Missouri initiated its sales tax on January 15, 1934 at a rate of .5%. The use tax,
the equivalent companion of the sales tax, became effective on August 29, 1959. While
the sales tax is a tax levied on goods and select services purchased in the state of
Missouri, the use tax is levied on items purchased out of state and then brought into the
state for consumption.
Prior to 1965, the sales and use taxes were excise taxes on the goods and services
purchased; however, after 1965, Missouri reformed its sales and use tax system to a tax
on gross receipts in which the seller of the good or service is responsible for the
collection and remittance of the tax. It was then considered to be a tax on gross receipts
of retail sales.
Sales at Retail
The Missouri statutes define a sale at retail as “an installment sale, credit sale,
transfer, exchange, or barter of tangible personal property or taxable service for valuable
consideration.”1 Sales at retail generally include: tangible personal property, admissions
to entertainment or athletic events, utilities, telecommunication services, meals,
beverages, lodging in public accommodations, intrastate transportation, and the rental of
tangible personal property.
This was taken from the University of Missouri’s Economic Policy Analysis and Research Center’s report
on the Sales and Use Tax. The report is included as Appendix A.
Missouri exempts the following from the sales and use tax: those made by or to
exempt organizations, sales that will later be resold and selected services and
Court Cases Involving the Sales and Use Tax3
In recent years, Missouri has faced court challenges stemming from a variety of
factors. The following court cases represent pertinent issues that affect Missouri’s sales
and use tax laws as well as the stability and vitality of the annual budget as well as
Southwestern Bell Telephone Company v. Director of Revenue
Southwestern Bell, a telecommunications company, filed suit against the Director
of Revenue for a return of sales tax paid on equipment (which includes handsets, wires,
phone poles, switches, etc.) used to “manufacture” a telephone call. Citing the Court’s
decision, ‘The standard for determining what is “used directly” has evolved as
manufacturing itself has changed from traditional rust-belt factories to industries that are
increasingly reliant what the AHC appropriately calls “technology of a new
Incorporating the three-pronged integrated plant doctrine, the Court ruled in favor
of Southwestern Bell by affirming that the equipment in question was “used directly” in
manufacturing the product, in this case the voice transmission. The case reflected how
For a complete listing of all the sales tax exemptions, please refer to Appendix B.
Lowell Pearson, Deputy Director of the Department of Revenue, presented the following cases at a Joint
Committee on Tax Policy hearing on September 13, 2006. The descriptions of the cases that follow merely
capture the essence of the cases and do not reflect the various complexities of each one. Information from
the cases was also gathered from memos from the Department of Revenue.
Missouri’s current statutes represent more of manufacturing economy, while Missouri’s
business climate has shifted to more of a service-oriented technological economy.
Southwestern Bell, as well as other interested parties have claims of $300,000,000
(though all of these claims have not been substantiated) coupled with interest payments
owed by Missouri of up to $150,000,000 totaling $450,000,000.
DST Systems, Inc. v. Director of Revenue
DST Systems Inc., a business which “provides information processing and
computer software services and products”4 filed suit against the Director of Revenue
claiming they qualified for a sales tax exemption for some of the equipment that they
purchased.5 They successfully claimed that their mainframe computers as well as other
equipment used primarily in their mutual funds operation were also used by a subsidiary
corporation to conduct its package production operations. The Court, employing the
“integrated plant doctrine,”6 ruled that while the equipment and mainframe was not used
exclusively to manufacture the product in question, it was, however, “substantially so
Six Flags Theme Parks, Inc. v. Director of Revenue
Six Flags Theme Parks, Inc. filed suit against the Director of Revenue claiming a
sales tax refund on certain admission ticket and season pass sales (specifically tickets and
season passes sold via telephone or mail to non-Missouri residents) and video game
This description was taken from their company profile on DST System Inc. website at
DST Systems Inc. claimed the same exemption that Southwestern Bell claimed in the previous case,
The integrated plant doctrine refers to the notion that the Court ‘views manufacturing operations as
“continuous and indivisible.”’ This idea was also ‘expanded to encompass two corporate entities under
common ownership, so “long as both businesses work together to manufacture a single product.’” The
previous quotes were taken from the Missouri Supreme Court ruling, DST Systems, Inc. vs. Director of
receipts. The sales tax exemption that Six Flags Theme Parks, Inc. claimed for the ticket
and season pass sales can be found in Section 144.030.1, RSMo, which claims an
exemption for “such retail sales as may be made in commerce between this state and any
other state of the United States.” The Court, however, determined that the product being
purchased by the out of state consumer was not the ticket or pass itself but rather it is “the
sale of permission to enter a place of amusement and become the recipient of a service”7
and as a result, the transaction does not take place in commerce between the states. This
claim was denied by the Court.
