Does a Missouri company doing custom, one-off machining and laser work to each customer's own specifications qualify for the manufacturing exemption under Sections 144.030 or 144.054, RSMo?

Plain-English summary

The Missouri Department of Revenue ruled that a new Missouri company performing custom machining and laser services does not qualify for the manufacturing sales/use tax exemption under either Section 144.030 or Section 144.054, RSMo -- because the work it does is custom-made to each individual customer's own specifications.

The company processes parts and materials shipped primarily out of Missouri, often without knowing the end use of what it processes since each job is a custom order built to that customer's needs. It also uses equipment for research and development in fields like agriculture, pharmaceuticals, aerospace, and computer technology.

Section 144.030.2(4), RSMo exempts machinery and equipment used directly in "manufacturing, mining, fabricating or producing a product which is intended to be sold ultimately for final use or consumption." The Missouri Supreme Court has defined "manufacturing" as the alteration or physical change of an object that produces something with a different use, identity, and value than the original (Galamet Inc. v. Dir. of Revenue; AAA Laundry & Linen Supply Co. v. Dir. of Revenue), and 12 CSR 10-111.010(2)(E) elaborates on that definition while excluding things like mere restoration, maintenance, or sorting.

The decisive issue here, though, was the meaning of "product." Under Interventional Center for Pain Management v. Director of Revenue, a "product" must be an output with market value that can be marketed to various buyers -- the business doesn't have to actually market it, but a market for it must exist. Because this company's machining and laser work is done to each customer's own specifications, one job at a time, its output isn't the kind of "product" that could be marketed to multiple, various buyers. As a result, the company does not qualify as a "manufacturer" for purposes of either the Section 144.030 or the Section 144.054 exemption.

What this means for you

Custom fabrication, machining, and job-shop businesses

If your business performs custom, made-to-order work -- machining, laser cutting, fabrication, or similar processing done to each customer's own specifications -- this ruling indicates you likely cannot claim the Section 144.030 or 144.054 manufacturing exemption on your equipment, even if your process otherwise looks like "manufacturing" (physically altering materials into something new). The controlling question is whether your output could be marketed to various buyers, not just to the one customer who ordered it.

Businesses considering the manufacturing exemption

Before claiming this exemption, ask whether what you produce has a market -- i.e., whether it's the kind of thing that could be sold to multiple, different buyers, even if you don't actually sell it that way. Bespoke, one-off, custom-specification work is unlikely to qualify, regardless of the equipment or physical processes involved.

Accountants and tax professionals

This ruling turns entirely on the "marketable to various buyers" test from Interventional Center for Pain Management, which applies to both Section 144.030 and Section 144.054. A client's process may satisfy the physical-transformation definition of "manufacturing" and still fail the exemption if its output is a one-off product built solely to a specific customer's specifications.

Common questions

Q: The company physically alters materials into a different product -- why doesn't that count as manufacturing?
A: Physically altering materials is necessary but not sufficient. The Missouri Supreme Court's manufacturing definition (physical change producing a different use, identity, and value) is satisfied here, but the exemption also requires that the output be a "product" -- meaning something that could be marketed to various buyers. Because each job is custom to one customer's specifications, that requirement isn't met.

Q: Does it matter that the company doesn't always know the end use of what it processes?
A: The ruling doesn't turn on that fact directly; it's part of the factual picture showing these are custom, one-off jobs built to each customer's needs rather than standardized products sold to a market of buyers.

Q: Does the research and development equipment change the answer?
A: No. The ruling's two issues and both "no" responses both address the manufacturing exemption for the custom machining and laser services; the R&D equipment use across fields like agriculture, pharmaceuticals, aerospace, and computer technology is part of the facts but isn't separately analyzed as changing the outcome.

Q: Can another custom machine shop rely on this ruling?
A: Not automatically. A Missouri letter ruling binds the Department only as to the requesting Applicant, only for three years, and only while the facts and law don't change. Another business with similar custom, made-to-order operations should consult a Missouri tax professional about its own specific situation.

