Does Missouri LR 8270 exempt a telecommunications provider's purchase of portable equipment huts and their HVAC units from sales or use tax?

Plain-English summary

The Missouri Department of Revenue ruled on two related questions from a Missouri Public Service Commission-certificated telecommunications provider that delivers Ethernet services (data, voice, video, and audio transmission) over fiber-optic cable strung on utility poles or buried underground.

Because Ethernet signals degrade over distance, the provider places signal-regeneration equipment -- filters, amplifiers, dispersion compensation modules, transponders, switches, routers, SONET equipment, media converters, monitors and alarms, firewalls, batteries, rectifiers, lasers, and cameras -- inside small, portable "GFRC huts" (gravel-faced reinforced concrete huts) at points along its network routes throughout Missouri. The huts are personal property, not real estate, and sit on concrete pads. Because the equipment inside needs a narrow operating temperature (64-75°F) and humidity range (35-70%), the provider attaches an HVAC unit to each hut. The huts and their HVAC units serve no purpose other than supporting the telecommunications equipment.

The provider asked whether its purchases of (1) the portable GFRC huts and (2) the attached HVAC units were exempt from Missouri sales or use tax under the manufacturing exemption. The Department said NO to both.

Section 144.020.1, RSMo, taxes retail sales generally, and Section 144.020.1(4)(a) specifically taxes sales or rentals of telecommunications equipment. Sections 144.030.2(4)-(5), RSMo, exempt replacement machinery, equipment, and parts used directly in manufacturing a product for final sale, or used to establish or expand a manufacturing plant -- and for telecommunications providers, "product" includes telecom services and "manufacturing" includes producing and transmitting those services.

Whether equipment is "used directly in manufacturing" is tested under the integrated plant doctrine (Dreyer Elec. Co. v. Dir. of Revenue, 603 S.W.3d 297, 302 (Mo. banc 2020)), which asks three questions (per Charter Commc'ns Ent. I, LLC v. Dir. of Revenue, 667 S.W.3d 84, 90 (Mo. 2023)): (1) is the item necessary to production; (2) how physically and causally close is it to the finished product; and (3) does it "operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system"?

The Department held that both the GFRC huts and the HVAC units fail this third prong. Even though they maintain the conditions the regeneration equipment needs, they don't themselves operate as part of the integrated, synchronized production system. The Department drew a direct analogy to Dreyer Elec. Co. itself, which held that electric outlets, lights, and lamps are not used directly in manufacturing, and that heat for a building is generally not part of the integrated manufacturing process. It also cited its own prior Letter Ruling 8180, which held that support structures for exempt machinery are themselves exempt, but the concrete foundations for those support structures are not -- drawing the same kind of line here between the actual regeneration equipment and the housing/climate-control infrastructure (the huts and HVAC units) that supports it.

What this means for you

Telecommunications providers

Buying or leasing the actual signal-regeneration equipment (filters, amplifiers, routers, switches, and similar gear) is a separate question from buying the huts and HVAC units that house and climate-control that equipment. This ruling only addresses the housing and climate-control infrastructure -- and holds that it does not qualify for the manufacturing exemption, even when it exists solely to protect exempt telecommunications equipment.

Manufacturers evaluating equipment tax exemptions

The lesson extends beyond telecom: infrastructure that supports exempt production equipment (buildings, huts, enclosures, climate control) is analyzed separately from the equipment itself. Being "necessary" for the exempt equipment to function properly is not enough -- the item must also operate harmoniously as part of the integrated, synchronized production system itself, not merely as a supporting structure or utility.

Accountants and tax attorneys

This ruling is a useful worked example of the third prong of the integrated plant doctrine as articulated in Charter Commc'ns Ent. I, LLC v. Dir. of Revenue. It also shows the Department continuing to apply the support-structure-versus-foundation distinction from its own Letter Ruling 8180 to new fact patterns (huts versus HVAC units), so it's worth flagging when advising clients that ancillary housing or climate-control equipment is unlikely to qualify even where the equipment it protects would.

