LR 8270
Taxability of Machinery and Equipment Not Used Directly for Telecommunications
September 25, 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 August 22, 2023.
The facts as presented in your letter ruling request are summarized as follows:
Applicant is certificated by the Missouri Public Service Commission to provide telecommunications services. Applicant provides, produces and transmits telecommunications services via Ethernet networks provisioned through the use of fiber optic cable hung from utility poles or buried below ground. Members of the public using Applicant's Ethernet services are provided with the ability to transmit data, voice, video and audio communications between two or more points.
Ethernet signals sent through the fiber optic cable begin to degrade at specific distances. Because of this, it is necessary at points along the Ethernet routes to receive and regenerate the signal. Receipt and regeneration requires the use of a variety of types of highly technical equipment located in climate controlled gravel faced reinforced concrete huts (GFRC huts) at locations along the route. The equipment located in the GFRC huts includes filters, amplifiers, dispersion compensation modules, transponders, switches, routers, SONET equipment, media converters, temperature and intrusion monitors and alarms, firewalls, batteries, rectifiers, lasers, and cameras. All of this equipment is necessary for the receipt, regeneration and secure transmission of customer telecommunications. Applicant's Ethernet regeneration equipment is housed in small GFRC huts throughout Missouri. The GFRC huts are placed on top of concrete pads to keep them from sinking into the ground. These GFRC huts are portable huts placed on concrete pads, and constitute personal property, not real estate.
The receipt and regeneration equipment has limited operating temperature range between 64o F to 75o F, and a limited operating humidity level range between 35% to 70% humidity. Because of this, Applicant must use an HVAC system attached to the GFRC Hut to maintain the operational temperature, humidity and air quality for the equipment. GFRC huts, and HVAC units attached to the huts, serve no other purpose to Applicant other than the provisioning of telecommunication services.
ISSUE 1:
Is Applicant's purchase of portable GFRC huts exempt from Missouri sales or use tax?
RESPONSE 1:
No. Applicant's purchase of portable GFRC huts are not exempt from Missouri sales or use tax.
Section 144.020.1, RSMo, provides that "[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." Section 144.020.1(4)(a) provides:
A tax equivalent to four percent on the basic rate paid or charged on all sales of local and long distance telecommunications service to telecommunications subscribers and to others through equipment of telecommunications subscribers for the transmission of messages and conversations and upon the sale, rental or leasing of all equipment or services pertaining or incidental thereto;
RSMo, 144.030.2(4) provides an exemption for replacement machinery, equipment, and parts that are used directly in manufacturing a product which is intended to be sold for final use. RSMo, 144.030.2(5) exempts machinery, equipment, and parts that are purchased and used to establish new, or to expand existing manufacturing plants in the state if such machinery and equipment is used directly in manufacturing a product which is intended to be sold for final use. Under subdivisions 4 and 5, the term "product" includes telecommunications services and the term "manufacturing" includes the production and transmission of telecommunications services.
The integrated plant doctrine is used to determine whether machinery, equipment, or parts are "used directly in manufacturing." Dreyer Elec. Co. v. Dir. of Revenue, 603 S.W.3d 297, 302 (Mo. banc 2020). In applying the integrated plant doctrine, three questions are considered:
(1) Is the disputed item necessary to production? (2) How close, physically and causally, is the disputed item to the finished product? (3) Does the disputed item operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system? Charter Commc'ns Ent. I, LLC v. Dir. of Revenue, 667 S.W.3d 84, 90 (Mo. 2023).
Applicant's purchase of GFRC Huts would not be exempt because they do not "operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system." Id. See Dreyer Elec. Co., LLC v. Dir. of Revenue, 603 S.W.3d 297, 304 (Mo. 2020) (finding that electric outlets, lights, and lamps are not used directly in manufacturing, and that heat for a building is generally not a part of the integrated process); See also Letter Ruling 8180 (explaining that support structures are exempt, while concrete foundations for the support structures would not be exempt).
Therefore, Applicant's purchase of portable GFRC huts are not exempt from Missouri sales or use tax.
ISSUE 2:
Is Applicant's purchase of HVAC units exempt from Missouri sales or use tax?
RESPONSE 2:
No. Applicant's purchase of HVAC units are not exempt from Missouri sales or use tax.
Applicant's purchase of HVAC units would not be exempt because they do not "operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system." Id. See Dreyer Elec. Co., LLC v. Dir. of Revenue, 603 S.W.3d 297, 304 (Mo. 2020) (finding that electric outlets, lights, and lamps are not used directly in manufacturing, and heat for a building is generally not a part of the integrated process); See also Letter Ruling 8180 (explaining that support structures are exempt, while concrete foundations for the support structures would not be exempt). See response 1 regarding the application of sections 144.030.2(4)-(5).
Therefore, Applicant's purchase of HVAC units are not exempt from Missouri sales or use 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 Michael C. Reed General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.
Sincerely,
Wayne Wallingford