              SUPREME COURT OF MISSOURI
                                       en banc
IBM CORPORATION,                                )
                                                )
       Respondent/Cross-Appellant,              )
                                                )
vs.                                             )      No. SC94999
                                                )
DIRECTOR OF REVENUE,                            )
                                                )
       Appellant/Cross-Respondent.              )

      PETITION FOR REVIEW OF A DECISION OF THE ADMINISTRATIVE
                          HEARING COMMISSION
            The Honorable Sreenivasa Rao Dandamudi, Commissioner

                              Opinion issued April 5, 2016

       The Director of Revenue seeks review 1 of the Administrative Hearing

Commission’s decision that IBM Corporation is entitled to a use tax refund under section

144.054.2 2 for its sales of hardware and software to MasterCard International, LLC, for

MasterCard’s use in processing credit and debit card transactions.            MasterCard

communicates information between merchants and banks and determines whether

customers’ purchases should be approved and whether a bank owes money or fees on the

transaction. The Commission found that MasterCard’s use of the hardware and software

qualified as “manufacturing a product” as that term is used in the use tax exemption set



1
  Although IBM is also listed as a cross-appellant, it determined not to pursue its cross-
appeal before this Court.
2
  Unless otherwise indicated, citations are to RSMo 2000 or RSMo Supp. 2013.
out in section 144.054.2. This Court reverses.

       IBM is not entitled to an exemption from use tax because MasterCard’s use of the

hardware and software does not qualify as the “manufacturing of any product” under

section 144.054.2, which provides an exemption from sales or use tax for “equipment[]

and materials used or consumed in the manufacturing, processing, compounding, mining,

or producing of any product ….” Interpretation of the word “manufacturing” (and of its

near synonym, “processing”) as used in this statute is governed by the well-established

principle that an exemption must be narrowly and strictly interpreted against the taxpayer

according to its plain and ordinary meaning. 3

       While IBM is correct that the organization and creation of intangible products

such as computer data can constitute manufacturing, it does not follow that the term

“manufacturing” should be broadly interpreted to include MasterCard’s use of computers

to transmit financial information between its customers and banks.           This expansive

reading of “manufacturing” goes too far. Products, whether tangible or intangible, still

must undergo “the alteration or physical change of an object or material in such a way

that produces an article with a use, identity, and value different from the use, identity, and

value of the original,” Galamet, Inc. v. Dir. of Revenue, 915 S.W.2d 331, 333 (Mo. banc

1996), to be manufactured.

       Here, IBM does not create or transform a product; it provides equipment that




3
 See, e.g., Ben Hur Steel Worx, LLC v. Dir. of Revenue, 452 S.W.3d 624, 626–27 (Mo.
banc 2015); Union Electric Co. v. Dir. of Revenue, 425 S.W.3d 118, 124 (Mo. banc
2014); Brinker Missouri, Inc. v. Dir. of Revenue, 319 S.W.3d 433, 437 (Mo. banc 2010).
allows merchants to check their customers’ credit information while completing and

approving a purchase. If such transmission of information is manufacturing, then so is

the use of any computer to answer a customer’s query. If the legislature wished to

exclude from the use tax all computers used by financial institutions to provide credit

information, or all computers used to answer customer queries, it could have done so. Cf.

Utilicorp United, Inc. v. Dir. of Revenue, 75 S.W.3d 725 (Mo. banc 2001). But it did not.

I.    STATEMENT OF FACTS AND PROCEDURAL HISTORY

      MasterCard purchased computer hardware and software from IBM for use in

providing various financial services to its customers. The core services it provided are

what it calls its “ACS” services – authorization, clearing, and settlement of transactions

made with MasterCard-issued credit and debit cards. 4

      During “authorization,” when a customer presents a credit or debit card to a

merchant to make a purchase, the merchant sends information concerning the transaction

to the merchant’s bank, called the “acquiring bank.” The acquiring bank sends that

information to MasterCard, which sends it to the bank that issued the credit or debit card

to the customer, called the “issuing bank.” The issuing bank decides whether to accept or

decline the transaction and sends its decision to MasterCard. MasterCard forwards the

issuing bank’s decision to the acquiring bank, which forwards it back to the merchant.




