States often dig in on issues where they shouldn’t, and we see that often in the sales and use tax context (as often as with other state taxes). The Missouri Director of Revenue incorrectly assessed use tax against a subsidiary (“Subsidiary”) of Wal-Mart Stores, Inc. that purchased price scanners, credit card readers, computers and servers from third parties, installed or added software and hardware to the equipment as necessary, and re-sold the equipment to related entities. The related entities paid for the equipment plus a markup and delivery costs, used the equipment in connection with store operations, and paid use tax in their respectively used jurisdictions.

Subsidiary refused to roll over and, after the Director lost at the Missouri Administrative Hearing Commission, the Director appealed to the Supreme Court of Missouri.

Under the use tax law, a sale is “any transfer … of [] title or ownership … for a consideration paid…” Mo. Stat Sec 144.605(7). The use tax resale exemption applies to “processors, retailers, importers, manufacturers, wholesalers, or jobbers solely for resale in the regular course of business[.]” Mo. Stat Sec 144.615(6). Prior Missouri case law required only that the taxpayer show a subsequent transaction that satisfies the exemption statute and the sale statute. Further, another statute provided for use tax exemption when the property at issue was purchased for “the purpose of resale” if the “subsequent sale is … [s]ubject to a tax in this or any other state[.]” Mo. Stat Sec 144.018.1(1).

The Court held that Subsidiary met the statutory tests for exemption by resale. It also held that Subsidiary met the test for exemption as having been purchased for the purpose of resale and the subsequent purchase would be taxed in Missouri or another state.

The Director raised a new issue (regarding the treatment of an LLC for use tax purposes) in the Missouri Supreme Court—it had not raised that issue at the Missouri Administrative Hearing Commission. The Court refused to address the newly raised issue.

It is important to remember that words matter. Subsidiary met the letter of the law. The Director should not have assessed use tax and should not have pursued the appeal. Justice prevails again!