Missouri limits sales-for-resale tax exemption


John Stowe
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Bob Gershon
Kansas City
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On March 17, 2020, the Missouri Supreme Court denied a sale-for-resale exemption for room furnishings sold to hotels.1 The Court’s 6-1 decision overturned several prior Missouri cases that had applied the use tax, rather than the sales tax, definition of a sale in order to permit use of this type of exemption.

Background DI Supply I, LLC (DI Supply) is a wholly-owned subsidiary of Drury Hotels Company, LLC (Drury), which manages hotels in many states throughout the United States, including Missouri. DI Supply sold furnishings to Drury for use in its hotels under an agreement. DI Supply contended that sales of the furnishings to the hotels managed by Drury were exempt from sales taxation under Missouri law. At audit, the Missouri Department of Revenue determined that DI Supply failed to remit sales tax on more than $11 million of sales under the Drury agreement, resulting in an assessment of over $600,000. The Missouri Administrative Hearing Commission upheld the Department’s decision, and DI Supply appealed to the Missouri Supreme Court.

DI Supply argued that the transfers of the hotel furnishings by Drury to hotel guests met the elements required to constitute a resale under Missouri law, because the transfer of such furnishings, following their sale from DI Supply to Drury, met the definition of a sale under the definition contained in the Missouri use tax statute.2 While the definition of “sale” used by DI Supply had its origin in use tax law, rather than sales tax law, it had been used in prior Missouri court cases.3

Under the definition used by DI Supply, a sale occurs when there is (i) a transfer, barter or exchange (ii) of title or ownership of tangible personal property or the right to use, store or consume the same (iii) for a consideration paid or to be paid. DI Supply stated that its arrangement with Drury met the three requirements of this definition because the provision of furnishings received by Drury to patrons of the hotel constituted a “transfer” of “the right to use.” The consideration for this transfer, it was argued, could be found in that the cost of the hotel rooms effectively incorporated the costs related to the furnishings transferred between DI Supply and Drury.

Court departs from precedent Noting that DI Supply’s definition of sale was based upon the principles of use tax rather than sales tax, and that a judgment in favor of DI Supply would be consistent with prior decisions of the Court on comparable resale scenarios, the Court nevertheless chose to discard the use tax definition of “sale” in favor of the definition set forth in retail sales. Under the retail sales definition, a sale is “any transfer . . . of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale . . . for a valuable consideration.”4

While this approach was arguably a departure from Missouri court precedents that dated back 25 years, the Court believed that these decisions were based upon a misunderstanding of the rules set forth in Sipco,5 a use tax case. In Sipco, the Court applied the definition of sale from the use tax statute, and noted that the use tax and sales tax resale exemptions were similar in purpose. Since Sipco, other cases erroneously relied upon this interpretation to assert that the use tax definition of the term “sale” could be extended and applied to sales tax matters. As a result, the Court concluded that it was no longer sensible to rely upon Missouri’s use tax definition of “sale” in cases not involving a use tax.

Ultimately, the Court held that DI Supply could not show that title or ownership of the furnishings was actually transferred to hotel customers, as required under the Missouri sales tax definition of a sale. This was because the property sold by DI Supply to Drury was not actually resold to hotel guests (and could not be considered a part of the price paid by customers for the hotel room). Only one justice objected to the decision on the basis of stare decisis.

Commentary This decision significantly limits the application of the resale exemption in Missouri. Some uncertainty is likely as businesses and courts debate the parameters of “ownership” and “title” in the context of new business models.

Many businesses are likely to re-evaluate their business models in light of this decision. It is possible that some taxpayers will consider responding to this decision by sourcing their furnishings outside Missouri. This would be done in the belief that such action would allow taxpayers to take advantage of a more liberal resale exemption, because the use tax definition of sale would be used when sourcing materials from outside the state. However, there are specific conditions required for transactions to be able to qualify for use tax treatment.6

It is important to note that while this decision will have an important impact upon hotel suppliers engaged in operations similar to DI Supply, many purchases of furnishings by hotels remain nontaxable to the hotels themselves. Mo. Rev. Stat. Sec. 144.011 provides an exemption for purchases of non-reusable items by hotel operators when these items are furnished to guests and included as part of total accommodation charges.7 Included among these items are “soap, shampoo, tissue and other toiletries and food or confectionery items offered to the guests without charge.”8

1 DI Supply I, LLC v. Director of Revenue, Missouri Supreme Court, No. SC97932, March 17, 2020.
2 MO. REV. STAT. § 144.605(7).
3 See Aladdin’s Castle v. Director of Revenue, 916 S.W.2d 196 (Mo. banc 1996).
4 MO. REV. STAT. § 144.010.1(11).
5 Sipco, Inc. v. Director of Revenue, 875 S.W.2d 539 (Mo. banc. 1994).
6 MO. CODE REGS. ANN. tit. 12, § 10-113.200.
7 MO. REV. STAT. § 144.011.
8 Id.

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