In DI Supply I, LLC v. Director of Revenue,¹ the Missouri Supreme Court (Court) reversed a long-standing policy of the Missouri courts to apply use tax definitions contained in the Missouri statutes for sales tax purposes to determine that a company's sales of room furnishings and supplies to a related hotel chain were not exempt sales for resale.

DI Supply I, LLC (DI), a wholly owned subsidiary of Drury Hotels Company, LLC (Drury), sold room furnishings to hotels managed by Drury within Missouri. DI argued that its sales to Drury were exempt under Missouri's resale exemption statute, Mo. Rev. Stat. Section 144.010.1(11), because Drury effectively included the cost of the room furnishings into the nightly rate for a hotel room. DI reasoned that the definition of "resale" included the "right to use" the room furnishings and, thus renting a hotel room constituted a resale of the room furnishings to the hotel customers who had purchased this "right to use" the room furnishings.

DI contended that the elements of a "resale" for Missouri sales tax purposes are derived from the definition of a "sale" under Missouri law. In prior decisions, Missouri courts defined a "sale" as (1) a transfer, barter or exchange (2) of title or ownership of tangible personal property or the right to use, store or consume the same (3) for a consideration paid or to be paid.² However, as the Court noted and DI acknowledged, these elements derived from the Missouri use tax statutes (Mo. Rev. Stat. Sections 144.600 through 144.746) rather than the Missouri sales tax statutes (Mo. Rev. Stat. Sections 144.010 through 144.527).

While both the sales tax and the use tax statutes contain resale exemptions, the Court noted that there is a distinction. The use tax exemption (set forth in Mo. Rev. Stat. Section 144.615(6)) defines a "resale" based on the use tax definition of "sale" contained in Mo. Rev. Stat. Section 144.605(7). That provision includes as a "sale" any transfer of the right to use, store or consume tangible personal property. Conversely, the Missouri sales tax statutes define a resale based on the sales tax definition of a "sale at retail" under Mo. Rev. Stat. Section 144.010.1(11), which requires the transfer of title or ownership for the purchaser's use or consumption.

The Court noted its more than 25-year history of "applying use tax definitions in sales tax cases," but explained that such mixing of statutory definitions was in error and, given that the sales tax and use tax resale exclusions "derive from separate and distinct statutes requiring independent analysis," application of the statutorily correct exemption requires application of the sales tax exemption to this sales tax case. The Court further noted that, while its own "muddled analysis" has caused understandable confusion, the language of the statutes is clear, and the sales tax and use tax statutory "definitions of 'sale,' though similar, have different requirements." Accordingly, the Court concluded, employment of the use tax definition of "sale" in sales tax resale exemption cases must no longer be followed.

Applying this new standard, the Court ultimately held that it could not consider whether the hotel customers' right to use the room furnishings implicated the resale exemption to sales tax because the sales tax statutes do not include the transfer of the right to use, store, or consume as a "sale at retail." Rather, the Court explained, DI would have to show title or ownership of the room furnishing transferred to hotel guests during the duration of their stay. Having concluded that DI had not met this burden, the Court upheld the assessment for unpaid sales tax against it.³

Implications

The decision overturns more than 25 years of precedent that had allowed a company to apply a use tax definition when claiming a sales tax exemption. Companies now must reexamine title transfers within their operations and the basis for claiming a sales tax or use tax resale exemption.

Additionally, going forward, companies will need to base their decision on whether to claim a sales tax exemption on a strict reading of the statute, rather than how the courts have interpreted the statute. Sales tax statutes and use tax statutes have been undifferentiated and substituted one for the other at times. The Court, however, has now clearly stated that the language of the specific statutes will govern taxability or exemption, not the courts' prior interpretations of the statute.

———————————————

———————————————
ENDNOTES

¹ No. SC97932 (Mo. S.Ct. Mar. 17, 2020).

² See Aladdin's Castle v. Dir. of Revenue, 916 S.W.2d 196, 198 (Mo. banc 1996); Sipco, Inc. v. Dir. of Revenue, 875 S.W.2d 539, 542 (Mo. Banc 1994); Kansas City Royals Baseball Corp. v. Dir. of Revenue, 32 S.W.3d 560, 562 (Mo. banc 2000).

³ Judge Fischer filed a dissent to the majority opinion primarily on stare decisis grounds but also suggested that harmonization of the sale tax and use tax statutes should be an objective of the courts.