Is a saw used to cut steel to length for customers exempt from Missouri sales tax as manufacturing equipment?

Plain-English summary

The Missouri Department of Revenue ruled that a steel and aluminum distributor's purchase of a metal-cutting saw is fully taxable -- not exempt as manufacturing or fabricating equipment -- because Applicant merely cuts already-manufactured steel and aluminum to a shorter length for customers, and that is not "fabrication" or "manufacturing" under Missouri law.

Applicant buys steel and aluminum from vendors for resale. When a customer asks, Applicant cuts a piece to a desired length (for example, cutting a standard 40-foot piece of steel into two 20-foot pieces) using in-house equipment such as a band saw, circular saw, or tube laser. Applicant bought a Tsune TK130GL Ferrous Saw for this purpose, along with installation labor, and expects future repair labor costs as well.

Three separate questions were addressed. First, the Tsune saw itself is not exempt from sales tax under Section 144.030.2(2), RSMo, which exempts machinery used in manufacturing, mining, fabricating, processing, compounding, or producing. 12 CSR 10-111.010.2(C) defines "fabrication" as transforming an item into a higher stage of development -- which can include cutting and reworking shapes to a required length, but only when it advances an elementary shape to a higher stage of development. Simply cutting steel or aluminum shorter does not do that, so the saw is ordinary taxable equipment, not exempt manufacturing equipment.

Second, the labor to install the Tsune is taxable, but future labor to repair the Tsune is not. Both conclusions rest on the "true object" test from Sneary v. Director of Revenue and Bartlett International, Inc. v. Director of Revenue, which asks what the buyer was really seeking in the transaction. Installation labor is taxable because the true object of buying and installing the saw was acquiring the saw itself -- installation labor is essentially never the true object of a transaction that includes buying the underlying equipment, regardless of whether the labor charge is separately stated. Future repair labor is different: the true object of a repair transaction is the repair or maintenance service itself, a non-taxable service, even though some tangible parts might be involved.

Third, shipping charges to deliver the Tsune are not taxable, because Section 144.010.1(4), RSMo, excludes "usual and customary delivery charges that are stated separately from the sale price" from taxable "gross receipts," and Applicant's shipping charges were stated separately.

What this means for you

Metal and materials distributors who cut-to-order

If your business buys steel, aluminum, or similar material for resale and simply cuts it to a customer-requested length using saws or similar equipment, this ruling indicates that equipment purchase is fully taxable -- it does not qualify for Missouri's manufacturing/fabricating machinery exemption. The exemption in Section 144.030.2(2), RSMo, requires more than cutting a shape to a shorter length; it requires advancing the material to a genuinely higher stage of development. When you buy that kind of equipment, expect to pay sales tax on the purchase price and on any installation labor. However, if you later pay for repair labor on that same equipment, this ruling's reasoning suggests that repair labor charge should not be taxable, and if your vendor separately states delivery/shipping charges on the invoice, those charges should also not be taxable.

Equipment buyers weighing installation vs. repair labor

This ruling draws a sharp line worth remembering: installation labor tied to buying new equipment is taxable (the "true object" is the equipment), but labor to repair or maintain equipment you already own is not taxable (the "true object" is the service). Separately stating an installation labor charge on an invoice does not change its taxability -- the true object test looks past how the charge is labeled or itemized.

Accountants and tax professionals preparing Missouri sales tax filings

When assessing whether cutting, trimming, or resizing equipment qualifies for Missouri's manufacturing/fabricating exemption, look at whether the process advances the material to a higher stage of development (per 12 CSR 10-111.010.2(C)) rather than just changing its length or size. Separately, when a transaction includes both tangible property and labor, apply the true object test from Sneary and Bartlett International to determine taxability of the labor component, and remember that installation labor and repair labor can come out differently even on the same piece of equipment. Finally, confirm that delivery charges are stated separately from the sale price on invoices to exclude them from taxable gross receipts under Section 144.010.1(4), RSMo.

Common questions

Q: Why isn't a saw that cuts steel to length treated as exempt manufacturing equipment?
A: Missouri's exemption under Section 144.030.2(2), RSMo, covers machinery used in manufacturing, mining, fabricating, processing, compounding, or producing. 12 CSR 10-111.010.2(C) defines "fabrication" as transforming an item into a higher stage of development. Applicant purchases already-manufactured steel and aluminum for resale; cutting it to a shorter length afterward does not advance it to a higher stage of development, so the saw does not qualify as exempt manufacturing or fabricating equipment.

Q: Is labor to install a new saw taxable, and is that different from labor to repair it later?
A: Yes, they're treated differently. Under the true object test (Sneary v. Director of Revenue; Bartlett International, Inc. v. Director of Revenue), installation labor tied to the purchase of the saw is taxable because the true object of that transaction is acquiring the saw itself -- installation labor is essentially never the true object of a transaction that also involves buying tangible personal property. By contrast, future repair labor on the same saw is not taxable, because the true object of a repair transaction is the repair/maintenance service, which is a non-taxable service.

Q: Does separately stating the installation labor charge on the invoice make it non-taxable?
A: No. The ruling specifically notes that separately stating the labor charge is not determinative -- what matters is the true object of the transaction, which here was acquiring the Tsune saw, not the installation labor.

Q: Are shipping charges for the saw taxable?
A: No. Section 144.010.1(4), RSMo, defines "gross receipts" to specifically exclude usual and customary delivery charges that are stated separately from the sale price. Because Applicant's shipping charges were stated separately, they are excluded from taxable gross receipts.

