Link to Mo. Sup. Ct. Opinion
The Supreme Court of Missouri examined a restaurant corporation’s claim that the purchases of kitchen equipment, non-disposable tableware, furniture and other items are exempt from Missouri’s use tax. The court interpreted the use tax narrowly, holding that restaurants are not entitled to the “production exemption” because they do not qualify as “plants” and that restaurant food service is not the same as manufacturing a product. Additionally, the court held that restaurants are not entitled to the “sale exclusion” because cutlery, furniture, and other items are not permanently transferred to customers and customers are not charged additional consideration for their temporary use.
I. Facts and Holding
Section 144.610.1, commonly known as the “use tax,” charges businesses “for the privilege of storing, using or consuming within this state any article of tangible personal property.”[2] Brinker Missouri, Inc. (“Brinker”), headquartered in Dallas, Texas, owns and operates twenty-three restaurants in Missouri.[3] Brinker’s restaurants, including Chili’s Grill & Bar, Ramano’s Macaroni Grill, On the Border, and Maggiano’s Little Italy, are subject to Missouri’s Sales tax and its use tax.[4]
Brinker initially paid use tax on the items in question from October 1, 2003 through December 31, 2004, but sought a refund under two exceptions: the “product exemption” and the “sale exclusion.”[5] Brinker, requested a refund of $54,034.86 in October of 2006 for the use tax previously paid.[6] The director denied $48,966.83 of the refund and Brinker sought review of $44,183.93 of the amount denied.[7]
The applicable standard of review is that the court will affirm the commission’s decision if: “(1) it is authorized by law; (2) it is supported by competent and substantial evidence on the whole record; (3) mandatory procedural safeguards are not violated; and (4) it is not clearly contrary to the reasonable expectations of the General Assembly.”[8] The court reviewed the decisions of the commission de novo.[9]
II. Legal Background
A. Exempt from Use Tax
Under section 144.610.1 a tax is levied on Missouri businesses “for the privilege of storing, using or consuming within this state any article of tangible personal property.”[10] Brinker admitted that the use tax is applicable to its restaurants but argued that the stoves, refrigerators, and other items qualified for an exemption under section 144.615(3).[11] Section 144.615(3) provides an exemption for “[t]angible personal property, the sale of which …would be exempt from or not subject to the Missouri sales tax under the provisions of subsection 2 and 3 of section 144.030.”[12]
Brinker also argued that it qualified for “product exemption” under 144.030.2(4) and (5)[13] because “when it cooks and serves food, it in effect is making a product.”[14] The court read these provisions narrowly, holding that the exemption does not apply to Brinker.[15] The court first highlighted the text of 144.030.2(5), which provides definition of the machinery and equipment, which qualifies under the production exemption: “(5) Machinery and equipment . . . purchased and used to establish new or to expand existing manufacturing, mining or fabricating plants in the state if such machinery and equipment is used directly in manufacturing, mining, or fabricating a product which is intended to be sold ultimately for final use or consumption . . . .”[16]
The court noted that the language of the statute does not include “retail,” but instead uses the word “plants.”[17] “It expressly states that the machinery and equipment must be used for new or expanded plants that manufacture, mine or fabricate products intended to be sold ultimately for final use or consumption by others.”[18] The court concluded that restaurants do not produce products “for final use or consumption”; therefore, this exemption is not applicable to new or expanded kitchen equipment in restaurants.[19] The court held that the commission was correct in refusing Brinker’s request for a refund of $21,588.19, the amount requested for the new or expanded kitchen equipment, in use taxes paid.[20]
The court next addressed 144.030.2(4), which exempts certain replacement machinery: “(4) Replacement machinery, equipment, and parts and materials and supplies solely required for the installation or construction of such replacement machinery, equipment, and parts, used directly in manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption ….[21]”
The court construed paragraph (4) and (5) of 144.030(2) together and held that “machinery, equipment, and parts qualify for the exemption only if they are used to establish new or expanded manufacturing, mining, or fabricating plants.”[22] Brinker argued that this section should be interpreted broadly with the terms “manufacture” and “produce” to include cooking and preparing food.[23] The only thing that should be required, according to Brinker, “is simply to refer to preparing food as producing it and cooking food as manufacturing or transforming it.”[24]