4
  Aside from these core ACS services, MasterCard also provides several ancillary
services including “InControl,” “Fraud Scoring,” and data warehousing.
                                           2
In “clearing,” merchants send periodic data concerning their transactions to their

acquiring banks, which communicate the data to MasterCard. MasterCard aggregates the

data received from acquiring banks and calculates the sums due from each issuing bank

to each acquiring bank based on how much the acquiring bank has loaned to its

customers – the merchants. The net amount of funds owed by or to a particular bank is

called a “settlement position.” In “settlement,” MasterCard communicates the settlement

positions it calculated to each issuing bank. If the issuing bank owes money, it remits the

amount owed to MasterCard’s settlement bank, which remits the money owed to each

acquiring bank that is owed money, after deducting its fee.

       In 2012, IBM filed a use tax return on behalf of MasterCard for purchases of

computer hardware and software. IBM claimed that the equipment it sold to MasterCard

was exempt from use tax because MasterCard’s activities qualify as “manufacturing”

under section 144.054.2, which exempts “equipment[] and materials used or consumed in

the manufacturing, processing, compounding, mining, or producing of any product ….”

The Commission found against the Director and granted IBM a refund, finding that

MasterCard’s activities could not be distinguished from cases in which the Commission

believed this Court broadly construed the manufacturing exemption, especially

Southwestern Bell Tel. Co. v. Dir. of Revenue, 182 S.W.3d 226 (Mo. banc 2005) (“Bell

II”), in which this Court held that the transmission of a voice over telephone lines

qualified as “manufacturing.” The Director seeks review.

II.    STANDARD OF REVIEW
                                            3
       Because this case involves the construction of a revenue law of this state, this

Court has exclusive appellate jurisdiction. Mo. Const. art. V, § 3. This Court reviews the

Commission’s interpretation of a revenue statute de novo. Fred Weber, Inc. v. Dir. of

Revenue, 452 S.W.3d 628, 629-30 (Mo. banc 2015). The Commission’s decision will be

“upheld when authorized by law and supported by competent and substantial evidence

upon the whole record, if a mandatory procedural safeguard is not violated” so long as

the Commission’s decision is not contrary to what the Court concludes were the

reasonable expectations of the legislature. § 621.193.

       “Tax exemptions are strictly construed against the taxpayer.”       Ben Hur, 452

S.W.3d at 626. “A taxpayer must show by ‘clear and unequivocal proof’ that it qualifies

for an exemption, and all doubts are resolved against the taxpayer.” Fred Weber, 452

S.W.3d at 630. This Court interprets statutes in a way that is not hypertechnical but

instead is reasonable and logical and gives meaning to the statute and the legislature’s

intent as reflected in the plain language of the statute at issue. Id.

III.   MASTERCARD’S ACTIVITIES ARE NOT THE “MANUFACTURING OF A
       PRODUCT” UNDER SECTION 144.054.2

       To qualify for the use tax exemption under section 144.054.2, IBM must show: (1)

that MasterCard sold equipment or materials used or consumed (2) during the

manufacturing, processing, compounding, mining, or producing (3) of a product. Fred

Weber, 452 S.W.3d at 630. The taxpayer has the burden of proof. Id. If IBM fails to

meet any of these three criteria, it does not qualify for the exemption under section


                                               4
144.054.2. Id. IBM’s failure to meet the second requirement is dispositive here.