Common questions

Q: Does Missouri's manufacturing exemption cover the GFRC huts that house telecom regeneration equipment?
A: No. The Department found that the huts do not "operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system," so they are not exempt, even though they exist solely to house that equipment.

Q: What about the HVAC units attached to the huts?
A: Also not exempt, for the same reason. Maintaining the required temperature and humidity range for the equipment inside doesn't make the HVAC unit part of the integrated, synchronized production system itself.

Q: Does this ruling say the regeneration equipment itself (routers, switches, amplifiers, etc.) is taxable too?
A: No -- this ruling addresses only the huts and the HVAC units. The Department's reasoning assumes the underlying telecommunications equipment is "admittedly exempt machinery," and contrasts the huts/HVAC against that equipment rather than reclassifying the equipment itself.

Q: Can another Missouri telecommunications provider rely on this ruling?
A: No. A Missouri letter ruling binds the Department only as to the requesting Applicant, only for three years from its date, and only so long as the facts and the underlying law don't change. Other taxpayers cannot rely on it directly and should consult a tax professional about their own facts.

Citations and references

Statutes and cases:

• Section 144.020.1, RSMo (imposition of sales/use tax on retail sales)
• Section 144.020.1(4)(a), RSMo (tax on telecommunications equipment sales/rentals)
• Sections 144.030.2(4)-(5), RSMo (manufacturing machinery/equipment exemption)
• Dreyer Elec. Co. v. Dir. of Revenue, 603 S.W.3d 297, 302, 304 (Mo. banc 2020) (integrated plant doctrine; outlets, lights, lamps, and building heat not used directly in manufacturing)
• Charter Commc'ns Ent. I, LLC v. Dir. of Revenue, 667 S.W.3d 84, 90 (Mo. 2023) (three-question integrated plant doctrine test)
• Missouri Letter Ruling 8180 (support structures for exempt machinery are exempt; concrete foundations for those structures are not)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8270

Original ruling text

Dear Applicant:

This is a letter ruling issued by the Director of Revenue under Section 536.021.10, RSMo, and Missouri Code of State Regulations 12 CSR 10-1.020, in response to your letter dated August 22, 2023.

The facts as presented in your letter ruling request are summarized as follows:

Applicant is certificated by the Missouri Public Service Commission to provide telecommunications services.   Applicant provides, produces and transmits telecommunications services via Ethernet networks provisioned through the use of fiber optic cable hung from utility poles or buried below ground.  Members of the public using Applicant's Ethernet services are provided with the ability to transmit data, voice, video and audio communications between two or more points.

Ethernet signals sent through the fiber optic cable begin to degrade at specific distances.  Because of this, it is necessary at points along the Ethernet routes to receive and regenerate the signal.   Receipt and regeneration requires the use of a variety of types of highly technical equipment located in climate controlled gravel faced reinforced concrete huts (GFRC huts) at locations along the route.   The equipment located in the GFRC huts includes filters, amplifiers, dispersion compensation modules, transponders, switches, routers, SONET equipment, media converters, temperature and intrusion monitors and alarms, firewalls, batteries, rectifiers, lasers, and cameras.   All of this equipment is necessary for the receipt, regeneration and secure transmission of customer telecommunications. Applicant's Ethernet regeneration equipment is housed in small GFRC huts throughout Missouri.  The GFRC huts are placed on top of concrete pads to keep them from sinking into the ground. These GFRC huts are portable huts placed on concrete pads, and constitute personal property, not real estate.

The receipt and regeneration equipment has limited operating temperature range between 64o F to 75o F, and a limited operating humidity level range between 35% to 70% humidity.  Because of this, Applicant must use an HVAC system attached to the GFRC Hut to maintain the operational temperature, humidity and air quality for the equipment. GFRC huts, and HVAC units attached to the huts, serve no other purpose to Applicant other than the provisioning of telecommunication services.

