On April 18, 2023, the Missouri Supreme Court ruled in favor of Charter Communications’ affiliate company, affirming the company’s claim under the state’s manufacturing exemption to a nearly $1.5M use tax refund on telecommunications replacement equipment it purchased in 2011 and 2012.1
This Missouri Supreme Court case appears to be the first of its kind directly addressing and supporting telecommunication companies’ claims to the manufacturing exemption since S.B. 768 became effective August 28, 2018. The bill revised the manufacturing exemption statutes Mo. Rev. Stat. §144.030 and Mo. Rev. Stat. §144.054 to include specified purchases and equipment used by telecommunications companies in providing telecommunication services. “Telecommunications services” were also redefined by the updated statute to be considered as products for manufacturing purposes. The bill stated that the term “’manufacturing’ has included and continues to include the production and transmission of ‘telecommunications services,’” contending that the law retroactively applies to telecommunication companies, widening the window for refund claims.
The arguments by the Missouri Department of Revenue in this Supreme Court case against Charter Communications’ affiliate company Charter Communications Entertainment I, LLC (“CCE I”) were that the Administrative Hearing Commission erred in concluding that CCE I’s telecommunication services qualified as manufacturing and that CCE I failed to show its telecommunications replacement equipment was used directly in manufacturing.
The Court found that CCE I established that the telecommunications process in which its replacement equipment is used is considered manufacturing and thus, that equipment is used in the manufacturing process for sales and use tax exemption purposes. The Court referenced prior case law which held that “‘manufacturing’ encompasses only activities that transform an input into an output with a separate and distinct use, identity, or value from the original.” CCE I’s replacement equipment converts waves of human voice into electrical signals then transmits those signals to recipient’s telephone and sound devices in a sound format so the end product is usable to the recipient.
CCE I’s equipment and process does not simply involve just the electronic transfer of voices, but the caller’s voice is transformed by CCE I’s equipment across several different stages in the Charter Network before reaching the final recipient’s handset “with new value to a listener who could not otherwise hear or understand it.”.2 Thus, CCE I’s replacement equipment “is used to transform an input into an output with a separate and distinct value from the original,” which establishes that the equipment is used in manufacturing and the telecommunications service production process qualifies as manufacturing.
The Court also found that the Administrative Hearing Commission correctly applied the law in its determination that CCE I’s replacement equipment was used directly in the manufacturing of telecommunication services. The Missouri Department of Revenue argued that CCE I’s replacement equipment was used for both manufacturing and non-exempt purposes (i.e., providing internet and cable services) and because of this CCE I needed to show that the “mixed-use” equipment was “substantially used” in manufacturing telecommunication services. In reviewing Mo. Rev. Stat. §144.030.2(4), the Administrative Hearing Commission did not find any use of the term “substantially used” nor did it find a requirement that a manufacturer establish that a potentially mixed-use piece of replacement equipment be “substantially used” in providing telecommunication services in order to qualify that equipment under the manufacturing exemption.
Since the term “substantially used” does not exist in the referenced statute, the Court asserts that the “integrated plant doctrine” test must instead be applied to the term “used directly,” which is the actual terminology used in the aforementioned statute. The integrated plant doctrine is an established test adopted by the courts to determine the qualifications of equipment used in the manufacturing process for the manufacturing exemption. The test poses the following three questions:
- Is the disputed item necessary to production?
- How close, physically and causally, is the disputed item to the finished product?
- Does the disputed item operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system?
The Court acknowledged that the Missouri Department of Revenue did not dispute the Administrative Hearing Commission’s conclusion that all of CCE I’s replacement equipment was used to provide telecommunication services, nor did it challenge the Administrative Hearing Commission’s conclusion that the equipment satisfied the integrated plant doctrine. Thus, the Court affirmed that the Administrative Hearing Commission did not err in not requiring CCE I to prove its replacement equipment was “substantially used” in the manufacturing process, but rather that the equipment needed only meet the “used directly” in manufacturing requirement, which was established by the Administrative Hearing Commission’s application of the integrated plant doctrine.
This likely won’t be the last case Missouri sees where telecommunications service providers raise the question of what qualifies as exempt production and manufacturing equipment under the state’s manufacturing exemption. As the application of this updated legislation continues to be ironed out by the Missouri Department of Revenue and the courts, following the progress and knowing when and how the manufacturing exemption applies to telecommunications service providers’ purchases going forward may help with additional refund claim opportunities within the state and help to avoid potential sales and use tax assessments where the exemption may be incorrectly claimed.
1 Charter Communications Entertainment I, LLC v. Director of Revenue, Mo. S. Ct., Dkt. No. SC99517, 04/18/2023.
2 Sw. Bell Tel. Co. v. Dir. of Revenue, 78 S.W.3d 763, 768 (Mo. banc 2002).