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Missouri - 2005 - Sales and Use Tax: Telephone Equipment Qualified for Manufacturing Exemption (Source)
Items purchased by a telephone company to produce telephone services were exempt from Missouri use tax as machinery and equipment used directly in manufacturing. Equipment used to provide telephone service, including networking equipment and transmission equipment, satisfied the integrated plant doctrine. Equipment used to provide vertical services was also exempt because the vertical services were intangible products manufactured by the taxpayer. However, the Administrative Hearing Commission (AHC) incorrectly applied the integrated plant doctrine in determining that components used in pay telephones were used directly in manufacturing. The AHC must reconsider the taxability of pay telephone components on remand.
Telephone Network Equipment
In a previous decision in
this case (Southwestern Bell Telephone Co. v. Director of
Revenue (Bell I), 78 S.W.3d 763 (2002)), the Missouri Supreme
Court held that telephone services provided by the taxpayer
constituted manufacturing. The Court instructed the AHC to
determine on remand whether the items purchased by the taxpayer
were equipment used directly in manufacturing. The AHC correctly
interpreted the Supreme Court's holding in Bell I when it
determined the taxpayer's telephone network equipment was used
directly in manufacturing. Contrary to the Director of
Taxation's assertion, Bell I did not hold that
manufacturing occurred only in the conversion of voice to
electronic signals that occurred in customer-owned telephones on
customers' premises. Therefore, network components were part of
the manufacture of telephone service and could qualify for the
manufacturing exemption.
The AHC correctly applied the integrated plant doctrine to determine that component parts of the taxpayer's telephone system were used directly in manufacturing. As required by the doctrine, the equipment was close, physically and causally, to the finished product, even though the telephone system performed some functions at customers' premises on customers' equipment. The integrated plant doctrine does not require that machinery and equipment be located in the same building or have common ownership to qualify for the manufacturing exemption. The taxpayer's manufacture of telephone service occurred throughout the entire telephone system. Although the component parts of the system were spread over far distances, they were not scattered or unconnected. Instead, the entire system operated continuously to create a single product in an integrated and coordinated process.
Transmission Equipment
Transmission equipment was also
used directly in manufacturing because it satisfied the
integrated plant doctrine. The equipment was necessary for the
production of telephone service in that it enabled signals to be
carried appreciable distances. Also, the equipment was close,
physically and causally, to the finished product of telephone
service. Finally, the equipment operated harmoniously with the
taxpayer's other exempt equipment in an integrated and
synchronized system.
Vertical Services Equipment
Equipment used to provide
vertical services, including caller ID, call-blocker, call
trace, call forwarding, call waiting, and three-way calling,
also qualified for the manufacturing exemption because, although
the services were not necessary for the production of telephone
services under the holding in Bell I, they were
additional intangible products manufactured by the taxpayer.
Equipment used to provide vertical billing services was also
exempt because the taxpayer presented evidence to show that the
billing services were manufactured products and not merely a
means by which the taxpayer charged its customers.
Pay Telephone Components
The AHC incorrectly applied the
integrated plant doctrine in concluding that components used in
pay telephones qualified for the manufacturing exemption, even
though the pay telephone components were not absolutely
essential to the provision of telephone service and were not
closely connected with production components. If a component
does not satisfy all three prongs of the integrated plant
doctrine, that component cannot be exempt. On remand, the AHC
must make new findings regarding pay telephone components and
reconsider all three prongs of the integrated plant doctrine.
NEWS-STATE, 2005TAXDAY, (Dec. 23, 2005), Item #S.10
Southwestern Bell Telephone Co. v. Director of Revenue, Missouri Supreme Court, No. SC86441, December 20, 2005, ¶202-578
Other References:
MO St. Tax Rep. at ¶60-510
MO St. Tax Rep. at ¶60-720
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