News & Insights

Missouri Supreme Court Reverses Course on Longstanding Sales Tax Exemption

Tax Development Mar 26, 2020

Missouri Supreme Court Reversal on DI Supply I, LLC v. Department of Revenue (No. SC 97932)The Missouri Supreme Court upheld an Administrative Hearing Commission’s decision, which veered dramatically from the last 25 years of the Court’s sales and use tax decisions. In DI Supply I, LLC v. Department of Revenue (No. SC 97932), the Drury Hotels Company (DHC) owned DI Supply and managed several dozen hotels in Missouri. DI Supply sells furnishings and supplies to hotels managed by DHC. Upon audit, the Department of Revenue assessed sales tax on $11 million of taxable furnishings DI Supply sold to DHC. DI Supply argued that the items of tangible personal property were purchased for resale to the hotel guests and, therefore, exempt from Missouri sales tax. The items sold included linens, mattresses, chairs, desks, soap dispensers, wall art, and irons, among other items. 

Missouri imposes sales tax on the retail sale in the state of tangible property. The term “sale at retail” is defined in Section 144.010.1(11) as “any transfer made by any person engaged in business as defined herein of the ownership of, or title to, tangible personal property to the purchaser, for the use or consumption and not for the resale in any form as tangible personal property, for valuable consideration.” This section provides an exemption from sales tax for sales of tangible personal property sold for the purpose of resale to another customer in the regular course of business. 

DI Supply has taken the position that the sales are exempt from sales tax because DHC hotels include the cost of the furnishings into the nightly room rate. This argument maintains that the hotels are reselling the room furnishings to hotel customers and that the resale exemption applies.

As has been historically interpreted, DI Supply applied the definition of sale in the use tax statutes to the sales at issue. Section 144.605(7) in the use tax statutes defines “sale” as “any transfer, barter, exchange of the title or ownership of tangible personal property, or the right to use, store, or consume the same, for a consideration paid or to be paid, and any transaction whether called leases, rentals, bailments, loans, conditional sales or otherwise, and not withstanding that the title or possession of the property or both is retained for security.” (Emphasis added.) Under this definition, the transfer of the right to use constitutes a “sale” for resale exemption purposes.

DI Supply’s reliance on this use tax statute should have been considered reasonable, as the Court has consistently used sales tax statutes and use tax statutes interchangeably for at least 25 years. A multitude of cases has been decided by this court, invoking use tax statute definitions in sales tax cases, similar to the position taken by DI Supply. This court took a radical departure from prior precedents to conclude that DI Supply failed to meet the burden of proof in the position that the items sold to DHC were resold by the hotels.

Taxpayers that rely on the use tax definition of “sale” need to reconsider their position, as the Court has definitively stated that courts should no longer employ the use tax definition of “sale” in sales tax resale exemption cases because the sales tax and use tax definition requirements differ. The dissenting opinion in this case points to the need for identical application of the statute language, in that the sales tax and use tax should complement each other.

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Mark Nachbar
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Ryan Domagalski
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