Q: Can another business rely on this ruling for its own equipment purchases?
A: Not automatically. This is a Missouri letter ruling, binding on the Department only with respect to the requesting Applicant, only for three years from its date, and only so long as the facts and law remain unchanged. A different business should confirm its own facts match those described here and consult a tax professional before relying on this result.

Citations and references

Statutes and regulations:

• Section 144.020.1, RSMo (imposition of sales tax on retail sales of tangible personal property)
• Section 144.030.2(2), RSMo (exemption for machinery/equipment used in manufacturing, mining, fabricating, processing, compounding, or producing)
• 12 CSR 10-111.010.2(C) (definition of "fabrication")
• Section 144.010.1(4), RSMo (definition of "gross receipts," including the delivery-charge exclusion)

Case law:

• Sneary v. Director of Revenue, 865 S.W.2d 342 (Mo banc 1993) (true object test)
• Bartlett International, Inc. v. Director of Revenue, 487 S.W.3d 470 (Mo banc 2016) (true object test)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8247

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 April 25, 2023.

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

Applicant is a steel and aluminum distributor, headquartered in the state of California. They purchase their aluminum and steel from their vendors for resale. On occasion, a customer may request further work from Applicant, such as cutting material to a desired length. For example, a customer will request a standard 40-feet piece of steel be cut into two 20 foot pieces. To perform this request, Applicant will utilize in house equipment to cut material to size and specs, such as band saw, circular saw, and tube laser. If no request is made by the customer, Applicant will remove the material from inventory and sell it to the customer.

Most of the orders with materials cut to size are required to be purchased by the customer. If the customer refuses the cut to size order, it can potentially be resized and sold to a different customer. Even if there are no immediate customers, Applicant is always able to sell the existing materials to their scrap dealers.

To accommodate a customer's request, Applicant has purchased a Tsune TK130GL Ferrous Saw (the "Tsune"), a circular saw used to cut materials to size. In addition to the purchase price of the Tsune, Applicant paid for the costs of labor to install the Tsune, and foresee costs of labor for repairing the Tsune.

ISSUE 1 :

Is Applicant's purchase of the Tsune used for cutting pieces of steel or aluminum exempt from sales tax as machinery or equipment used in manufacturing, mining, fabricating, processing compounding, or producing?

RESPONSE 1 :

No. Applicant's purchase of the Tsune is not exempt from sales tax, because the activities described by Applicant do not rise to the definition of manufacturing, processing, compounding, mining, fabricating, or producing.

Section 144.020.1 RSMo, provides: "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."

However, section 144.030.2(2) provides:

Materials, manufactured goods, machinery and parts which when used in manufacturing, processing, compounding, mining, producing or fabricating become a component part or ingredient of the new personal property resulting from such manufacturing, processing, compounding, mining, producing or fabricating and which new personal property is intended to be sold ultimately for final use or consumption [...]

Applicant purchases already manufactured steel and aluminum for resale, and their subsequent cutting is not fabrication.

12 CSR 10-111.010.2(C) defines fabrication as:

The process of transforming an item into a higher stage of development. It does not imply or signify manufacturing, but the meaning of the term is limited to cutting, carving, dressing, shaping; advancing an elementary shape to a higher stage of development; reworking and cutting shapes to required length.

While Applicant's process does involve cutting aluminum into smaller pieces, this is not advancing an elementary shape to a higher stage of development. Therefore, the Tsune used in the cutting process is not exempt machinery because it is not used in manufacturing, mining, fabricating, or producing a product, and is subject to sales tax.

ISSUE 2:

Are Applicant's costs to install the Tsune and foreseeable costs of labor and repair subject to Missouri sales tax?

RESPONSE 2:

Yes. Applicant's purchases of repair parts for the Tsune are subject to sales tax, because they are not replacement parts for machinery used in manufacturing, mining, fabricating, or producing a product. See Response 1.

The taxability of repair and installation labor for the Tsune will be dependent on the true object of the transaction.

Section 144.010.1(4) defines "Gross receipts" as:

Means the total amount of the sale price of the sales at retail including any services other than charges incident to the extension of credit that are a part of such sales[.]

The true object test determines whether or not to treat a transaction as a taxable transfer of tangible personal property or the non-taxable performance of a service. The true object is what the buyer seeks in making the purchase. See Sneary v. Director of Revenue , 865 S.W.2d 342 (Mo banc 1993); see also Bartlett International, Inc. v. Director of Revenue , 487 S.W.3d 470 (Mo banc 2016).

Here, Applicant's costs for installation labor would be subject to sales tax, because the true object of the transaction is acquiring the Tsune, not for installation labor. Installation labor is unlikely to ever be the true object of a transaction that includes the sale of the property itself. The fact that the charges are separately stated is not determinative, it is the true object of the transaction. In this transaction, the installation labor would be unnecessary without the tangible personal property, so the true object is clearly the Tsune saw.

Future charges for repairs on the Tsune saw would not be subject to sales tax. Again, this transaction is considered under the true object test. Although repairs may include tangible personal property, the object of the transaction is the repair/maintenance of the Tsune saw, which is a non-taxable service. Therefore, future charges for labor are not subject to sales tax.

ISSUE 3:

Are Applicant's costs for shipping the Tsune after purchase taxable?

RESPONSE 3:

No. Applicant's costs for shipping the Tsune are not taxable.

Section 144.010.1(4) defines "Gross receipts" and includes: "[T]he term gross receipts shall not include usual and customary delivery charges that are stated separately from the sale price[.]"

Applicant's shipping charges are separately stated from the sale price, therefore, they are not included in the gross receipts for purposes of calculating sales 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 J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961.

Sincerely,

Wayne Wallingford