Missouri Rules that Carfax is Not Entitled to Manufacturing Exemptions
October 31, 2022
By: Tina Chunn, SALT Senior Manager
At a glance
- The main takeaway: The Supreme Court of Missouri concluded that Carfax is not classified as a “manufacturer” of its vehicle history reports and is ineligible for a sales tax exemption on its equipment used to generate those reports.
- Assess the impact: Since there is no universal interpretation of what constitutes as “manufacturing,” it’s challenging for businesses to determine if they are eligible to receive sales tax exemptions on machinery and equipment.
- Take the next step: Aprio’s State and Local Tax (SALT) team has experience with addressing the parameters of a state’s manufacturing exemption and can help you pursue potential sales tax refunds.
Schedule a free consultation today to learn more!
The full story:
In most states, manufacturers are entitled to a sales tax exemption for machinery and equipment (and potentially other items) used in the manufacturing process. Unfortunately, there is no common definition or interpretation among the states as to what constitutes manufacturing. Recently, the Supreme Court of Missouri issued an opinion in which it determined that Carfax, Inc. (Carfax) does not “manufacture” its vehicle history reports (VHR), and therefore is not entitled to a sales tax exemption for equipment used to generate those reports.
Take a closer look at the case
Carfax is in the business of providing VHRs to individuals and businesses on used cars and trucks. These reports contain information on ownership and title history, mileage, accidents, previous maintenance and repairs, and manufacturer recall notices. Carfax collects this data from approximately 112,000 sources and stores it in a server room located in Missouri. Carfax performs an automated data cleansing process to remove incorrect or inconsistent data, and then uses its proprietary systems to organize and merge the data into its database. When a customer requests a VHR, the data for that particular vehicle is extracted, and the generated report is delivered to the customer.
Missouri conducted a sales tax audit for the period from 2013 through 2016 and determined that Carfax’s operations in generating the VHRs did not meet the definition of manufacturing, and therefore, the disputed equipment, consisting of items such as computers, servers and networks, was not eligible for the manufacturing sales tax exemption. This decision was subsequently appealed by Carfax to the Missouri Administrative Hearing Commission (AHC) which agreed with Carfax that the equipment did qualify for the manufacturing exemption as it was used in the process of manufacturing VHRs.
The ruling explained
However, the Court reversed the AHC and agreed with the Department of Revenue’s original determination to disallow the manufacturing exemption. The Court explained that it has in prior cases defined the term “manufacturing” as “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.”
Applying that definition, the Court did not agree that the generation of VHRs constitutes manufacturing, as the process involves merely the collection of data (generated by others and obtained/stored by Carfax) and the presentation of that information in a report (similar to the process used to generate the phone book). As such, the data fed into the analysis was not meaningfully transformed in use or identity to be considered the manufacturing of a separate and distinct product.
There are a couple of points worth noting in connection with this case:
- First, the Court stated that this case was a “close call,” noting that the Court “is called upon to determine whether the term “manufacturing” includes activities that scarcely could have been imagined when that word first was used in these statutes.” As many of our previous articles have noted, taxpayers and practitioners are attempting to apply existing tax guidance to business models that were not envisioned at the time the guidance was adopted. This creates uncertainty which leads to frustration for taxpayers who, more often than not, prefer knowing what the “answer” is whether favorable or not.
- Second, and to the first point, another article in this month’s SALT newsletter summarizes a Louisiana Board of Tax Appeals ruling that the taxpayer, a software developer, is a “manufacturer” of software (i.e., tangible personal property), and therefore, it is entitled to use the corporate franchise tax apportionment formula applicable to manufacturers.
The bottom line
Aprio’s SALT team understands the specific guidelines and parameters of a state’s manufacturing exemption as well as court interpretations of these requirements. We have worked with businesses to help them successfully pursue refunds of sales tax paid on machinery and equipment based on their business qualifying as a “manufacturer.” We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.
This article was featured in the October 2022 SALT newsletter.
 Carfax Inc. v. Director of Revenue, No. SC99367, Supreme Court of Missouri, September 13, 2022.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.
About the Author
Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.