Scott E. Vincent
Shughart, Thomson & Kilroy
Kansas City

A number of sale for resale cases in the last year have been significant. These cases deal with situations where taxes were paid on items that could have been purchased as a sale for resale, entitling the purchasers to a refund. These cases are a good reminder to review and re-examine client operations on a regular basis to determine whether they are properly collecting and remitting sales and use taxes when required, and sometimes more importantly, to eliminate any payments of sales or use tax when possible. Two key cases that highlight the recent activity are outlined below.

Kansas City Power and Light Company

One recent case is Kansas City Power and Light Company vs. Director of Revenue, Administrative Hearing Commission, Case No. 99-1775RV (November 7, 2001). The Kansas City Power and Light (KCP&L) case involved the application of sales tax to electricity used in hotels. This case is of significant importance to Missouri hotels and motels since they may be entitled to a refund of the sales tax they have already paid. The case is also a good reminder that sales tax exemptions and use tax exemptions can sometimes be applied in a unique and expansive manner.

The basis of the KCP&L claim is that electricity purchased by the hotel and used in the guest rooms, meeting and banquet spaces is re-sold to hotel guests. Currently, when a hotel purchases electricity the hotel is considered the end user and, therefore, pays tax to the utility company for remittance to the Department of Revenue. The argument in KCP&L was that the hotel is not the end user. The electricity is factored into the price of the room and re-sold to hotel guests. Therefore, the hotel purchased the electricity for resale and should not have paid sales tax to the utility company. The Missouri Administrative Hearing Commission has agreed that the sale for resale exemption applies to these facts.

The KCP&L case is currently on appeal to the Supreme Court of Missouri. The Department of Revenue's position is that the hotel sold a service rather than electricity, that the hotel itself used and consumed the electricity in providing this service, and that the resale exclusion does not cover resale of a service. The department has also challenged the formula used by the Administrative Hearing Commission for determining the amount of electricity covered by the exemption and refund claim.

As we all await results of the KCP&L appeal, it is important to remember that sales and use tax refunds are subject to a three-year statute of limitations. Therefore, hotels and motels in Missouri should consider current refund claims to preserve their rights with respect to older tax periods.

Kansas City Royals Baseball Corporation

Another recent sale for resale case was Kansas City Royals Baseball Corp. v. Director of Revenue, Supreme Court of Missouri, 32 SW3d 560 (December 5, 2000). The Royals designated certain games as promotional events. At these promotional event games, the Royals gave some fans (often the first to arrive) promotional items at no additional charge. These items included baseball caps, trading cards, baseball gloves, batting gloves and T-shirts. Even though not every fan received a promotional item, the Supreme Court determined that the cost of purchasing those items was factored into the price charged for each ticket of admission. Therefore, a resale occurred and no use tax was due on the promotional items.

This decision has clear implications for other taxpayers who give away promotional items. This case supports the theory that any transactions involving promotional items qualify for the sale for resale exemption if the cost of the promotional items is included in products sold by the taxpayer.

Conclusion

Most taxpayers need to continually review their sales and use tax practices with a state and local tax practitioner. Missouri's sales and use tax statutes are often antiquated in relation to current technology. In addition, the sales and use tax area is constantly being changed by legislation, government regulation and case law. With this "moving target," it makes sense to at least annually review existing law and sales and use tax transactions to evaluate whether there are changes that could benefit our clients or our own practices.