Replacement Machinery and Equipment (Rescinded January 30, 2000)

AUTHORITY: section 144.270, RSMo 1994. This rule was previously filed as rule no. 26 Jan. 22, 1973, effective Feb. 1, 1973. S.T. regulation 030-34 was last filed Dec. 31, 1975, effective Jan. 10, 1976. Refiled March 30, 1976. Rescinded: Filed July 14, 1999, effective Jan. 30, 2000. Floyd Charcoal Co. v. Director of Revenue, 599 SW2d 173 (Mo. banc 1980). To determine if new or replacement equipment is exempt from sales or use tax, an integrated plant approach is used to determine if it is used directly in manufacturing products. St. Joseph Light & Power Co. v. Director of Revenue, Case No. RS-79-0162 (A.H.C. 1/21/83). Taxpayer utility company purchased a new boiler to replace a boiler that was worn out. The issue is whether the boiler’s purchase should be exempt from use tax pursuant to section 144.030.3(3), RSMo which exempts the purchase of machinery and equipment used directly for manufacturing or fabricating when the purchase is caused by reason of a design or product change, or whether it is exempt under section 144.030.3(4), RSMo as machinery or equipment used to expand an existing manufacturing plant. The Administrative Hearing Commission found that because the boiler was purchased to replace a wornout boiler, it was precluded from finding that the machinery was purchased by reason of a design or product change. Therefore, taxpayer was not entitled to an exemption on this basis. However, the commission found that the new boiler did expand the plant’s capacity by five megawatts and allowed the boiler to operate an additional two days per month. Based upon this finding, the commission concluded that the new boiler was equipment purchased and used to expand an existing manufacturing plant in this state. Empire District Electric Co. v. Director of Revenue, Case No. RS79-0249 (A.H.C. 3/29/83). In this case the issue was the taxability of a transformer, concrete, oil and antifreeze used in an electric generating facility. The Administrative Hearing Commission was faced with the task of applying the new “integrated plant” theory which the Missouri Supreme Court adopted in Floyd Charcoal Co. v. Director of Revenue, 599 SW2d 173 (Mo. banc 1980) and Noranda Aluminum v. Missouri Department of Revenue, 599 SW2d 1 (Mo. banc 1980) to determine whether these items were exempt under section 144.030.3(4), RSMo from sales and use tax as “machinery and equipment, purchased and used to establish new or to expand existing manufacturing, mining or fabricating.” The commission found that while Missouri has adopted the integrated plant theory, it is apparent from the statute limiting language that not all items used in the manufacture of a product are exempt from sales or use tax. With respect to the oil and antifreeze the commission found, first of all, that it did not qualify as a “device” and thus could not be considered equipment and machinery. It also found that the oil and antifreeze, though used in the start up of equipment, was not solely required for installation and construction. It continued to be used in the machinery after start-up and, therefore, it was not exempt as supplies used solely for installation or construction of this machinery or equipment. With respect to the concrete that was used to construct duct banks protecting the electrical system and manhole covers for access to the electrical system, the court found that the decision in Noranda Aluminum was not controlling, because in that case the materials in question were used to construct duct banks which prevented the spillage of molten aluminum. Because the cement in question was not used to protect the electrical system from the manufacturing process itself, it was found not to be an integral part of that manufacturing process. Therefore, the concrete was not exempt from sales or use tax. With respect to the step-up transformer, the court found that it had two functions. It had a nonexempt function controlling the transmission of electricity to customers. The commission relied on New York law to the effect that the generation of voltage is manufacturing, the transmission of voltage is not. However, several times a year the transformer was used to start a generator which manufactures electricity. On those occasions the transformer was used in the manufacturing process. Therefore, the transformer is exempt from sales tax or use tax, because section 144.030.3(4), RSMo does not require that machinery be used exclusively or even primarily for manufacturing to qualify for exemption (see also State ex rel. Ozark Lead Co. v. Goldberg, 610 SW2d 954 (1981) and Noranda Aluminum v. Missouri Department of Revenue, 599 SW2d 1 (Mo. banc 1980)). American Lithographers, Inc. v. Director of Revenue, Case No. RS-87-1355 (A.H.C. 10/25/88). The Administrative Hearing Commission found that the purchase of printing plates was exempt from the imposition of sales and use tax under 144.030.2(4), RSMo as “replacement parts replaced by reason of product or design change.” The Administrative Hearing Commission compared the printing plates with the dies and molds used by automobile manufacturers and then cited the Department of Revenue’s regulation 12 CSR 10-3.316(2) which states in part that “if an automobile plant must replace machinery because the present machinery cannot do the work due to changes on the new models, the machinery is not subject to the sales tax.” Tension Envelope Corp. v. Director of Revenue, Case No. RS-870420 (A.H.C. 12/6/88). The Administrative Hearing Commission found that printing plates were exempt under 144.030.2(4), RSMo as “replacement parts replaced by reason of product or design change.” In reference to the artwork and the prep work, the Administrative Hearing Commission, citing the case of Empire District Electric v. Director of Revenue, Case No. RS-79-0249, stated that one requirement for eligibility under section 144.030 is that the item by a “device” and because the artwork and prep work are not devices their purchase was not exempt under 144.030.2(4).