On September 13, 2022, the Missouri Supreme Court ruled that the machinery and equipment used by Carfax Inc. (“Carfax”) in generating vehicle history reports (VHR) did not qualify for an exemption from sales and use tax allowed for manufacturers.1
Carfax is a commercial web-based service that supplies VHRs to individuals and businesses on used cars and light trucks for American and Canadian consumers. The reports contain information on ownership and title history, mileage, accidents, previous maintenance and repairs, and manufacturer recall notices. Carfax may also include information regarding comparisons to industry averages, whether the vehicle was located in a historical flood area, and whether the vehicle adhered to recommended oil change schedules. The data collected from approximately 112,000 sources was stored in the company’s 600-square-foot server room in Columbia, Missouri. Upon request for a VHR, Carfax extracted the information pertaining to that vehicle from its organized and cleansed database to provide to the customer.
During a sales tax audit of 2013 through 2016, the Director of Revenue (“Director”) determined that the disputed equipment—computers, servers, and networks—used to “manufacture” VHRs was not exempt from Missouri sales tax for purposes of manufacturing, processing, compounding, mining, or producing any product.
Carfax appealed the decision to the Missouri Administrative Hearing Commission (“Commission”), which disagreed with the Director and ruled that the equipment was used directly in the manufacturing process of the VHRs and allowed the sales tax exemption. The Missouri Supreme Court, however, disagreed with the Commission, stating that the computers, servers, and network equipment did not “transform an input into an output with a separate and distinct use, identity, or value”2 from the original. The Court did not agree that what Carfax used the equipment for could be characterized as “manufacturing,” as Carfax only collects data and presents that information in a report, much like assembling a phone book. The Court conceded that this was a close call, but the Court must apply the principle of strict construction to tax exemptions, with any doubt resolved in favor of application of the tax, not in favor of the taxpayer.
This ruling is significant in light of the Missouri Legislature affirming the Missouri Supreme Court’s application of the manufacturing exemption in DST Systems, Inc. v. Director of Revenue, 43 S.W.3d 799 (Mo. banc 2001). Under section 144.030.2, the Missouri Legislature recognized a sales tax exemption for an activity similar to Carfax.
1 Carfax Inc. v. Director of Revenue (No. SC99367), September 13, 2022.
2 Branson Props. USA, L.P. v. Director of Revenue, 110 S.W.3d 824,826 (MO. Banc 2003).
TECHNICAL INFORMATION CONTACTS:
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at firstname.lastname@example.org.