                SUPREME COURT OF MISSOURI
                                           en banc
DREYER ELECTRIC CO., LLC,                  )    Opinion issued June 16, 2020
                                           )
              Respondent,                  )
                                           )
v.                                         )     No. SC98007
                                           )
DIRECTOR OF REVENUE,                       )
                                           )
              Appellant.                   )


        Petition for Review of a Decision of the Administrative Hearing Commission
                      The Honorable Renee T. Slusher, Commissioner

       The Director of Revenue petitions this Court for review of the decision of the

Administrative Hearing Commission (AHC) that equipment purchased by Dreyer Electric

Co., LLC, was exempt from sales tax because it was “replacement equipment” “used

directly in the manufacturing process,” as those terms are used in section 144.030.2(5).1

For the reasons set forth below, this Court reverses the decision and remands the case for

a redetermination of Dreyer’s tax liability.

       The Director is incorrect in arguing the AHC should have applied the exemption



1
  Effective August 2018, section 144.030.2(5) was amended and is currently codified at
section 144.030.2(4). Citations in this opinion are to the 2016 version of the statute that
was in effect at the times relevant to this case. Other statutory citations are to RSMo
only to replacement equipment used to transform raw materials into a finished product.

This Court rejected that test in Floyd Charcoal Co. v. Director of Revenue, 599 S.W.2d

173, 177 (Mo. banc 1980), and reaffirms its holding today. The AHC correctly applied

Floyd Charcoal’s three-factor “integrated plant” test to determine whether the

replacement parts and equipment at issue were “used directly in manufacturing.” But the

AHC then erred by making specific findings as to some parts and then grouping all the

parts together, including those it had not discussed, to find they were collectively integral

to the electrical system that powered the machinery. It should have considered whether

each type of equipment was independently exempt under the integrated plant doctrine.

This Court, therefore, reverses and remands for application of the “integrated plant

doctrine” test to each type of replacement part or equipment purchased.

I.     FACTUAL AND PROCEDURAL BACKGROUND

       B&B Timber Company is a sawmill that manufactures flooring, railroad ties,

pallet materials and other timber products using multiple pieces of equipment. Much of

this admittedly exempt equipment, such as the debarker, the chain rollers, the saws, and

the grinders and chippers, is located in building A and requires electricity to run. After a

fire in August 2016, B&B rebuilt building A and other facilities. B&B hired Dreyer to

install a new electrical system for the building. This required Dreyer to buy and install a

wide variety of equipment such as wiring, electrical outlets, and safety equipment the

electric company required for safe manufacturing. Equipment purchased included “soft

starters” that cause the machinery to draw power slowly to avoid a sudden surge of power


2016 unless otherwise noted.
                                                 2
that could cause other electric customers to experience service disruptions; a 1,200 amp

disconnect service that provides circuit breakers for various machines in the event of a

malfunction; and a NEMA overload relay to stop the machinery in the case of

overheating, as well as all conduits, couplings, ground rods and cables, washers,

connectors and disconnectors, and a variety of other equipment. Together these items

and systems comprise the “disputed parts.”

       After Dreyer completed the work, B&B gave Dreyer a tax-exemption certificate

describing the equipment installed as “electrical panels, starters, wiring, motors, support

material.” Describing the disputed equipment as permanent electrical components that

direct and manage the electric current to each of B&B’s machines used in the

manufacturing of its products or to protect the motors used to operate the machinery,

Dreyer submitted a claim seeking a refund of the $6,366.61 it had paid in sales tax on the

disputed equipment, which it said was replacement equipment used directly in

manufacturing B&B’s wood products and exempt from tax under section 114.030.2(4).

       The Director denied the claim, believing the items were not replacement

equipment directly related to manufacturing. Dreyer petitioned the AHC for review.

Dreyer presented evidence that most of the items were used either to provide power to the

machines manufacturing B&B’s products, or to safely disconnect them in the event of a

problem, and that they were needed to safely power the manufacturing machinery. The

AHC determined the “disputed items” were replacement equipment “because they are a

combination of parts that work together to create an electrical system designed

specifically for B&B’s manufacturing machinery” and were “necessary in order for B&B

                                                3
to manufacture its products.” The AHC also found the disputed items “were physically

and causally close to B&B’s manufacturing machinery.”          It rejected the Director’s

argument that equipment used to distribute or transmit electricity cannot be used directly

in manufacturing, finding unpersuasive the Director’s analogy to Emerson Electric Co. v.