Six Flags’ claim against video game receipts, however, had a different outcome.
They claimed, under Section 144.020.1(8), RSMo that a sales tax had already been paid
on the purchase of the video game machine and therefore the rental or lease thereof by
customers was not a taxable transaction. The Court agreed citing a prior case, Westwood
Country Club v. Director of Revenue, in which the taxpayer successfully claimed that the
rental of golf carts were not taxable transactions since a tax was already paid on the
purchase of the golf cart by the Country Club. Employing the same logic, the Court ruled
that the transaction between the customer and the video game machine was consistent
with the rental or the lease of the machine and therefore was not subject to the Missouri
Ronnoco Coffee v. Director of Revenue
The Ronnoco Coffee case involved three separate and distinct cases of which the
Court ruled in one decision (one of the cases involved a separate coffee company, Rose
Coffee Company). Prior to the Supreme Court hearing the case, the Administrative
Hearing Commission had ruled in favor of the coffee companies and against the Director
Six Flags vs. Director of Revenue, 102 S.W.3d 526 (Mo.banc 2003).
of Revenue on all three accounts. The Supreme Court had to decide whether or not to
uphold the decision by the commission which had determined that the coffee companies
were due the sales tax exemption.
The first of the three cases mentioned previously involved Ronnoco Coffee
Company claiming an exemption under Section 144.615(6), RSMo.8 Ronnoco Coffee
company had purchased equipment used to make coffee and then developed a loan
agreement with retailers, charging more for the coffee and less for the rental or loaning of
the equipment used to produce the coffee. Their logic in claiming the exemption rested
in the fact that they were reselling or loaning equipment (leasing) which they had already
purchased therefore qualifying for the exemption listed above and described in the
footnote below. In the second of the three cases, Rose Coffee Company claimed the
same exemption as Ronnoco, and asked for a refund for use taxes paid on coffee
equipment which was later resold, or more specifically, leased to retailers. The third case
involved not a refund sought, but rather a dispute between the Director of Revenue and
Ronnoco Coffee Company. After an audit by the Department of Revenue, the Director of
Revenue claimed that Ronnoco was liable for sales and use tax on the same equipment
The crux of the case rested on the notion of whether or not the loan agreement
developed by the coffee companies and their respective retailers qualified as a resale of
tangible personal property. The Court upheld the decision by the Administrative Hearing
Commission, stating “the fact that Coffee Companies’ customers are required to return
the equipment if the “loan agreement” is terminated does not defeat the fact that
Section 144.615, RSMo lists exemptions to the sales/use tax. Subsection 6 reads “Tangible personal
property held by processors, retailers, importers, manufacturers, wholesalers, or jobbers solely for resale in
the regular course of business.”
customers give consideration for the right to use the equipment under the terms of the
agreement. Like the lessor’s transactions in Brambles, Coffee Companies’ transactions
meet the definition of resale and are, therefore, exempt from the sales tax” (Ronnoco,
Sales Tax on Services
According to the Federation of Tax Administrators, out of the list of 177 different
services, Missouri levies a tax on thirty-nine or 28% of all services in the state.11 In
efforts to stabilize budget revenues and expand their sales and use tax base while
reducing the burden of high tax rates, states have, in the past and in some cases recently,
moved toward expanding their sales tax base to include services.
