Southwestern Bell Telephone Co. v. Director of Revenue

LAURA DENVIR STITH, Judge,

concurring in part and dissenting in part.

I disagree with the conclusion of the principal opinion that machinery and equipment used by Bell in its telephone transmission services are used directly in “manufacturing” and thereby qualify for the use tax exemption set out in sections 144.030.2(4) and (5). As this Court noted in its decision on prior appeal of this case:

Over the last few decades, the growth of modern information and communication technologies has challenged lawmakers and courts to keep pace with modem industry. One area of specific difficulty in Missouri has been the application of the manufacturing sales and use tax exemptions to intangible products or services. Two somewhat interrelated issues, the definitions of “product” and “manufacturing”, have been at the heart of this jurisprudence.

Southwestern Bell Telephone Co. v. Director of Revenue, 78 S.W.3d 763, 766 (Mo. banc 2002) (“Bell I ”).

It is unfortunate that, in its attempts to “update” the meaning of the word “manufacturing” as used in the manufacturing *238sales and use tax provisions, Bell I unintentionally gave the word a meaning beyond its dictionary meaning and inconsistent with the intent of the legislature as expressed in the taxing statutes themselves.

The sales and use tax exemption at issue states:

(4) Machinery and equipment, and the materials and supplies solely required for the installation or construction of such machinery and equipment, replacing and used for the same purposes as the machinery and equipment replaced by reason of design or product changes, which is purchased for and used directly for manufacturing or fabricating a product which is intended to be sold ultimately for final use or consumption;
(5) Machinery and equipment, and the materials and supplies solely required for the installation or construction of such 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[.]

Secs. 144.030.2(4)-(5), RSMo Supp.1992.

In attempting to apply these provisions to the telecommunications industry, as the principal opinion notes, op. at 228, the taxpayer carries the burden of showing he or she is entitled to an exemption under the statute. Branson Props. USA, L.P. v. Director of Revenue, 110 S.W.3d 824, 825 (Mo. banc 2003). Exemptions from taxation are to be strictly construed against the taxpayer, so that any doubt or ambiguity in regard to the applicability of the exemption is resolved in favor of application of the tax. Id. Further, in construing the manufacturing exemption: Courts are instructed by the legislature to take the words in a statute in their plain and ordinary sense. The plain meaning of words, as found in the dictionary, will be used unless the legislature provides a different definition.

Lincoln Industrial, Inc. v. Director of Revenue, 51 S.W.3d 462, 465 (Mo. banc 2001) (citations omitted).

The dictionary definition of “manufacturing” does not encompass the services at issue here. To “manufacture” is variously described as, “1: to make (as raw material) into a product suitable for use ... 2a: to make from raw materials by hand or by machinery ... 2b: to produce according to an organized plan and with division of labor.” Webster’s Third New International Dictionary 1S78 (1993). It is similarly defined as, “1. a. To make or process (a raw material) into a finished product, esp. by means of a large-scale industrial operation. b. To make or process (a product), esp. with the use of industrial machines. 2. To create, produce, or turn out in a mechanical manner.” The American Heritage Dictionary, 2nd College Edition 76⅛ (1991).

As is evident, these definitions describe a physical process or one that involves making a product. Even if these definitions can be applied to the making of an intangible product, as this Court has previously held, they cannot be equated with the transmission of a voice over the telephone. Equipment may be used in facilitating the transmission, and the voice may change in form as it travels to its destination, but the voice is not manufactured. It is transmitted. Whether it is transmitted digitally or by a more antiquated process should not affect the fact that equipment used to transmit it is not used directly in manufacturing.

*239Even were it ambiguous whether transmission of voices could fit within these definitions, the statute would not apply to the telephone services at issue here. As we recognized in another Southwestern Bell case involving a related company, our first obligation would be to turn to the intent of the legislature in enacting the exemption, for:

If some ambiguity persists in the statute after consulting a dictionary, courts derive meaning from the intent of the legislature. Courts cannot add words to a statute under the auspice of statutory construction.

Southwestern Bell Yellow Pages, Inc. v. Director of Revenue, 94 S.W.3d 388, 390 (Mo. banc 2002) (citations omitted). Given this standard, it is important to determine the purpose for which the legislature enacted this exemption.

While Missouri does not have legislative history that expressly sets out the purpose of the manufacturing exemption, its purpose is apparent from the nature of the exemption itself. As this Court has previously recognized, “These statutes were enacted by the legislature to encourage the production of items ultimately subject to sales tax and to encourage the location and expansion of industry in Missouri.” Concord Publishing House, Inc. v. Director of Revenue, 916 S.W.2d 186, 190 (Mo. banc 1996). See also Heidelberg Central, Inc. v. Director of Revenue, 476 S.W.2d 502, 506 (Mo.1972) (per curiam) (“one purpose of the statute clearly was to promote manufacturing business in the State”). This makes the updating of old plants and equipment more economical and encourages businesses to locate and expand here.

The distance this Court’s construction of the word manufacturing has moved from the purposes for which the exemption was enacted is demonstrated by the principal opinion, which states that equipment used to give the company information needed to bill the customer for services, and equipment used to tell the customer that he or she has a call waiting or is being called by a private caller and so forth, is manufacturing. If this follows from the definition of “manufacturing” applied in Bell I, then Bell I itself was too far down the slippery slope; certainly this Court should not slide further down that slope, as it has here in holding that such services are exempt. The answer, rather, should be to acknowledge our eiTor in Bell I and climb back to the original meaning of the manufacturing exemption.

Looked at objectively, in light of the dictionary and common sense meaning of “manufacturing,” the fact that the telephone companies change the human voice into data and then transmit it and change it back into voice does not mean that equipment that is used to transmit telephone calls and to tell the caller that they have another call waiting, or who is making a call, or how much they will be billed, is directly used in manufacturing. It is equipment used in transmitting a voice, and certainly that equipment is needed the way many activities use technological devices to accomplish their intended purposes — here, to communicate to persons not within earshot. But, exempting such equipment from the use tax will not serve any of the purposes to be served by the statute — it will not encourage the location of jobs or factories here, it will not encourage the updating of equipment and so avoid the phasing out of jobs to other locations with newer plants,1 for the plain *240fact is that transmitting voices over the telephone does not require manufacturing the voice.

The legislature can, of course, enact a statute exempting the telecommunications industry from tax on the equipment it uses to transmit calls, print bills, and offer other services, if it so chooses. It has not yet done so, however, and it is not appropriate for this Court to effectively do so for it by expanding the definition of “manufacturing” so as to encompass industries that could not have been intended to be included within its compass when the legislature enacted the manufacturing exemption.

The machinery and equipment at issue here were not directly used in manufacturing, as required for the manufacturing exemption to apply. Accordingly, I would reverse so much of the decision as applies the exemption. I concur in the portion of the principal opinion that finds that pay telephone equipment is not exempt.