Director of Revenue, 204 S.W.3d 642 (Mo. banc 2006), and Utilicorp United, Inc. v.

Director of Revenue, 75 S.W.3d 725 (Mo. banc 2001).            In Emerson Electric, the

equipment was used only to prepare for, or as a prelude to, manufacturing. 204 S.W.3d at

646. In Utilicorp, this Court determined electricity was not being used as part of the

manufacturing process itself. 75 S.W.3d at 730. Here, the AHC found B&B used the

electrical equipment directly in manufacturing products to “ensure that the machine

motors operate, are protected from electrical spikes, do not overheat, and are directly

wired into machine motors.”

      Based on this assessment, the AHC held all of the electrical equipment was

directly related to manufacturing and found in Dreyer’s favor for the full amount of the

claimed exemption. The Director seeks this Court’s review. This Court has exclusive

jurisdiction in all appeals involving the construction of Missouri’s state revenue laws.

Mo. Const. art. V, § 3. “A ‘revenue law’ is [a state law] that imposes, amends, or

abolishes a tax or fee.” Armstrong-Trotwood, LLC v. State Tax Comm’n, 516 S.W.3d

830, 834 (Mo. banc 2017).

II.   STANDARD OF REVIEW AND BURDEN OF PROOF

      “This Court will affirm a decision of the AHC if it: (1) is authorized by law; (2) is

supported by competent and substantial evidence on the whole record; (3) does not

                                               4
violate mandatory procedural safeguards; and (4) is not clearly contrary to the General

Assembly’s reasonable expectations.” Bus. Aviation, LLC v. Dir. of Revenue, 579 S.W.3d

212, 215 (Mo. banc 2019); § 621.193; Mo. Const. art. V, § 18. This Court does not

uphold a decision of the AHC if it is “arbitrary, capricious, unreasonable, unlawful, or in

excess of jurisdiction.” Myron Green Corp. v. Dir. of Revenue, 567 S.W.3d 161, 164

(Mo. banc 2019). This Court reviews the AHC’s legal decisions de novo. Id. “This

Court is not bound by the [AHC]’s interpretation and application of the law.” Gervich v.

Condaire, Inc., 370 S.W.3d 617, 620 (Mo. banc 2012).

       “Taxing statutes must be strictly construed in favor of the taxpayer and against the

taxing authority.” Bartlett Int’l, Inc. v. Dir. of Revenue, 487 S.W.3d 470, 472 (Mo. banc

2016). “Tax exemptions or exclusions, on the other hand, must be strictly construed

against the taxpayer, and any doubt must be resolved in favor of the application of the

tax.” Id.

III.   DISPUTED PARTS MUST BE ANALYZED INDIVIDUALLY

       At issue is whether some or all of the replacement equipment Dreyer purchased

for B&B qualified for a tax exemption under section 144.030.2(5). When the items were

purchased in 2016, the statute exempted from sales tax:

       Replacement machinery, equipment, and parts and the materials and
       supplies solely required for the installation or construction of such
       replacement machinery, equipment and parts, used directly in
       manufacturing … a product ….

       In the proceedings before the AHC, the Director contended the disputed items

were not replacement equipment or parts, and, even if they were, they were not used


                                                5
directly in manufacturing a product. In this Court, the Director contends only that the

equipment and parts were not “used directly in manufacturing.” It is to the meaning of

the latter phrase, therefore, that this Court turns.

       The Director contends the phrase should be interpreted according to the dictionary

definition of “direct” to include only items used in the actual machines that transform the

wood into products. It should not, the Director argues, apply to equipment that allows the

machines to operate safely and that provides power to them because:

       Some of these items work to deliver and control power to the
       manufacturing machinery; other items are required by the electric company
       solely for safety reasons and are not necessary to power the equipment. The
       items that work to deliver and control power, while necessary, are causally
       one step removed from the actual manufacturing process itself and thus are
       not exempt under the manufacturing statute.

Relying on cases decided by states such as Georgia and Ohio, the Director argues such

equipment and parts should not be exempt because they are not “directly involved in the

alteration of the graded logs into the final products that B&B produces” and “do not

cause a change to any raw materials and are not a part of the production line.”