       IBM argues that MasterCard’s activities qualify as “manufacturing a product”

under section 144.054.2 and, therefore, it is entitled to an exemption from use tax for the

computer hardware and software it sold to MasterCard.            IBM claims that when

MasterCard transmits approvals and disapprovals of credit card transactions and

summarizes the credit card transactions undertaken each day by its customers,

MasterCard organizes, manipulates, and communicates data and by doing so,

manufactures new products during every transaction. This Court disagrees.

      While this Court has held that the production of intangible products such as

computer data may be “manufacturing,” it has rejected the idea that every use of a

computer to aid a business or transmit information is “manufacturing.”             Such an

interpretation of the term “manufacturing” would be at odds with the fundamental

principle, long recognized and applied in Missouri, that exemptions are to be construed

narrowly against the taxpayer. See, e.g., State ex rel. Mount Mora Cemetery Ass’n v.

Casey, 109 S.W. 1, 4 (Mo. 1908); Salvation Army v. Hoehn, 188 S.W.2d 826, 114 (Mo.

1945); Kansas City Power & Light Co. v. Dir. of Revenue, 783 S.W.2d 910, 911 (Mo.

banc 1990); Union Electric, 425 S.W.3d at 120.

      This Court’s decisions in Utilicorp and the Bell cases were among its first attempts

to integrate fast-changing technology into the decades-old exemption for manufacturing.

In Utilicorp, the utility company claimed a manufacturing exemption for the equipment

used in the transmission of electricity to its customers. Utilicorp, 75 S.W.3d at 725–26.

                                            5
The Court rejected this argument, stating, “Though volts and amperes may change during

the transmission and distribution, not every change is ‘manufacturing.’” Id. at 729. In

other words, the fact that some intangible products can be manufactured does not mean

that all intangibles are manufactured products. Equipment used in the transmission and

distribution of electricity, Utilicorp concluded, “is not, in the words of section

144.030.2(4) and (5), ‘used directly’ in manufacturing” and so was not subject to the

exemption. Id.

       In Southwestern Bell Tel. Co. v. Dir. of Revenue, 78 S.W. 763 (Mo. banc 2002)

(“Bell I”) and Bell II, the Court faced the issue of how to apply the terms “product” and

“manufacturing” to technologies that could not even have been imagined at the time that

the manufacturing exemption was enacted. As Bell II said:

       As technology has evolved, consideration has been given to how the
       manufacturing exemption applies when a company’s machinery and
       equipment is connected by telephone lines and via data processing
       connections. As noted in Bell I, this case requires the application of a
       statutory framework that first took shape in the thirties and forties to current
       technology.

Bell II, 182 S.W.3d at 229 (internal quotation marks omitted). Bell I similarly had noted:

       [T]he growth of modern information and communication technologies has
       challenged lawmakers and courts to keep pace with modern industry. One
       area of specific difficulty in Missouri has been the application of the
       manufacturing sales and use tax exemptions to intangible products or
       services.

Bell I, 78 S.W.3d at 766.




                                              6
       In an attempt to update the definition of “manufacturing” so that it could apply to

modern technology, Bell I and II stated that voices transmitted over a telephone are

“products” that are “‘manufactured’ into electronic impulses that can be transmitted and

reproduced into an understandable replica.” Bell I, 78 S.W.3d at 768. Bell I continued,

“The end ‘product’ is not the same human voice, but a complete reproduction of it, with

new value to a listener who could not otherwise hear or understand it.” Id.; see also Bell

II, 182 S.W.3d at 232.

       IBM premises its argument for the application of the exemption to it on its reading

of Bell I and Bell II as applying a broad rather than strict definition of “manufacturing”

and argues that this Court should expand the manufacturing exemption to include just the

transmission of computer data itself. This broad interpretation, IBM says, would allow

this Court to treat the transmission and analysis of credit information among MasterCard,

its customers and servicing banks as a form of “manufacturing” and so subject to the

exemption. IBM’s argument is inconsistent with the well-settled principle that:

       Courts are instructed by the legislature to take the words in a statute in their
       plain and ordinary sense. The plain meaning of words, as found in the
       dictionary, will be used unless the legislature provides a different
       definition.

