Computer Information Systems for Expansion of Existing Manufacturing - Exemption for Sales/Use Tax Under § 144.030, RSMo

In Concord Publishing House, Inc. v. Director, 916 S.W.2d 186 (Mo banc 1996), the Supreme Court of Missouri determined that a publishing company which purchased an integrated computer system which allowed it to implement a new publishing process that allowed the newspaper publisher to increase production was entitled to various tax exemptions under §144.030 RSMo, et seq., even though there was no tangible, physical expansion of the publisher's facilities. The hardware and software acquired to convert the newspaper layout and process into a pagination system qualified as equipment directly used in manufacturing or the expansion of existing manufacturing. The computer system was determined to be as much as an integral part of the printing of the paper as the actual printing presses.

Concord's primary business was commercial printing. One division operated a printing press which was used to print a number of newspapers. The taxpayer used a tiling, or overlaying, process to prepare the newspaper for print. Text was entered into computers and printed off on laser printers. It was then manually arranged on a sample page, and a photograph was taken to create a negative. As a result of purchasing the computer equipment for which the sales tax exemption was claimed, the newspaper revised its publishing by using a pagination process which eliminated a significant amount of manual work involved in creating the layouts. The pages were assembled on a computer network and the negative was electronically produced. Because of pagination, the newspaper was assembled more quickly and the newspaper could be published seven days a week instead of six. The purchased computer equipment used in pagination was not acquired to replace old, worn out, or obsolete equipment but to upgrade the publication system in order to implement pagination and expand production. The Director of Revenue assessed sales and use tax on the equipment which the taxpayer paid under protest. The Administrative Hearing Commission upheld the protest.

The Director appealed from the AHC's decision allowing an exemption for the pagination computer equipment. The Director contended that the only manufacturing that was done by the taxpayer which occurred in the publishing of the newspaper was the physical process of putting ink on paper and that gathering, storing, and arranging the information by means of computers was not manufacturing. The Director asserted that the purchase of the computer equipment did not result in a change in the product, because each edition of a newspaper looks different from the previous editions. The Director further contended that the equipment did not qualify for the expanding existing manufacturing exemption, because the exemption under § 144.030 is provided only for those items that physically expand manufacturing plants. The Supreme Court rejected each of the Director's positions. Organizing information through computer technology is manufacturing under the precepts outlined in Bridge Data Co. v. Director, 794 S.W.3d 20 (Mo. banc 1990). The Concord computer layout system was used to process data and convey information to customers. The final product was clearly different from what is put into the system. The Concord computer network, according to the Court, produced a tangible taxable product, a newspaper.

The Director's argument that the only manufacturing that occurs in the publishing of a newspaper is the process of putting ink on paper was determined by the Court to be artificially limited. It ignored the labor, skill, and complex machinery required to generate daily newspapers and the transformation that took place when the taxpayers adopted the pagination system.

Further, the Court determined that the pagination system was an essential, integral part of the newspaper manufacturing process. "By holding the computers are used in manufacturing a newspaper, we also find they are directly sed in manufacturing because they are an integral part of the publication process. The computers are as essential to the printing of the paper as the printing presses themselves. A more limited view of the process would arguably exclude the most important step in manufacturing a newspaper, the composition and editing of its contents." Id. at 192.

Composition, editing, recording of information, design change and product change of the newspaper were all determined to be an integral part of the manufacturing of the newspaper. "The statute allows an exemption for equipment that replaces other equipment °by reason of a design or product change.' The taxpayers' equipment was purchased °by reason of,' or for the purpose of, implementing a new manufacturing process and creating a new and better product." Id. at 194.

The concept of "integration" used by the Court is beneficial for other taxpayers who acquire tangible and intangible assets for its "manufacturing" and seek sales/use tax exemptions under Missouri law. Many manufacturing concerns need an integrated computer system to enhance production capabilities.