       As the Director recognizes elsewhere in his brief, however, the meaning of “used

directly in manufacturing” is determined not by separating out and defining each word of

the phrase independently but by looking at the statutory language as a whole in light of its

legislative purpose. Undertaking just such an analysis, this Court expressly rejected in

Floyd Charcoal an argument nearly identical to the one the Director makes today. The

issue in Floyd Charcoal was how to determine whether replacement parts and equipment

used in manufacturing charcoal came within the definition of “used directly in


                                                   6
manufacturing.” 599 S.W.2d at 176. In Floyd Charcoal, as here, the Director relied on

the laws of Georgia and Ohio to argue for a narrow definition of that phase, asserting

only equipment that produced a change in the composition of the raw materials was

directly related to manufacturing and the phrase, therefore, excludes other equipment. Id.

       This Court rejected the Director’s argument, stating it was based, at best, on

outdated methods of manufacturing and failed to consider that “[m]odern manufacturing

facilities are designed to operate on an integrated basis.” Id. at 178. A machine cannot

change a raw product into a finished one by itself; rather, today’s machines are integrated

with other machinery that is also essential to the process. For this reason, “[t]o limit the

exemption to those items of machinery or equipment which produce a change in the

composition of the raw materials involved in the manufacturing process would ignore the

essential contribution of the devices required for such operation.” Id.

       Floyd Charcoal instead adopted the broader test it called the “integrated plant

rule” – which since has been referred to as the “integrated plant doctrine.” That doctrine,

Floyd Charcoal said, was more consistent with the Missouri legislature’s intent “to

encourage the location and expansion of industries” in the state by providing an

exemption for replacement equipment and parts used directly in manufacturing. Id. at

177. In applying this broader test to determine whether a particular part or process falls

within the statutory exemption, a court should consider three questions:

       (1) Is the disputed item necessary to production? (2) How close, physically
       and casually, is the disputed item to the finished product? (3) Does the
       disputed item operate harmoniously with the admittedly exempt machinery
       to make an integrated and synchronized system?


                                                7
Id. In Floyd Charcoal, the issue was the taxability of various pieces of replacement

equipment used to manufacture charcoal, including a starch system (consisting of

conveyer belts and storage bins), weight scales, a sacking system and filter, a check

weight system, pallets, plastic bags, and stairways and ramps. Id. at 175.

      Floyd Charcoal did not apply the integrated plant doctrine by deciding whether

the equipment as a whole was used directly in manufacturing. Instead, it looked at each

type of equipment and considered whether it qualified for the exemption. This Court first

considered and rejected the Director’s argument that the starch system was not directly

related to manufacturing charcoal because charcoal could be produced without it. Floyd

Charcoal held the starch system was used directly in manufacturing because it

“contributes to the continuous flow process … and that process requires the starch

system.” Id. at 178.

      Floyd Charcoal then considered and rejected the Director’s argument that the

equipment used in weighing and sacking the charcoal could not be considered directly

used in manufacturing because the charcoal was fully produced by the time it was

weighed and sacked. This Court reasoned the charcoal is manufactured “for distribution

and sale only in packages which must be accurately weighed and closed. Those steps are

an integral part of the respondent’s manufacturing process.” Id.        The Court found,

however, that the company had not shown its pallets, fuel oil, ramps, and certain other

equipment were used directly in manufacturing even though they were part of the

process; therefore, the company failed to show these types of equipment were entitled to

the exemption. Id. at 178-81.

                                                8
      This Court applied Floyd Charcoal’s integrated plant doctrine in Southwestern

Bell Telephone Co. v. Director of Revenue, 182 S.W.3d 226, 233-34 (Mo. banc 2005).

The question in Southwestern Bell was whether equipment used in the telephone system

was directly related to manufacturing. Id at 229. The disputed items included a signals

system with components at both the company’s warehouse and the customer’s home and

also included pay telephones.      Id at 233-37.   Because the telephone signal system

performed sending functions at the plant and receiving functions at the customer’s

location, the Director argued the system did not meet the prong of the integrated plant

doctrine that asks “how close, physically and casually” the disputed item is to the

finished product. Id. at 232-33.

