The Supreme Court of Missouri reviewed the Administrative Hearing Commission’s (AHC) analysis of whether certain equipment purchased by a telephone company qualified for a manufacturing exemption. The AHC determined that telephone network equipment was exempt from sales and use tax under the integrated plant theory because, while parts were not physically close, they were part of an integrated and coordinated process. Transmission equipment was also found to be exempt because it met all requirements for the integrated plant theory: necessity, physical or causal proximity, and integrated operation. Finally, the AHC concluded that vertical services equipment (e.g. caller ID, call forwarding, call waiting) and billing services to be exempt from sales and use tax because they were proved to be manufactured items and not simply a method to charge its customers. While the Supreme Court agreed with the AHC’s position on these issues, it found the AHC wrongly applied the integrated plant theory and erred in concluding that pay telephone components were exempt. (Southwestern Bell Telephone Company, Respondent v. Director of Revenue, Appellant, SC86441)
UPDATE: Missouri has enacted legislation clarifying that the state’s manufacturing exemption includes certain telecommunications services.