The state of Florida relies heavily on the sales and use tax for their budget
revenues. In 1987, the state of Florida succeeded in expanding their sales tax base to
include services. There was, however, a major backlash from across the country in how
they expanded their sales tax base, largely from the business community. One of the
most controversial aspects was the inclusion of advertising in the sales and use tax base.
Essentially, under the legislation passed in 1987, businesses that bought and sold
advertising in magazines, newspapers, radio, television, etc. would have to pay sales and
use tax on that advertising. If the market included Florida as well as part of another state,
Section 144.605(7) , RSMo states that a leases, rentals, bailments, loans, conditional sales or otherwise
are all included in the definition of a sale and therefore a resale.
Brambles Industries v. Director of Revenue, 1998 helped set precedent regarding the issue of whether a
lease constituted as a resale of property. The Court determined that it was, treating leases and sales as the
For a more comprehensive review of sales tax on services, please refer to the Sales Tax on Services
Report submitted to the Joint Committee on Tax Policy in October of 2005, available on the Joint
Committee on Tax Policy website, or visit the Federation of Tax Administrator’s website at
http://www.taxadmin.org/fta/pub/services/services.html and use their searchable database.
then the business would have to apportion part of that advertising to Florida and the rest
of the advertising to other states and pay the sales and use tax in Florida accordingly.
Lawsuits were filed against the state because the 1987 legislation taxed
advertising which, they claimed, violated the first amendment of the Constitution in
regards to freedom of speech, and taxed legal representation, which violated the right to
counsel. Amidst the uproar from the business community and the national attention that
Florida received as a result of their sales and use tax base expansion, Florida ultimately
repealed the 1987 legislation the following year and instead increased the sales and use
tax rate to increase budget revenues.12
In response to Florida’s tax policy failure as well as the considerations of other
states in expanding their sales and use tax to include services, economists began
conjecturing about what the ideal sales and use tax structure should be. In 1988, Perry D.
Quick and Michael J. McKee published an article which explained that Florida’s recent
foray into sales and use tax reform presents an opportunity for states to reform their tax
structure for the most economically efficient as well as fair sales and use tax policy.
The Ideal Sales and Use Tax Structure
The authors of the article cited several dysfunctions with the sales tax structures
of most states including: the unfairness of taxing goods and services while not applying
the tax to other preferential goods and services as well as not exempting business to
business transactions. The first dysfunction is more out of fairness- products in the
The above information was taken from Walter Hellerstein’s article, “Florida’s Sales Tax on Services,”
published in the March 1988 edition of the National Tax Journal. For a much more comprehensive look at
Florida’s sales and use tax controversy, please refer to the aforementioned article included in the list of
market should be taxed fairly and equally13, while the second dysfunction deals largely
with economic efficiencies, i.e. avoiding tax pyramiding and vertical integration of large
businesses as well as some fairness issues with small businesses14 (who generally do not
have the resources to vertically integrate).
To provide for the fairest and most economically efficient sales and use taxation,
sales and use tax, according to the authors, should only be levied on goods and services
sold to households or solely household consumption. They further argue that businesses
will include the cost of the sales and use tax in the price of their product and household
consumers ultimately pay the sales and use tax anyway.15
This reform option is also advocated by others as well. Hallerstein references the
notion in his article.16 Robert Cline, John L. Mikesell, Thomas S. Neubig, and Andrew
Phillips explore and advocate for the idea in their February 2005 article, “Sales Taxation
of Business Inputs: Existing Tax Distortions And the Consequences of Extending The
Sales Tax to Business Services.”17 In another article written in January of 2005, “A
Quality Index for State Sales Tax Structure- Measuring the States Against an Ideal
Standard,” John Mikesell employs a tax on household consumption as the ideal sales tax
structure and measures how closely each of the forty-five states that levy a sales tax live
up to that standard.18
Quick and McKee, p. 395.
Quick and McKee, p. 396.
Quick and McKee, p. 397-399.
Hallerstein, p. 8.
Within the article, the authors calculate the share of revenue generated from business inputs to be 44.9%,
nearly 2% above the average of the states- 43%.
