Opinion handed down March 6, 2012
The Supreme Court of Missouri held that the Administrative Hearing Commission (AHC) erred in finding that Casey’s General Stores were exempt from sales and use tax for the electricity it purchases and uses for its food preparation activities. The court found that the legislature did not intend the term “processing” to include retail food preparation in Revised Statutes of Missouri § 144.054.2.
I. Facts and Holding
Casey’s General Stores (Casey’s) is a convenience store chain “engaged in the retail sale of gas, grocery items, various nonfood items, and prepared foods.”[2] On February 6, 2009, Casey’s filed a sales tax refund claim with the director of revenue relating to a portion of electricity sold to two store locations in Grain Valley and Greenwood, Missouri.[3] Casey’s argued that Revised Statutes of Missouri § 144.054, which grants sales and use tax exemptions on the sale of electricity to those engaged in manufacturing or processing, should be construed broadly so as to include Casey’s food preparation operations within its meaning of “processing.”[4] The operations that Casey’s argued were “processing” ranged from the reheating of pre-cooked products, the cooking of frozen raw products, and the preparation of pizzas and donuts.[5] The preparation of pizzas and donuts requires more steps than other products and requires more participation on the part of the employee than simply reheating precooked products or heating raw products.[6] Casey’s claim to the director of revenue was denied.[7]
Aquila Foreign Qualifications Corporation (Aquila) is a utility company that sells electricity, including to Casey’s.[8] After the director denied Casey’s refund claim, Aquila, at the request of Casey’s, filed a complaint challenging the director’s final decision.[9]
The case was first heard before the AHC, which reversed the director’s denial and concluded that §144.054 was intended to exempt a broad range of activities.[10] The AHC found that Casey’s food preparation operations constituted “processing” within the meaning of the statute.[11]
On appeal, the Supreme Court of Missouri reversed the AHC’s decision and found that the food preparation activities conducted by Casey’s did not constitute “processing” as it was intended under Revised Statutes of Missouri § 144.054.2.[12]
The count found that the statute’s definition of “processing,” which is defined as “any mode of treatment, act, or series of acts performed upon materials to transform or reduce them to a different state or thing,” to be ambiguous.[13] The court held that when there are ambiguities in statutes, the meaning is resolved by looking to legislative intent.[14] Further, the court found that when determining the legislature’s intent, the statute should be read in the context of the entire statute and should not be read in isolation.[15]
Following the logic of Brinker Missouri, Inc. v. Director Of Revenue, which found that if the legislature had intended to exempt certain activities it would have included those terms in the statute,[16] the court in Aquila found that if the legislature intended to exempt such operations as Casey’s it would have included specific language in Revised Statutes of Missouri § 144.054 to meet that goal.[17]
The court also noted that in its interpretation of “processing,” it was guided by the statutory maxim noscitur a sociss, or “a word is known by the company it keeps.”[18] The court found that § 144.054 contains an industrial connotation and thus the legislature did not intend “processing” to include food preparation activities such as Casey’s.[19]
In sum, the court stated “[i]f the legislature intended ‘processing’ to encompass retail food sales by restaurants or convenience stores, it could have used terms such as ‘preparing,’ ‘furnishing,’ or ‘serving.’”[20] The legislature did not utilize such terms, so the court found that Casey’s was not entitled to the tax exemption.[21]
Judge Price dissented, arguing that “processing” was “the most generic of terms that the [legislature] could have chosen.”[22] Judge Price argued that all of Casey’s activities were a series of acts that transformed raw materials into a “different state” before being sold to consumers.[23] The term “processing,” he argued, was not ambiguous as to its meaning but rather broad, covering a wide range of activities, including the activities at issue in this case.[24] Judge Price also criticized the court’s reliance on Brinker because a different statute was at issue in that case.[25]
II. Legal Background
Revised Statutes of Missouri § 144.054 was passed by the Missouri legislature in 2007, and there is little precedent dealing with this section.[26] The Supreme Court of Missouri has noted, though, in Brinker Mo. v. Dir. Of Revenue, that tax exemptions, such as this, are construed against the taxpayer.[27] The burden of proof also falls on the taxpayer seeking the exemption and any doubt is resolved in favor of taxation.[28]
According to the Supreme Court of Missouri in Derousse v. State Farm Mut. Auto. Ins. Co., when a statute is ambiguous, the job of the court is to look to the intent of the legislature and give effect to its intent whenever possible.[29]
The Supreme Court of Missouri has addressed how to determine legislative intent for ambiguous statutory language previously, most notably in Brinker.[30] The ambiguous language in Brinker concerned whether restaurants were “plants” under the statutory definitions; the statute allowed for a tax exemption on 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 or fabricating a product which is intended to be sold ultimately for final use or consumption . . . ”[31] This court in Brinker reasoned that the lack of terms “restaurant,” “preparation,” “furnishing,” or “serving” in the statute demonstrated that the legislature had not intended to exempt those activities because if it had, it would have included those terms in the statute.[32]
The court in Brinker also stated that a broad construction of “plant” is inappropriate when a party is trying to take advantage of an exemption.[33] A broad construction is inappropriate because exemptions are only allowed “upon clear and unequivocal proof, and doubts are resolved against the party claiming it.”[34] Additionally the court pointed out that the legislature did not include the words “restaurant,” “preparation,” “furnishing,” or “serving” in the statute and did not indicate that it thought a broad reading of the statute should include such activities as Brinker’s.[35] As a result, the court found against Brinker and against a broad reading of the exemption statute.
