This article is a brief update regarding state and local tax ("SALT") developments in the State of Missouri. SALT issues include both Missouri income tax matters and sales and use tax matters. The Missouri Department of Revenue has been increasingly active in recent years, so it is important to keep up with SALT issues and how they may affect our clients.
Missouri Income Tax
Qualified Subchapter S Subsidiaries
The 1996 Small Business Act created a new entity called a "qualified subchapter S subsidiary" or "QSSS." This new entity, available for tax years beginning on or after January 1, 1997, basically allows one S corporation to own another S corporation as a 100% shareholder. Once this ownership is established, a QSSS election is filed with the IRS. The two S corporations then file a single, combined federal income tax return. Generally, this provides the advantage of offsetting income and loss among the two corporations, but maintains them as separate legal entities for liability and other business purposes.
The Missouri Department of Revenue initially rejected the tax effects of the QSSS election for Missouri income tax purposes. After considering the issue further, the department has recently reversed its position and will now honor QSSS elections, and their tax effects, for purposes of Missouri income taxes. The departments general counsel, Carol Iles, has indicated that a ruling is pending that will confirm the departments new position with respect to QSSS matters.
Consolidated Return Rules
General Motors Corporation and Subsidiaries v. Director of Revenue (decided December 22, 1998) severed as unconstitutional a portion of the current Missouri consolidated return statute. Section 143.431(1), RSMo 1994, provides as follows:
If an affiliated group of corporations files a consolidated income tax return for the taxable year for federal income tax purposes and fifty percent or more of its income is derived from sources within this state . . . then it may elect to file a Missouri consolidated income tax return.
The Supreme Court determined that the fifty percent requirement in the statute is unconstitutional because it discriminates against interstate commerce. Rather than eliminating the entire statute, the Court "severed" the fifty percent requirement. Therefore, the only requirement for electing to file a Missouri consolidated return is that the group file a consolidated federal tax return.
Companies that filed consolidated federal tax returns will need to carefully consider this decision. These companies may have as many as three "open" years for which the statute of limitations has not expired and refund claims may be available. If these companies, like General Motors, ignored the fifty percent requirement, made a Missouri election and filed Missouri consolidated returns, the decision supports their position. Companies that did not challenge the statute by previously filing consolidated returns may want to consider filing amended returns claiming retroactive effect (and possible refunds) resulting from this decision. However, the Department of Revenue has initially indicated that it will challenge retroactive efforts to make the required election and claim refunds. At a minimum, companies filing consolidated federal tax returns need to consider a Missouri consolidated return election on a prspective basis.
Missouri Sales and Use Tax
Repair Parts Exemption
Despite some recent confusion, repair parts for maintaining and upgrading machinery or equipment used in manufacturing are generally exempt from sales and use tax in Missouri. Missouri Senate Bill 936, which became effective on August 28, 1998, added the term "parts" to the exemption for installation or construction of replacement machinery and equipment and to the new and expanded plant exemption. The Missouri Department of Revenue initially stated that Senate Bill 936 did not include repair parts. A proposed regulation that excluded repair parts was circulated, and the department indicated that the legislation was under review, which created significant confusion.
On January 20, 1999, the director of revenue issued a written statement clarifying the departments new position that "the law provides an exemption from sales and use tax on purchases of parts for repairing, maintaining and upgrading machinery or equipment used in manufacturing. The interpretation of the law was delayed from the bills August 28, 1998, effective date in order to address the complexity of the law." The director of revenue has also stated that any taxpayers who have already paid sales or use tax on parts purchased since the law became effective and who used the parts for repairing, maintaining or upgrading machinery or equipment used in manufacturing may apply to the department for a refund.
Sale for Resale in Leasing Context
Another recent Supreme Court of Missouri case addressed the application of the sale for resale exemption from sales and use tax in the context of a lease relationship. In Brambles Industries, Inc., a/k/a CHEP USA v. Director of Revenue (decided on December 22, 1998), the Court determined that, under certain circumstances, leases were excludable from sales tax as a sale for resale. Brambles had applied for a refund of taxes paid on leases of pallets. Brambles theory was that pallets purchased under identical circumstances would be exempt from sales tax as purchases for resale, and that a lease for release should similarly be exempt. The Administrative Hearing Commission found for the department, holding that the lease transactions are not eligible for a sale for resale exemption because title is not transferred. The Supreme Court of Missouri disagreed and determined that a lease may also qualify as a sale for resale. The Court noted that proceeds of the leases would only be includable in gross receipts if a comparable sale would be included. Following the decision, the Department of Revenue requested an opportunity to present additional evidence, and a hearing has been set for the end of March for that purpose. Therefore, these issues, including the particular factual circumstances that may qualify for the Courts "lease for release" exemption, are still pending.
Component Part Exemption
The Doe Run Resource Company d/b/a Doe Run Company, Smelting Division, and Arsarco, Inc. v. Director of Revenue (also decided December 22, 1998) dealt with the component part exemption from Missouri sales and use tax. This is an exemption for "materials, manufactured goods, machinery and parts which when used in manufacturing, processing, compounding, mining, producing or fabricating become a component part or ingredient of the new personal property..." The key issue in Doe Run was whether coke that was entirely consumed in the companys smelting process became a component part or ingredient of the lead and, therefore, was entitled to an exemption. The Court determined that the coke, although an essential ingredient to the process, was not intended to become a component part or ingredient of the product. The coke, a key material in the smelting process, was not treated as a "component part" because the process by design eliminated the coke from the final product.