United States

Missouri court rules hardware and software not manufacturing equipment

Sales and use tax exemption does not apply


On April 5, 2016, the Missouri Supreme Court issued its decision in IBM Corporation v. Director of Revenue, holding that IBM Corporation, was not entitled to a use tax refund on hardware and software sold to Mastercard International LLC, which uses the equipment to process credit and debit card transactions, overturning the prior decision of the Missouri Administrative Hearing Commission that this equipment  qualified as exempt manufacturing equipment under Missouri Revised Statutes section 144.054.2.

Mastercard purchased the hardware and software from IBM, and used the equipment to authorize and process debit and credit card transactions. The process involves several steps, a customer presents credit or debit card to merchant, the merchant sends the transction information to their bank, the bank sends that information to Mastercard, Mastercard sends the bank credit card information and the bank decides whether to accept or decline the transaction.  Mastercard summarizes amounts due from each bank and issues settlement statements, and the banks remit funds to Mastercard. IBM charged Mastercard Missouri use tax on the hardware and software used in this process. 

In 2012, IBM filed a use tax refund claim with the Missouri Department of Revenue, claiming the hardware and software used in processing transactions was exempt manufacturing equipment under section144.054.2. This provision exempts equipment and materials used in manufacturing, processing, compounding, mining or producing any product. The director of revenue denied the refund, and IBM appealed. On appeal, the Missouri Administrative Hearing Commission found against the Department, stating that the Missouri Supreme Court construed this activity as manufacturing. The Director appealed the decision to the Missouri Supreme Court.

Before the Missouri Supreme Court, IBM argued that Mastercard’s activities of transmitting aprrovals and disapprovals, summarizing data reports for banks, and communicating this information is the manufacturing of a new product. IBM based its arguments on two Soutwestern Bell cases previously decided by the Missouri Supreme Court, in which the court ruled that equipment used to transmit voices is considered exempt manufacturing equipment.  The Missouri Supreme Court determined that, to qualify for the exemption, the equipment and materials must be used during the manufacturing, processing, compounding, mining or producing a product, and that, in the current case, application of its prior decisions in Soutwestern Bell was too broad.  The court then reviewed the nature of the activites in question, which it construed as information analysis and transmission services, and found that the equipment did not qualify as manufacturing equipment within the meaning of section 144.054.2.

This decision continues to the trend of the Missouri Supreme Court narrowing the application of its prior Southwestern Bell decisions, and ruling against taxpayers claiming the manufacturing exemption in similar circumstances. Taxpayers should review the facts in this decision in relation to their own activities, and exercise caution when claiming Missouri’s sales and use tax exemption for manufacturing equipment and materials.


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