Additionally, the Missouri Code of State Regulations expressly states “[a] restaurant preparing food for immediate consumption is not exempt [under 144.054] [and] [t]herefore, all state and local taxes apply.”[36]
III. Comment
In determining that the word “processing” is ambiguous the Supreme Court of Missouri looked to the intent of the legislature for its meaning. Utilizing Missouri’s rules of construction regarding tax exemption statutes, the Supreme Court of Missouri reached the reasonable result that the legislature did not intend “processing” to include food preparation activities such as Casey’s.[37]
While the Supreme Court of Missouri reached a reasonable result in this case, it was not able to ultimately answer the question of whether the Missouri General Assembly actually did in fact intend to cover the food preparation activities of convenience stores. The Supreme Court of Missouri merely concluded that, given the narrow rules of construction for statutes regarding tax exemptions, it must determine that if the legislature meant for such activities to be exempted, it would have provided more specific language to unambiguously give it that effect.
While the rules of construction for exemption statutes may not perfectly provide courts with the intent of the legislature, it is appropriate due to the potentially far-reaching implications of such exemptions. If the court had ruled in favor of Casey’s exemption it would have been at the consequence of unknown millions of dollars in tax revenue for all food preparation activities carried on by convenience stores in the state of Missouri. While the legislature may have intended this consequence, it should not generously be read into the statute without clear proof that it was a purpose of the legislature.
If the legislature did in fact intend to cover the food preparation activities of convenience stores in the exemption, then legislators should find a valuable lesson in this opinion. The lesson is that when drafting legislation, great care and specificity should be afforded to the language used, particularly regarding tax exemptions, which are allowed by courts only on clear and unequivocal proof.
- Nathan Atkinson
[1] No. SC91784 (Mo. March 6, 2012) (en banc), available at http://www.courts.mo.gov/file.jsp?id=52915. The West reporter citation is Aquila Foreign Qualifications Corp. v. Dir. of Revenue, 362 S.W.3d 1 (Mo. March 6, 2012) (en banc).
[2] Id. at 2.
[3] Id. at 2; Aquila Foreign Qualifications Corp. v. Dir. of Revenue, Administrative Hearing Commission Hearing, No. 09-0376 RS, 2 (April 28, 2011), available at http://oa.mo.gov/ahc/pages/Case0043.html.
[4] Aquila, No. SC91784, slip op. at 2; Mo. Rev. Stat. § 144.054 (2010) (“In addition to all other exemptions granted under this chapter, there is hereby specifically exempted . . . electrical energy and gas, whether natural, artificial, or propane, water, coal, and energy sources, chemicals, machinery, equipment, and materials used or consumed in the manufacturing, processing, compounding, mining, or producing of any product, or used or consumed in the processing of recovered materials, or used in research and development related to manufacturing, processing, compounding, mining, or producing any product.”).
[5] Id. at 2-3.
[6] Id. at 3.
[7] Id. at 2.
[8] Id. at 2.
[9] Id.
[10] Aquila Foreign Qualifications Corp. v. Dir. of Revenue, Administrative Hearing Commission Hearing, No. 09-0376 RS, 27-29 (April 28, 2011), available at http://oa.mo.gov/ahc/pages/Case0043.html.
[11] Id. at 29.
[12] Aquila, No. SC91784, slip op. at 8.
[13] Id. at 4-5.
[14] Id. at 5. (citing Derousse v. State Farm Mut. Auto Ins. Co., 298 S.W.3d 891, 895 (Mo. 2009) (en banc).
[15] Id.
[16] 319 S.W.3d 433, 438 (Mo. 2010) (en banc).
[17] Aquila, No. SC91784, slip op. at 7-8.
[18] Id. at 7.
[19] Id. at 7-8.
[20] Id. at 8.
[21] Id. at 8-9.
[22] Id. at 10 (Price, J., dissenting).
[23] Id. at 11 (Price, J., dissenting).
[24] Id.
[25] Id. at 11-12 (Price, J., dissenting).
[26] Mo. Rev. Stat. §144.054 (credits) (2010).
[27] 319 S.W. 3d 433, 436 (Mo. 2010) (en banc).
[28] Id. at 437.
[29] 298 S.W.3d 891, 895 (Mo. 2009) (en banc).
[30] Aquila, No. SC91784, slip op at 5.
[31] Brinker, 319 S.W.3d at 436; Mo. Rev. Stat. § 144.030.2(4) (2010).
[32] Brinker, 319 S.W.3d at 438; Mo. Rev. Stat. § 144.030.2(4) (2010).
[33] Id. at 437.
[34] Id.
[35] Id. at 438.
[36] Mo. Code Regs. Ann. tit. 12, § 10-110.621(5)(A) (2010).
[37] Aquila, No. SC91784, slip op. at 7-8.