The court disagreed, noting that, under statutory interpretation, principles an exemption is “allowed only upon clear and unequivocal proof, and doubts are resolved against the party claiming it.”[25] The court highlighted that, in lay terms, people do not speak of restaurants as manufacturing or producing food and drink.[26] The court then pointed to other statutory language where restaurants are specifically referred to, in contrast to the statutes that provide exemptions to the use tax.[27] The court found that, “[h]ad the legislature intended to include restaurants or restaurant equipment within the exemptions set forth in section 144.030.2, then it would have added the word ‘restaurant’ to those statutes.” [28] The court held that it was not in error to deny the requests for refunds paid in use tax on the replacement machinery.[29]
B. Exclusion Based on the Sale of Property
The Supreme Court of Missouri also examined Brinker’s claim that the “furniture at which the customers sit and eat as well as on the other items in and on which their food is served” is sold to the customers temporarily, consequently exempting the restaurants from having to pay a use tax on these items.[30] “Section 144.610.1 imposes a use tax ‘for the privilege of storing, using, or consuming within this state any article of tangible personal property.’”[31] However, according to section 144.605(13), the term “use” excludes “the sale of property in the regular course of business.”[32]
The court held that in order for a transaction to be a sale or resale under section 144.605(7), and therefore exempt from the use tax, “three elements must be satisfied: (1) a transfer, barter, or exchange; (2) of the title or ownership of tangible personal property, or the right to use, store, or consume the same; (3) for consideration paid or to be paid.”[33]
Brinker claimed that the cost of things like tables, chairs, silverware, and dishes are included in overhead and that when customers pay at the restaurant they are not only paying for food but also the right to temporarily use the furniture and silverware.[34] The court held this was not the legislature’s intent, and that if this were in fact the definition then “everything a customer touches in the restaurant in that sense is resold and not subject to the use tax.”[35]
The court determined that precedent relied on by Brinker did not support its argument because, in all of the cases relied upon, the title was transferred from the taxpayer to the third party for a purchase, and therefore a sale had occurred.[36] The court also highlighted that customers are not charged varying amounts based on whether they dine in the restaurant or take their meal home.[37] Therefore, the court held that Brinker did not qualify for the “sale exclusion.”[38]
C. Dissent
Writing in dissent, Chief Justice William Ray Price, Jr. argued that Brinker’s restaurants should qualify as “plants” and pointed to examples where the court broadly interpreted statutes.[39] He argued that because cooking requires manual skill and training, it fits within a trade that would qualify the restaurants as plants under 144.030.2(4) and (5).[40]
Chief Justice Price also argued that cooking qualifies as manufacturing under the statute.[41] Again, he pointed out that interpretation of what qualifies as “output” to meet the definition of manufacturing has been interpreted broadly by the court.[42] Justice Price pointed to Wilson & Company, Incorporated v. Department of Revenue, where the court held that preparing hogs for sale qualified as manufacturing.[43] Similarly, he argued that restaurants convert food into products fit for human consumption.[44] Chief Justice Price stated that by interpreting the statute narrowly the court is undercutting the legislative intent of creating jobs and nurturing small businesses in Missouri.[45]
III. Comment
The majority’s interpretation of the statute seems in line with the legislative intent when enacting the statute. If the legislature had intended to include restaurants, the phrasing and terminology of the statute would have been different or a section explicitly including foodservice would have been inserted. The legislature clearly set out to help businesses in the state of Missouri, but restaurants and their parent corporations were not the intended beneficiaries of this relief.
While Chief Justice Price goes through some terminology and other case law that could be used to side with Brinker, the majority reaches the most logical conclusion based on the language of the statute. Any other finding would have led to a windfall of refund claims from restaurants all over the state.
-Lawrence Hall
[1] No. SC 90463, 2010 WL 3430437 (Mo. 2010) (en banc).
[2] Id. at *2.
[3] Id. at *1
[4] Id.
[5] Id. at *2-5.
[6] Id. at *2.
[7] Id. “The supreme court shall have exclusive appellate jurisdiction in all cases involving the validity of a treaty or statute of the United States, or of a statute or provision of the constitution of this state, the construction of the revenue laws of this state, the title to any state office and in all cases where the punishment imposed is death. The court of appeals shall have general appellate jurisdiction in all cases except those within the exclusive jurisdiction of the Supreme Court.” Mo. Const. Art. V, § 3.
[8] Id.
[9] Id.
[10] Id.
[11] Id.
[12] Id.
[13] Id.
[14] Id.
[15] Id. at *3.
[16] Id. (quoting Mo. Rev. Stat. § 144.030.2(5)) (emphasis supplied by the court).
[17] Id.
[18] Id.
[19] Id.
[20] Id.
[21] Id. (quoting Mo. Rev. Stat. § 144.030.2(4)) (emphasis supplied by the court).
[22] Id. at *4.
[23] Id.
[24] Id.
[25] Id.
[26] Id.
[27] Id.
[28] Id.
[29] Id. at *5.
[30] Id.
[31] Id.
[32] Id.
[33] Id.
[34] Id.
[35] Id. at *6.
[36] Id.
[37] Id.
[38] Id.
[39] Id.
[40] Id.
[41] Id. at *7
[42] Id. at *8
[43] Id. See 531 S.W.2d 752 (Mo.1976) (en banc).
[44] Id.
[45] Id.
