Missouri Rules Industrial Processing Exemption Does Not Include Food Preparation.

Thursday, February 28th, 2013


The Missouri Administrative Hearing Commission released a ruling confirming that "processing" does not include the preparation of food for retail consumption. Union Electric Co. d/b/a Ameren Missouri v. Director of Revenue, No. 11-0427 (Mo. Admin. Hearing Commn. Dec. 19, 2012).

The taxpayer Union Electric Company sells electricity and natural gas. It filed a refund claim for purchases of electricity and natural gas on behalf of its customer Schnucks (a retail grocery store chain). Union Electric Company claimed that the bakery departments inside the grocery stores were "processing" food and therefore exempt from paying sales tax on electrical energy and natural gas. However, Union Electric Company was denied the refund claim by the Director of Revenue. It then filed a complaint with the Administrative Hearing Committee (AHC) challenging the Director if Revenue's decision.

In determining whether Union Electric Company was entitled to a tax exemption, the AHC reviewed the case considering that tax exemptions are strictly construed against the taxpayer who has the burden to prove entitlement to the tax exemption and that any doubt is resolved in favor of taxation. Union Electric Company argued that Missouri exempts electrical energy and natural gas used or consumed during the "processing" of any product. Mo. Rev. Stat. sec.144.054. Although United Electric Company claimed that bakeries are "processing" in the sense that there is "an act or series of acts performed upon materials to transform or reduce them to a different product," ultimately the AHC decided that a word is known by the company that it keeps. Meaning that in the exemption for electricity and gas "processing" is in the company of manufacturing, compounding, mining and producing which are all industrial activities," and therefore, food preparation for retail consumption is not "processing" because it is not an industrial activity. The AHC directly correlated its findings with Aquila Foreign Qualifications v. Director of Revenue in that the Missouri Supreme Court held the preparation of food for retail consumption is not "processing" within the meaning of section Mo. Rev. Stat. sec. 144.054.2. Also, United Electric Company argued that Mo. Code regs. tit. 12, 10-110-621(4)(O) exempts bakeries under Mo. Rev. Stat. sec.144.054. However, the AHC found that this regulation was in direct conflict with Mo. Rev. Stat. sec. 144.054.2 as well as a preceding judicial interpretation of that statute, and when there is a direct conflict or inconsistency between statute and regulation, the statute, which represents the true legislative intent must prevail. Furthermore, not only must a statute prevail against an inconsistent regulation, but judicial interpretation of that statute must prevail as well. Mo. Code regs. tit. 12, 10-110-621(4)(O); Aquila Foreign Qualifications Corp v. Director of Revenue, 362 S.W.3d 1(Mo. 2012).

Union Electric Company did not prove entitlement to a refund under this exemption. The AHC supported the findings of the Director of Revenue and denied Union Electric Company's refund claim for purchases of electricity and gas on behalf of its customer, Schnucks. Retail food preparation is not included in the legislative intent or the judicial interpretation of "processing."

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