Missouri Supreme Court Denies Processing Exemption to Restaurants

In Aquila Foreign Qualifications Corporation v. Director of Revenue, (MO SC No. 91784, March 6, 2012), Missouri’s Supreme Court (“Court”) denied a convenience store/restaurant a partial sales tax exemption for electricity used to prepare food for sale. The exemption, Section 144.054 RSMo, allows Missouri taxpayers to claim a partial exemption on utilities, machinery, equipment, and materials used or consumed in manufacturing, processing, compounding, mining, or producing any product. When the Missouri Legislature (“Legislature”) added Section 144.054 to the statute in 2007, the new exemption was described as pro-business legislation designed to allow Missouri to compete with surrounding states.

Casey’s General Stores (“Casey’s”) used the electricity to power machinery and equipment to prepare food for sale. Aquila Foreign Qualifications Corporation (“Aquila”), an electric utility, filed a sales tax refund claim on behalf of its customer, Casey’s.

In a hearing before the Administrative Hearing Commission (“Commission”), Casey’s demonstrated that its food preparation activities were “processing” as defined in Section 144.054. Section 144.054 provides that processing is “[a]ny mode of treatment, act, or series of acts performed upon materials to transform or reduce them to a different state or thing, including treatment necessary to maintain or preserve such processing by the producer at the production facility…” Casey’s took raw materials, such as flour, water, tomato sauce, meat, and cheese, and through a series of procedures utilizing a variety of equipment, transformed the materials into a finished product—a cooked pizza.

Although the Missouri Department of Revenue (“Department”) argued that the interpretation of “processing,” according to Casey’s, was overly broad and would have significant impact on state revenue, the Commission ruled in favor of Casey’s. In her ruling, Commissioner Karen Winn wrote, “[a]s we read the exemption we agree that it is very broad, but we can only apply the plain language of Section 144.054. The wisdom of any such exemption is for the legislature, not this Commission, to decide. We cannot change the law, and must apply the law as written.”

Overturning the Commission’s decision, the Court rejected the plain-language reading of the exemption. Instead, the Court found that the statutory definition of “processing,” as passed by the Legislature, was ambiguous. Because the term “processing” was ambiguous, the Court was authorized to determine legislative intent. Using the “industrial connotations” of other qualifying activities (manufacturing, compounding, mining, and producing any product), the Court concluded the Legislature did not intend “processing” to include the preparation of food for retail sale.

In a dissenting opinion, Chief Justice William Price stated that the Legislature’s chosen statutory definition of “processing” confirms that the Legislature intended the scope of processing to be as broad as possible. Justice Price stated, “[t]he term ‘processing’ is broad, but not ambiguous. Its application to the activities in which Casey’s engages could not be clearer. Courts have a duty to read statutes in their plain, ordinary and usual sense…where there is no ambiguity, this Court does not apply any other rule of construction.” Justice Teitelman concurred in Chief Justice Price’s dissenting opinion, concluding that Casey’s should have qualified for the claimed exemption.

It is interesting to note that the in-store processing used by Casey’s qualifies for sales tax exemptions in other states, including Missouri’s neighbors, Kansas and Iowa. Unfortunately, the Court’s ruling results in a setback of the Legislature’s effort to level the playing field for Missouri’s producers.