LR 8247
Taxability of Machines Used to Cut Metal
June 28, 2023
Dear Applicant:
This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated April 25, 2023.
The facts as presented in your letter ruling request are summarized as follows:
Applicant is a steel and aluminum distributor, headquartered in the state of California. They purchase their aluminum and steel from their vendors for resale. On occasion, a customer may request further work from Applicant, such as cutting material to a desired length. For example, a customer will request a standard 40-feet piece of steel be cut into two 20 foot pieces. To perform this request, Applicant will utilize in house equipment to cut material to size and specs, such as band saw, circular saw, and tube laser. If no request is made by the customer, Applicant will remove the material from inventory and sell it to the customer.
Most of the orders with materials cut to size are required to be purchased by the customer. If the customer refuses the cut to size order, it can potentially be resized and sold to a different customer. Even if there are no immediate customers, Applicant is always able to sell the existing materials to their scrap dealers.
To accommodate a customer's request, Applicant has purchased a Tsune TK130GL Ferrous Saw (the "Tsune"), a circular saw used to cut materials to size. In addition to the purchase price of the Tsune, Applicant paid for the costs of labor to install the Tsune, and foresee costs of labor for repairing the Tsune.
ISSUE 1:
Is Applicant's purchase of the Tsune used for cutting pieces of steel or aluminum exempt from sales tax as machinery or equipment used in manufacturing, mining, fabricating, processing compounding, or producing?
RESPONSE 1:
No. Applicant's purchase of the Tsune is not exempt from sales tax, because the activities described by Applicant do not rise to the definition of manufacturing, processing, compounding, mining, fabricating, or producing.
Section 144.020.1 RSMo, provides: "A tax is hereby levied and imposed [...] upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state."
However, section 144.030.2(2) provides:
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 resulting from such manufacturing, processing, compounding, mining, producing or fabricating and which new personal property is intended to be sold ultimately for final use or consumption [...]
Applicant purchases already manufactured steel and aluminum for resale, and their subsequent cutting is not fabrication.
12 CSR 10-111.010.2(C) defines fabrication as:
The process of transforming an item into a higher stage of development. It does not imply or signify manufacturing, but the meaning of the term is limited to cutting, carving, dressing, shaping; advancing an elementary shape to a higher stage of development; reworking and cutting shapes to required length.
While Applicant's process does involve cutting aluminum into smaller pieces, this is not advancing an elementary shape to a higher stage of development. Therefore, the Tsune used in the cutting process is not exempt machinery because it is not used in manufacturing, mining, fabricating, or producing a product, and is subject to sales tax.
ISSUE 2:
Are Applicant's costs to install the Tsune and foreseeable costs of labor and repair subject to Missouri sales tax?
RESPONSE 2:
Yes. Applicant's purchases of repair parts for the Tsune are subject to sales tax, because they are not replacement parts for machinery used in manufacturing, mining, fabricating, or producing a product. See Response 1.
The taxability of repair and installation labor for the Tsune will be dependent on the true object of the transaction.
Section 144.010.1(4) defines "Gross receipts" as:
Means the total amount of the sale price of the sales at retail including any services other than charges incident to the extension of credit that are a part of such sales[.]
The true object test determines whether or not to treat a transaction as a taxable transfer of tangible personal property or the non-taxable performance of a service. The true object is what the buyer seeks in making the purchase. See Sneary v. Director of Revenue, 865 S.W.2d 342 (Mo banc 1993); see also Bartlett International, Inc. v. Director of Revenue, 487 S.W.3d 470 (Mo banc 2016).
Here, Applicant's costs for installation labor would be subject to sales tax, because the true object of the transaction is acquiring the Tsune, not for installation labor. Installation labor is unlikely to ever be the true object of a transaction that includes the sale of the property itself. The fact that the charges are separately stated is not determinative, it is the true object of the transaction. In this transaction, the installation labor would be unnecessary without the tangible personal property, so the true object is clearly the Tsune saw.
Future charges for repairs on the Tsune saw would not be subject to sales tax. Again, this transaction is considered under the true object test. Although repairs may include tangible personal property, the object of the transaction is the repair/maintenance of the Tsune saw, which is a non-taxable service. Therefore, future charges for labor are not subject to sales tax.
ISSUE 3:
Are Applicant's costs for shipping the Tsune after purchase taxable?
RESPONSE 3:
No. Applicant's costs for shipping the Tsune are not taxable.
Section 144.010.1(4) defines "Gross receipts" and includes: "[T]he term gross receipts shall not include usual and customary delivery charges that are stated separately from the sale price[.]"
Applicant's shipping charges are separately stated from the sale price, therefore, they are not included in the gross receipts for purposes of calculating sales tax.
This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals. If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change. For this reason, the interpretation set forth above should be reviewed on a regular basis. Please note that any change in or deviation from the facts as presented will render this ruling inapplicable.
Should additional information be needed, please contact Legal Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.
Sincerely,
Wayne Wallingford