According to the report, out of a possible perfect score of 526.66, Missouri falls short scoring 416.9.
The idea is also reinforced by the Tax Foundation’s 2007 State Business Tax
Climate Index.19 The index ranks each state on its overall tax policy by developing
indexes and sub-indexes for each of the major taxes. In regards to the sales and use tax,
Missouri, according to the study, does a good job of avoiding much of tax pyramiding by
exempting many specific business to business transactions, ranking comparatively well
against other states; however, there are still some business to business transactions that
Some argue, however, that such a system of exempting business to business
transactions would be difficult to administer. Michael Mazerov of the Center on Budget
and Policy Priorities contended that “business owners could claim purchases of many
services — such as telecommunications, hotel rentals, and auto and computer repair — to
be for business use when they were actually for personal use. Preventing this abuse
would require that substantial additional resources for tax enforcement be provided to
state tax departments. The costs of preventing tax evasion could exceed the economic
benefits of exempting business inputs from taxation.”20
Quick and McKee, however, do offer a suggestion for implementing this sales and
use tax policy- issue business ids which would allow businesses to make exempt business
to business transactions. The transactions would have to need to be recorded, but the
authors suggest that this is not an entirely new record-keeping method as businesses must
account for purchases by the federal government as well as exempt or non-profit
An executive summary of the 2007 State Business Tax Climate Index is included as Appendix G.
Quick and McKee, p. 402-403.
Streamlined Sales and Use Tax Agreement22
Quill Corporation v. North Dakota23
In 1992, the United States Supreme Court ruled on the decision Quill Corp. v.
North Dakota. North Dakota had required that Quill Corporation, an out-of-state
catalogue business, collect a use tax on items sold to customers in North Dakota. The
case rested on the notion of nexus, or essentially, the relationship between a businesses
and a state. Ultimately, the court ruled that nexus with a state is not established based
solely on the fact that the business had customers in the state. In order for nexus to be
established, according to the court, there had to be a physical presence by the business in
the state- i.e. physical structures and employees.
Largely, the Supreme Court was wary that it would be administratively difficult
for any business that was a remote seller to navigate the sales and use tax structures of the
45 states as well as Washington D.C. that all have a sales tax (Alaska, Delaware, New
Hampshire, Oregon, and Montana do not levy sales and use taxes). Basically, the
Supreme Court would not require remote sellers to collect sales and use taxes until
simplification and uniformity were brought to these sales tax structures.
The explosion of the internet caused many more transactions to be conducted by
remote sellers via electronic commerce. This has caused many states to look to the future
to see where the future of sales and use taxation is heading.
Joan Wagnon, Director of the Kansas Department of Revenue testified before the committee via
teleconference call on December 5, 2005 about the experiences that Kansas has had in implementing the
Streamlined Sales and Use Tax Agreement. Chuck Surface of the Missouri Association of Counties
expressed his support for SSUTA at the same meeting. An outline of all recent sales tax testimony is
included as Appendix D.
This information was obtained from the Tax Foundation’s blog site as a brief. The citation is included in
the list of references.
Streamlined Sales and Use Tax Project24
In March of 2000, states banded together to create the Streamlined Sales and Use
Tax Project, an organization dedicated to making the sales and use tax structures in the
various states more uniform and easier to administrate. The product of the organization’s
efforts became the Streamlined Sales and Use Tax Agreement. Adopted in November of
2002, the agreement addresses how states should structure their sales and use taxes. The
following represents the major requirements of the uniform and simplified sales and use
1. State Level Administration- the state administers the sales and use tax25
2. Conformity of General Tax Base Definitions- states must adopt general tax base
definitions; however, definitions may vary somewhat from one state to another
3. State and Local Tax Base- a uniform state and local government tax base26
4. State and Local Tax Rates- one single state rate for the whole state (special
exemptions include sales of food, food ingredients, and prescription drugs) and
one single local rate for each local jurisdiction (tax boundaries are drawn by zip
5. Uniform Sourcing Rules- generally this is destination-based sourcing28
Much of the following information was gathered from an online brief detailing the specifics of the
agreement. The website from where this information came was
Missouri currently administers the sales and use tax for the state and local governments.