ISSUE 1 :

Is Applicant's purchase of portable GFRC huts exempt from Missouri sales or use tax?

RESPONSE 1 :

No. Applicant's purchase of portable GFRC huts are not exempt from Missouri sales or use tax.

Section 144.020.1, RSMo, provides that "[a] tax is hereby levied and imposed upon all sellers for the privilege of engaging in the business of selling tangible personal property or rendering taxable service at retail in this state."  Section 144.020.1(4)(a) provides:

A tax equivalent to four percent on the basic rate paid or charged on all sales of local and long distance telecommunications service to telecommunications subscribers and to others through equipment of telecommunications subscribers for the transmission of messages and conversations and upon the sale, rental or leasing of all equipment or services pertaining or incidental thereto;

RSMo, 144.030.2(4) provides an exemption for replacement machinery, equipment, and parts that are used directly in manufacturing a product which is intended to be sold for final use. RSMo, 144.030.2(5) exempts machinery, equipment, and parts that are purchased and used to establish new, or to expand existing manufacturing plants in the state if such machinery and equipment is used directly in manufacturing a product which is intended to be sold for final use. Under subdivisions 4 and 5, the term "product" includes telecommunications services and the term "manufacturing" includes the production and transmission of telecommunications services.

The integrated plant doctrine is used to determine whether machinery, equipment, or parts are "used directly in manufacturing." Dreyer Elec. Co. v. Dir. of Revenue , 603 S.W.3d 297, 302 (Mo. banc 2020). In applying the integrated plant doctrine, three questions are considered:

(1) Is the disputed item necessary to production? (2) How close, physically and causally, 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? Charter Commc'ns Ent. I, LLC v. Dir. of Revenue , 667 S.W.3d 84, 90 (Mo. 2023).

Applicant's purchase of GFRC Huts would not be exempt because they do not "operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system." Id . See Dreyer Elec. Co., LLC v. Dir. of Revenue, 603 S.W.3d 297, 304 (Mo. 2020) (finding that electric outlets, lights, and lamps are not used directly in manufacturing, and that heat for a building is generally not a part of the integrated process); See also Letter Ruling 8180 (explaining that support structures are exempt, while concrete foundations for the support structures would not be exempt).

Therefore, Applicant's purchase of portable GFRC huts are not exempt from Missouri sales or use tax.

ISSUE 2 :

Is Applicant's purchase of HVAC units exempt from Missouri sales or use tax?

RESPONSE 2 :

No. Applicant's purchase of HVAC units are not exempt from Missouri sales or use tax.

Applicant's purchase of HVAC units would not be exempt because they do not "operate harmoniously with the admittedly exempt machinery to make an integrated and synchronized system." Id . See Dreyer Elec. Co., LLC v. Dir. of Revenue, 603 S.W.3d 297, 304 (Mo. 2020) (finding that electric outlets, lights, and lamps are not used directly in manufacturing, and heat for a building is generally not a part of the integrated process); See also Letter Ruling 8180 (explaining that support structures are exempt, while concrete foundations for the support structures would not be exempt). See response 1 regarding the application of sections 144.030.2(4)-(5).

Therefore, Applicant's purchase of HVAC units are not exempt from Missouri sales or use tax.

This letter ruling is binding upon the Department of Revenue with respect to the Applicant for three (3) years from the date of this letter and is subject only to statutory changes by the General Assembly and to changes in the interpretation of law by the courts or administrative tribunals.  If a change occurs, the taxpayer who relies upon an outdated interpretation may be subject to additional taxes, interest and penalties, which may be imposed prospectively from the date of the change.  For this reason, the interpretation set forth above should be reviewed on a regular basis.  Please note that any change in or deviation from the facts as presented will render this ruling inapplicable

Should additional information be needed, please contact Legal Counsel Michael C. Reed General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford