Recently, the Supreme Court of Missouri affirmed a decision that approved a use tax refund of Charter Communications Inc.’s entity CCE I, which provides telecommunications, internet and cable services. The Court upheld a $1.5 million use tax refund related to purchases of equipment used to provide telecommunication services.
“Processes and procedures can be implemented to minimize unnecessary overpayments.”
THE $1.5 Million refund
CCE I provides telecommunication services that use various equipment purchased from Cisco Systems, Inc. In 2014, CCE I submitted a refund claim with the Missouri Department of Revenue (Department) for a refund for the use tax paid on the equipment. Although the refund request was initially denied, the decision was later overturned by the state’s Administrative Hearing Commission (AHC).
In reaching its decision, the AHC determined that CCE I’s telecommunication services constituted manufacturing because the equipment was “used directly” in manufacturing the services. The Department appealed the AHC’s decision, claiming CCE I needed to establish that the equipment was “substantially used” in manufacturing telecommunication services instead of the required “used directly”.
On appeal, the Supreme Court of Missouri rejected this argument, emphasizing that the equipment needed only to be “used directly” in the manufacturing process. The Court also referenced case law that established the standards for determining whether equipment was “used directly” in the process, such as whether the equipment is necessary for production and how the equipment operates with other production systems.
Used directly
For manufacturers or companies that utilize manufacturing to provide other services, determining whether tangible personal property or services are “used directly” in the manufacturing process is critical for sales and use tax exemption purposes. Property or services that are “used directly” in manufacturing are often eligible for sales or use tax exemptions. Although the specific statutory language varies amongst the states, the significance of “used directly” in the process remains.
For example, Pennsylvania statute exempts from sales and use tax any property or services performed by a person engaged in manufacturing or processing if the property is “predominantly used directly” in the manufacturing or processing operations. Like the standards in Missouri, Pennsylvania has its own tests for determining whether property is directly used, such as physical proximity of the property to the production process.
Ohio has a similar statute, but with its own unique wording. Ohio exempts from tax any purchases made for the purpose of “using” the thing transferred as a material or a part “primarily” in a manufacturing operation to produce tangible personal property for sale.
exemptions & refunds
As with CCE I, companies should be aware of all available sales and use tax exemptions provided for manufacturers and companies that utilize manufacturing to provide services. Subject to each individual state’s statute of limitations, for sales or use tax paid on eligible exempt purchases, refund claims can be filed. Additionally, process and procedures can be implemented that will minimize unnecessary overpayments. Know what you owe so you do not pay more than what is due!