      Southwestern Bell rejected the Director’s argument, stating, “The multitude of

component parts of the telephone system are necessarily spread over far distances, but

they are not scattered and unconnected.” Id. at 233. “Nothing in [the location] question

requires claimed machinery and equipment to be located in the same building or to have

common ownership to qualify for the exemption.” Id. “The end product of telephone

service could not be produced without the conversion of voice-to-signal and signal-to-

voice that occurs at customers’ premises.” Id. “[T]he manufacture of telephone services

occurs throughout the entire telephone system, not only at customers’ locations.” Id.

“[T]he entire system operates continuously along pathways formed by much of the

equipment at issue in this case.” Id. For these reasons, this equipment was exempt. 2


2
 When the legislature amended section 144.030 in 2018, it stated it was abrogating the
holding of IBM Corporation v. Director of Revenue, 491 S.W.3d 535 (Mo. banc 2016), to
                                             9
        This Court reached a different result when considering the pay telephones the

company claimed were similarly exempt. It found these telephones were taxable because

they “are not absolutely essential to the provision of telephone service, and are not

closely connected to those portions of the system that actually effect a change in the

signals[.]” Id.

        In sum, whether a particular component of a system qualifies for the exemption

depends on whether that component satisfies the broad three-part “integrated plant” test

set out in Floyd Charcoal, not the narrow test argued for by the Director and rejected in

Floyd Charcoal.       The Director is correct, however, that, under the integrated plant

doctrine, the exemption of one type of replacement equipment, such as the soft starters,

does not exempt all equipment purchased for the system. As is evident from the above

explanation of the approach taken in Floyd Charcoal and Southwestern Bell, exemptions

are determined by applying the three-part test to the particular type of replacement

equipment at issue.

        Applying these principles here, this Court rejects the Director’s arguments that

items such as the circuit breakers, soft starters, and overload relays are not directly used

in manufacturing because wood products theoretically can be manufactured without

them.    The AHC found this equipment was necessary to operate the wood-making



the extent IBM disapproved the application to telecommunications services of the broad
reading of “used directly in manufacturing” this Court applied in Southwestern Bell and
its predecessor case Southwestern Bell Telephone Co. v. Director of Revenue, 78 S.W.3d
763 (Mo. banc 2002). This instant case, of course, does not concern telecommunications
equipment; therefore, IBM’s discussion of the application of the integrated plant doctrine
to such equipment would not govern here.
                                              10
machinery safely and without overloading the electrical system. The AHC similarly

found the starters, connectors and disconnectors, and power and control wires were

necessary to deliver power to the manufacturing equipment. Clearly, under the reasoning

of the cited cases, such equipment is a part of an integrated process that is necessary to

the production of B&B’s wood products and so is exempt.

       By contrast, the Director is correct that electric outlets, lights, and lamps not used

in powering the plant and heat for the buildings generally is not a part of the integrated

process used to produce B&B’s products and so is not exempt because they do not

“operate harmoniously with the admittedly exempt machinery to make an integrated and

synchronized system” and are not necessary to operate the equipment. 3

       The AHC failed to mention other replacement equipment specifically in its

decision, seeming to assume that, because the major equipment purchased was exempt,

every item purchased was exempt. This Court, therefore, remands so the AHC can apply

the analysis approved in cases such as Floyd Charcoal and Southwestern Bell to the

remaining types of replacement equipment to determine if they are used directly in

manufacturing like the soft starters or, instead, are simply of general use to B&B, such as

electrical outlets, but are not used directly in manufacturing. 4


3
  Dreyer also installed a heating element, which the Director alleges is used to heat the
building where the machinery is housed and, therefore, is not exempt, but which Dreyer
alleges is a heating element for the NEMA overload relay and, therefore, is exempt.
Because the Court is remanding this cause, it need not resolve this disagreement.
4
  Dreyer seems to assume this Court will treat the tax as either owing or not owing as a
whole, so it is not worthwhile to require the Director to apply the integrated plant
doctrine to the small amounts spent on other equipment. While, as noted, this is incorrect,
it does raise the question why either the Director or Dreyer believed the small sum
                                               11
      IV.     CONCLUSION

      For the reasons set forth above, the AHC’s decision is reversed, and the cause is

remanded for further proceedings in accordance with this opinion.




                                         _______________________________
                                         LAURA DENVIR STITH, JUDGE


All concur.




involved was worth their presumably much higher expense in litigating this issue or
worth the time involved for the AHC or this Court in resolving it. This Court will assume
the parties are concerned that the principles involved need clarification and could have
broad application beyond the facts of this seemingly minor dispute.
                                               12
