The Missouri General Assembly passed a bill (SB 823) that temporarily prohibits the Missouri Department of Revenue (Department) from issuing sales and use tax assessments based on the recent Missouri Supreme Court (Court) ruling in IBM.¹ The bill was sent to Governor Jay Nixon on May 25, 2016. He has 45 days to act on the measure.

In IBM, the Court found that the taxpayer was not entitled to a use tax exemption for hardware and software sold to a large credit card company because the credit card company's use of the materials for processing credit and debit card transactions did not qualify as "manufacturing of any product" under the statute.² This ruling potentially overturns a quarter century of Supreme Court precedent in that organizing information constitutes manufacturing. An earlier version of SB 823 would have effectively reversed the Court's ruling in IBM by expanding the exemption to include the activity at issue in the case. This language, however, was removed during conference committee and replaced with a provision prohibiting the Department from sending notice to any taxpayer regarding taxability of transactions under IBM before August 28, 2017. Under legislation enacted in 2015, such notification is required before the Department can issue a new assessment based on the change in law.

Specifically, SB 18 (Mo. Laws 2015) provides that, when the taxability of tangible personal property or services is modified by the revenue director, an administrative hearing commission or a court of competent jurisdiction, the Department is required to notify "all affected sellers … before such modification shall take effect for such sellers." The failure to notify sellers regarding this change in taxability relieves the sellers of the tax liability until they are notified.

Other provisions in SB 823

SB 823 would create a state and local tax exemption for internet access or for the use of internet access, regardless of whether the tax is imposed on a provider or buyer of internet access. It also modifies the bonding requirement for retail sales licensees, lowering the bonding requirement cap for retail sales licensees to two times the average monthly tax liability of the taxpayer. It also releases taxpayers after one year of satisfactory tax compliance.³

Implications

In the meantime, without the language contained in SB 823, the revenue director would be able at any time to notify affected sellers of the taxability of transactions like those in IBM, and begin issuing assessments based on the decision. It is anticipated that during the 2017 legislative season, the Missouri General Assembly will reconsider legislation to effectively overturn the Court's ruling in IBM. The delay contained in SB 823 gives the General Assembly time to approve a legislative fix. It's worth noting that in 2017, Missouri will have a new governor, who may, or may not be, more receptive to tax relief provisions for business taxpayers.

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ENDNOTES

¹ IBM Corp. v. Mo. Dir. of Rev., No. SC94999 (Mo. S. Ct. April 5, 2016) (opinion modified May 24, 2016) (taxpayer not entitled to use tax refund for sales of hardware and software to a large credit card company for the credit card company's use in processing credit and debit card transactions, because the credit card company's use of the hardware and software did not qualify as "manufacturing a product" as used in the statutory exemption).

² Mo. Rev. Stat. Ann. Section 144.054.2.

³ Currently, applicants for retail sales licenses and certain licensees must file bonds for up to three times the average monthly tax liability of the taxpayer. After two years of satisfactory tax compliance, the taxpayer is released from this bonding requirement.