Missouri currently allows a different sales tax base for state and local governments.
This would represent a significant undertaking for Missouri because local taxing jurisdictions (which do
not have boundaries set by zip codes) can set their own rates. A list of all taxing jurisdictions their rates
can be found on DOR’s website. The web address is http://www.dor.mo.gov/tax/business/sales/rates/2006/
Missouri’s current system is origin-based sourcing. The large amount of Missouri’s local taxing
jurisdictions’ sales tax rates makes destination-based sourcing administratively complex for businesses in
Missouri as well as other states.
6. Uniform Exemption Certificates- states must adopt a uniform certificate both for
tax-exempt entities and specific tax exemptions
7. Simplification in Returning and Remitting Taxes- one tax return is filed per tax
period for each state and one payment is made to each state, regardless of the
local levels; in addition, the agreement allows businesses to utilize a certified
service provider (a collector and administrator of sales taxes) for their business.
These certified service providers, or CSPs, would be designated by the state.
8. Consumer Protection Privacy- CSPs are required to not retain information
obtained from consumers when performing their service to businesses; should an
exemption be used, states are required to discard the consumer information once
the exemption has been determined to be valid.2930
States participating in the agreement fall under three categories: full member
states, associate member states, or observer states. Full member states are in complete
compliance with the agreement. Associate member states are generally in compliance or
are scheduled to be in compliance with the agreement by January 1, 2008. Observer
states are interested in the project, but not in compliance with the agreement.
Full member states include: Indiana, Iowa, Kansas, Kentucky, Michigan,
Minnesota, Nebraska, New Jersey, North Carolina, North Dakota, Oklahoma, South
Dakota, and West Virginia. Associate member states include: Arkansas, Nevada, Ohio,
These 8 provisions only represent the major provisions. For a full copy of the agreement, please refer to
the SSUTA website at http://www.streamlinedsalestax.org/SSUTA%20As%20Amended%2008-30-06.pdf.
An executive summary of the Streamlines Sales and Use Tax Agreement is attached as Appendix E.
Tennessee, Vermont, Utah, and Wyoming. Observer states include the remaining states
with the exception of Alaska, Delaware, Idaho, Montana, and New Hampshire.31
Transportation Development Districts
The State Auditor’s Office completed an audit of the Transportation Development
Districts, otherwise known as TDDs, throughout the state of Missouri. Transportation
development districts, according to the audit, “are separate political subdivisions
established and organized for the construction of roads, bridges, interchanges, or other
transportation-related projects, financed through the issuance of notes, bonds, or other
debt securities and governed by a board of directors. These boards have the authority to
impose sales taxes or tolls, or levy property taxes or special assessments within the
boundaries of the respective TDDs to pay those transportation-related project
expenditures.” While the audit covers a variety of issues involving the creation and
administration of TDDs, the issue pertinent to the realm of taxation is embedded in the
collection of sales and use taxes.
The State Auditor’s Office reported that the Department of Revenue does not
collect the sales tax revenues associated with TDDs unless the TDD encompasses an
entire county or city. The collection of sales and use taxes are performed either by a
private contractor or the local municipality. As of the audit, the Department of Revenue
performs the collection function for one TDD; the remaining eighty-six TDDs in
existence (as of October, 2005) employ the other options. Charging the Department of
Revenue with collecting the sales and use tax of TDDs, according to the audit, would
Information obtained from the Streamlined Sales and Use Tax Project website at
http://www.streamlinedsalestax.org/ssutachart2.pdf on October 18, 2006.
subject the sales tax collections to “established controls and procedures to maximize and
safeguard this process” as well as “allow the sales tax revenues distributed to TDDs to be
more effectively monitored by auditors and other outside parties to help ensure the sales
tax collections are discontinued at that time when no further collections are needed.”32
These quotes were taken from the State Auditors Office audit on Transportation Development Districts
from March 2006. The page concerning the collections of TDDs’ revenues is included as Appendix F.