The Missouri Department of Revenue (the “Department”) issued guidance regarding the impact of the Missouri Supreme Court’s decision in ICC Management, Inc. v. Director of Revenue, 290 S.W.3d 699 (Mo. Banc 2009) on the resale exclusion from the state sales and use tax.
After several months of internal analysis, the Department posted the following information on the Department’s Website on December 23, 2009 regarding the Court’s decision in the case:
ICC Management, Inc. v. Director of Revenue - The Missouri Supreme Court recently issued a ruling that impacts sellers' use of the resale exclusion. This change applies to all affected transactions occurring after September 1, 2009, the date the decision became final.
In ICC Management, Inc. v. Director of Revenue, 290 S.W.3d 699 (Mo. banc 2009), the taxpayer provided nontaxable services to counties and municipalities in Missouri. ICC claimed that tangible personal property it purchased to perform those services was resold to the local governments, which are excluded from the sales tax, and was therefore not subject to tax. The Court held that the sale to the local governments was not a sale at retail because it was not subject to tax. Consequently, ICC could not claim the sale for resale exclusion and must pay tax on its purchases.
The Court relied primarily on two cases: Greenbriar Hills Country Club v. Director of Revenue, 935 S.W.2d 36 (Mo. banc 1996), and Westwood Country Club v. Director of Revenue, 6 S.W.3d 885 (Mo. banc 1999). InGreenbriar Hills, the Court held that a private country club that only sold meals to its members and guests did not have to collect and remit tax on the sales of those meals because the statute only imposed tax on places "in which rooms, meals or drinks are regularly sold to the public." Meals sold only to members and guests were excluded from the taxing statute.
In Westwood, another private country club claimed it did not have to pay tax on its purchases of food used to sell meals to its members and guests because they were sales for resale. The Court held that because the sales of meals were excluded from tax, they did not constitute sales at retail. Because the sale for resale exclusion is contained in the definition of sale at retail, a transaction that is not a sale at retail cannot be a sale for resale. As the Court noted, Westwood invoked the principle of avoiding double taxation "to avoid being taxed even once." 6 S.W.3d at 888.
The ICC court expressly adopted the Westwoodrationale: This rationale is directly applicable here. ICC's supply of the food and consumables to the inmates will not be taxed due to application of the governmental sales exemption. As in Westwood, this disqualifies ICC from claiming the resale exemption, because the rationale for that exemption - the avoidance of double taxation - does not apply. . . . The purpose of the exemption is not to provide a special benefit to ICC that is not enjoyed by other taxpayers. As in Westwood, the taxpayer must pay tax on its purchase of consumables where, as here, its resale of the consumables is not taxable.
While the Department’s Web post does not specifically inform taxpayers that they may not issue a resale exemption certificate for purchases of goods that are ultimately resold to governmental entities, its comment that this change applies to all affected transactions occurring after September 1, 2009 is apparently meant to put retailers (and government contractors) on notice that sales to governmental bodies are not “sales at retail” and, therefore, do not qualify for the resale exclusion. Approximately one month earlier, the Department had provided industry groups a draft communication regarding the Court’s decision, which stated the following:
[D]ue to this decision, a business may no longer rely on the resale exclusion when selling to government entities. If the business knows at the time of its purchase that an item will be sold to a government entity, it should not give a resale certificate for the purchase. The business must pay tax on the item purchased unless an exemption or exclusion, other than the resale exclusion applies.
The draft document continued:
If the business does not know that an item will be sold to a government entity at the time of purchase, it may give a resale certificate. When the item is sold to the government entity, the business must accrue tax on that item based on the price paid by the business when it purchased the item and remit the tax to the Department.
In response, taxpayer groups had urged the Department to limit the application of the ICC Management decision to the unique facts in the case. While the Department has not distributed this draft communication to retailers, based on the Department’s Web post, it appears Department leadership has decided to broadly apply the decision to “all affected transactions,” and retroactively back to September 1, 2009. The Department has not yet revised its resale regulation, nor has it provided taxpayers detailed guidance regarding which government sales do not qualify for the resale exclusion and how to report and remit tax on purchases that were ultimately sold to exempt purchasers.
Implementation of this decision is expected to cause numerous difficulties for retailers, both from a compliance perspective as well as from an economic standpoint. Many retailers may not have internal systems to track the purchase cost of goods ultimately sold to exempt purchasers. Additionally, some retailers may be forced to increase retail prices charged to governmental entities to cover the additional tax cost incurred on the purchase of the goods.