08.

(2) A current transformer: a small transformer connected to the power system and in this case located in a power substation to take measurements of currents and voltages. Utilicorp claimed a $32.70 refund for the use tax paid on one current transformer.

(3) Capacitors: instruments located in the vicinity of the customers and useful for controlling voltage to meet regulatory standards for delivery of power to the customers. Sho-Me claimed a refund of $243.36 and NW claimed a refund of $440.26 in use taxes on purchases of capacitors.

(4) Supervisory control and data acquisition hardware: equipment used to provide information back from the distribution system to the control equipment for the generator in order to adjust the generators' outputs to the needs of the customers. Sho-Me claimed $3,078.66 and NW claimed refunds of $13,117.15 of use tax on such hardware.

Discussion

None of the equipment on which use tax refunds are claimed is used in generating electricity. The parties agree that generating electricity is manufacturing within the meaning of the statute, section 144.030.2(4)³ and (5).⁴

The question is whether the transmission and distribution of electricity are also "manufacturing." Because this case involves an exemption from sales and use tax, it is the taxpayers' burden to show that they qualify for the exemption. Sections 136.300.1 and 2 and 621.050.2, RSMo 2000.⁵ See, e.g., Westwood Country Club v. Director of Revenue, 6 S.W.3d 885, 887 (Mo. banc 1999).

This Court's decision in Galamet, Inc. v. Director of Revenue, 915 S.W.2d 331, 333 (Mo. banc 1996), traces the various factual settings of manufacturing, which includes the changing of an item or product so as to make it suitable for a new use. Production of intangibles, such as computer data, may be included as manufacturing. International Business Machines Corp. v. Director of Revenue, 958 S.W.2d 554, 557 (Mo. banc 1997).

Once coal, nuclear fuel or dammed water has been converted into electricity by the generating process, it is rational to conclude that a "product" has been "manufactured." But since electricity is invisible, if not exactly intangible,⁶ discussions of electricity tend to involve the use of analogies and figures of speech. We speak of "currents" and "flows" in the same way we describe water.⁷

The utilities invite us to think of the production and distribution of their product the way we think of cement, a product whose manufacturing is completed in cement mixers as it is being delivered.⁸

On the other hand, the director of revenue invites us to think of the product as analogous to the process in House of Lloyd v. Director of Revenue, 824 S.W.2d 914 (Mo. banc 1992), which involved the repackaging and shipping of items already manufactured.

These analogies to the world of visible objects are helpful in supplying the mental imagery needed to discern how far the concept of manufacturing can be stretched to fit the various stages of electric production, transmission, and distribution. Employing these analogies, the cement mixer example falls short because the raw materials, including water, sand, and gravel, are put in the mixer, which makes a new product while it is being delivered. The essential question is: Does the transforming and regulating of electricity by these devices result in a "new" product or simply the "repackaging" of an existing product? The repackaging example seems closer to the point.

The product—electricity—may have its voltage increased, and thereby its amperage reduced, for transmission across distances.⁹ And its voltage may be reduced and its amperage thereby increased near the customer's meter to deliver electricity at a voltage suitable for the customer's needs. But the essential product, and the total electric power expressed in watts, remains fundamentally unchanged from the time and place the electricity was generated.

It is, thus, rational as well to conclude that the equipment whose purchase is at issue here is used in the transmission and distribution of the product and is not, in the words of section 144.030.2(4) and (5), "used directly" in manufacturing.

To carry their burden of showing that they qualify for the exemption, the utilities contend that the equipment in each case is part of an "integrated plant." See Concord Publishing House, Inc. v. Director of Revenue, 916 S.W.2d 186, 191 (Mo. banc 1996), and DST Systems, Inc. v. Director of Revenue, 43 S.W.3d 799, 803 (Mo. banc 2001). DST Systems is pertinent, the utilities contend, because the Court held that DST's computer system was part of an integrated plant that produced printed statements through a different, but related, corporation and at a site apart from the DST computers. The equipment at issue here is not at the generator sites, but rather is dispersed throughout the utilities' service areas.

DST Systems is of no help to the utilities. Much of the electricity transmitted and distributed by them is not generated by them. In particular, NW has no generating facilities and, thus, clearly cannot show that its facilities are part of anyone's integrated plant.

More fundamentally, none of the utilities can show that, through the use of this equipment, the utility makes something new and different, whether it generates the electricity or buys the electricity from others. Though volts and amperes may change during the transmission and distribution, not every change is "manufacturing." L & R Egg Co. v....