Lincoln Industrial, Inc. v. Dir. of Revenue, 51 S.W.3d 462, 465 (Mo. banc 2001) (internal

citations omitted). Furthermore, to the extent that Bell I and Bell II invited this proposed

further expansion of the meaning of “manufacturing” in their attempt to apply the term to

new technologies, their reasoning was at variance with the well-established rule that


                                              7
“[e]xemptions from taxation are to be strictly construed against the taxpayer, and any

doubt is resolved in favor of application of the tax.” Brinker, 319 S.W.3d at 436.

       Narrowly construing the term “manufacturing” as used in the exemption in

question, MasterCard’s computers do not “manufacture” a tangible or intangible product.

Rather, they receive information, analyze and make determinations based on this

information, and relay these determinations to their customers. This type of activity is

not “manufacturing” under section 144.054.2 or under the common lay terminology one

uses in speaking of analyzing credit card transactions. See Union Electric, 425 S.W.3d at

123. Otherwise, every time a person received an email, made some type of business or

mathematical decision, and sent back an email with that decision, the person would be

said to be “manufacturing” the data sent and received. That these calculations were done

using sophisticated hardware and software does not change the fact that the activity is not

“manufacturing.”

       Indeed, even the dissenting opinion in Brinker, which complained of the failure to

give exemptions a broad construction, drew a distinction between transformation of a

product and mere transmission of information, agreeing the latter is not “manufacturing,”

stating:

       Acts that fall outside [the meaning of “manufacturing” in] subdivisions (4)
       and (5) generally involve repairing or transmitting products rather than
       creating output that has a distinct use, identity or value. See Utilicorp
       United v. Dir. of Revenue, 75 S.W.3d 725, 729 (Mo. banc 2001)
       (transmitting or distributing electricity); Unitog Rental Services v. Dir. of
       Revenue, 779 S.W.2d 568, 570–71 (Mo. banc 1989) (cleaning and repairing
       uniforms) ….

                                            8
Brinker, 319 S.W.3d at 441–42 (Price, J., dissenting). To give section 144.054.2 the

expansive meaning sought by IBM would conflict with this Court’s century-old

requirement of strictly construing tax exemptions against the taxpayer. See, e.g., Casey,

109 S.W. at 4.

       This determination is supported by the principle noted in many of this Court’s

recent cases that it would be inconsistent with the appropriate standard of review to

expand the meaning of words such as “manufacturing” and “processing” beyond their

normal meaning to encompass activity that the legislature easily could have made subject

to the statute had it so intended. Ben Hur and Fred Weber provide good examples of the

application of this principle.

       Both cases concerned the meaning of “manufacturing” as used in the exemption

set out in section 144.054.2 for “equipment[] and materials used or consumed in the

manufacturing, processing, compounding, mining, or producing of any product ….” In

Fred Weber, the Court rejected the claim that rock sold to paving companies for use in

making asphalt to lay down pavements should be exempt from sales tax under section

144.054.2 because the process of making asphalt and laying pavements does not qualify

as “manufacturing,” but rather as “construction.” 452 S.W.3d at 628, 631, citing, Union

Electric, 425 S.W.3d at 124. But the word “construction” does not appear in section

144.054.2, “nor do any words that would be associated with construction activities.”

Fred Weber, 452 S.W.3d at 631. This Court held that, had the legislature intended to


                                           9
exempt construction activities, it would have done so as it has in other tax exemptions

within chapter 144, and rejected the taxpayer’s attempt to fit its construction activities

within the manufacturing exemption. Id.

       Ben Hur reached this same result in denying a “manufacturing” exemption to a

taxpayer for the purchase of beams used to construct steel frames for commercial

buildings and structures. 452 S.W.3d at 625. This Court held that the taxpayer engaged

in construction, not “manufacturing,” and so the exemption did not apply. Id. at 627.

       In other recent cases, this Court has refused to expand the term “manufacturing” to

the broad limits argued for by IBM. In Brinker, this Court rejected the taxpayer’s

argument that a restaurant was engaged in “manufacturing” when it prepares, cooks, and

serves food. 319 S.W.3d at 435. The Court held that “[i]n lay terminology, one does not

speak of a restaurant as manufacturing or producing food or drink; instead, restaurants

prepare, cook and serve food and drink to their customers.” Id. at 438. This holding was

quoted in Union Electric in which the Court held – similarly to Brinker – that a bakery

that made baked goods from scratch was not engaged in “manufacturing.”             Union

Electric, 425 S.W.3d at 123–24.        “One does not speak of a grocery store bakery

department as ‘processing’ baked goods any more than one speaks of it as manufacturing,

compounding or producing such goods.” Id. at 124. These cases reflect a consensus by

this Court to interpret the term “manufacturing” based on the “common sense meaning of

[the word].” Bell II, 182 S.W.3d at 239 (Stith, J., dissenting).

       Applying the principles set out in the above cases here, had the legislature

                                             10
intended financial transactions or computer communications to be subject to the

exemption set out in section 144.054.2, it easily could have added such language to the

statute. As in Fred Weber, no terms relating to credit cards, electronic or computerized

calculations or transmissions are found anywhere in section 144.054.2. They are found

in the exemption for “equipment used or consumed directly in television or radio

broadcasting …,” § 144.054.3 (emphasis added), and in section 144.030.2(9) that

exempts “computers … used in producing newspapers ….” (Emphasis added). In fact,

chapter 148 is titled “Taxation of Financial Institutions” and contains tax statutes relating

to banks, credit institutions, and insurance companies. Had the legislature intended

section 144.054.2 to apply to the processing of credit card transactions, it could have

included additional language within the exemption so indicating, rather than relying on

an unreasonably broad interpretation of “manufacturing” inconsistent with this Court’s

most basic rule of interpreting exemptions narrowly. Moreover, one does not speak of

the transmission and analysis of credit card data as “manufacturing.”            For in lay

terminology, such activity is not applicable to the term. To extend the manufacturing

exemption to this activity would be to ignore this Court’s rule strictly construing

exemptions against the taxpayer. MasterCard’s activities are not “manufacturing” under

section 144.054.2, the hardware and software sold by IBM is not exempt from use tax,

and it was error for the Commission to grant IBM’s request for a use tax exemption.

       Greater familiarity with computer and other electronic technology and greater

experience with the application of the word “manufacturing” in cases such as Brinker,

                                             11
Ben Hur, Fred Weber and Union Electric, have demonstrated that expanding the statutory

definition of “manufacturing” in the Bell cases put the Court too far down a slippery

slope.    To the extent cases such as Bell I and Bell II suggest that an expansive

interpretation of the word “manufacturing” is authorized by the “manufacturing”

exemption, and to the extent that they hold that the electronic transfer of voices is itself

manufacturing as that term is used in the exemption, they are no longer to be followed. 5

IV.      CONCLUSION

         The Commission erred in reversing the Director’s decision and granting IBM’s

request for a use tax exemption for the computer hardware and software it sold to

MasterCard. MasterCard’s activities do not qualify as the “manufacturing of a product”

under this Court’s strict interpretation of exemptions. IBM is not entitled to a use tax

exemption for the hardware and software it sold to MasterCard. The Commission’s

decision is reversed.


                                                 _________________________________
                                                   LAURA DENVIR STITH, JUDGE

All concur.




5
  In addition, to the extent that the Commission and IBM read this Court’s cases prior to
Bell I and II to permit a broad rather than a narrow reading of exemptions, they are in
error. The Commission should have read the exemption narrowly and held that the mere
transmission and analysis of computer information is not the manufacturing of a product.
                                            12