Citations and references

Statutes and cases:

• Section 144.030.2(4), RSMo (manufacturing exemption for replacement machinery, equipment, and parts)
• Section 144.054, RSMo (manufacturing exemption for machinery, equipment, and materials)
• 12 CSR 10-111.010(2)(E) (regulatory definition of manufacturing)
• Galamet Inc. v. Dir. of Revenue, 915 S.W.2d 331 (Mo. 1996) (defines manufacturing as physical alteration producing a different use, identity, and value)
• AAA Laundry & Linen Supply Co. v. Dir. of Revenue, 425 S.W.3d 126 (Mo. banc 2014) (reaffirms the manufacturing definition)
• Interventional Center for Pain Management v. Director of Revenue, 592 S.W.3d 350 (Mo. banc 2019) (a qualifying product must be marketable to various buyers, even if not actually marketed)

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8310

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 June 3, 2024.

The facts as presented in your letter ruling request, phone call with counsel, and in additional documentation submitted, are summarized as follows:

Applicant is starting a new company located in Missouri. The company will be performing custom machining and laser services for parts/materials that are shipped primarily out of the state of Missouri. Applicant is not always knowledgeable of the end use of some of the products that they will process. These are custom orders and subject to the customer's needs.

Applicant will also be using various equipment for research and development including agricultural, pharmaceuticals, aerospace, computer technology, etc.

ISSUE 1 :

Is Applicant exempt under section 144.030, RSMo, as a manufacturer?

RESPONSE 1 :

No. Applicant does not qualify for an exemption from sales and use tax under section 144.030.2, RSMo.

Section 144.030.2(4), RSMo, exempts from Missouri state and local sales and use 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, mining, fabricating or producing a product which is intended to
be sold ultimately for final use or consumption; and machinery and equipment, and the materials and supplies required solely for the operation, installation or construction of such machinery and equipment, purchased and used to establish new, or to replace or expand existing, material recovery processing plants in this state.

The Missouri Supreme Court has determined that manufacturing "consists of 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. 1996). See also AAA Laundry & Linen Supply Co. v. Dir. of Revenue, 425 S.W. 3d 126,129 (Mo. banc 2014).

Generally, Missouri Code of State Regulations 12 CSR 10-111.010(2)(E) defines manufacturing as creating new and distinct items:

i)      [T]he alteration or physical change of an object or material to produce an article with a use, identity and value different from the use, identity and value of the original; or

ii)      a process which changes and adapts something practically unsuitable for any common use into something suitable for common use; or

iii)     the production of new and different articles, by the use of machinery, labor and skill, in forms suitable for new applications; or

iv)     a process that makes more than a superficial transformation in quality and adaptability and creates an end product quite different from the original; or

v)      requires the manipulation of an item in such a way as to create a new and distinct item, with a value and identity completely different from the original.

Manufacturing does not include processes that restore articles to their original condition (e.g., cleaning, repairing); processes that maintain a product (e.g., refrigeration); or processes that do not result in a change in the articles being processed (e.g., inspecting, sorting).

In Interventional Center for Pain Management v. Director of Revenue , 592 S.W.3d 350 (Mo. banc 2019), the Supreme Court also has stated that in order to qualify for the Section 144.054 manufacturing exemption, the taxpayer must show that its product can be marketed to multiple buyers:

The legislature did not define "product" as used in chapter 144, but this Court has held the term "product" means "an output with market value." Fenix Constr. Co. of St. Louis v. Dir. of Revenue, 449 S.W.3d 778, 780 (Mo. banc 2014). This Court has also held a "product" "can either be a tangible personal property or a service." Int'l Bus. Mach. Corp. v. Dir. of Revenue, 958 S.W.2d 554, 557 (Mo. banc 1997). The taxpayer is not required to actually market the good or service, but the taxpayer must prove the existence of a market. Fenix, 449 S.W.3d at 780 (citing Mid-Am. Dairymen, Inc. v. Dir. of Revenue, 924 S.W.2d 280, 283 (Mo. banc 1996)). "A strict construction of the term 'product' as used in section 144.054.2 indicates that the fundamental quality defining a product as an 'output with a market value' is that the price of an alleged product is set primarily by competing buyers and sellers." Id. By extension, a good or service is a product only if it can be marketed to various buyers. Id. To successfully demonstrate eligibility for the use tax exemption under section 144.054.2, therefore, Center must show it uses the disputed items in compounding a product output with market value that can be marketed to various buyers.

Interventional Center at 353. Emphasis added.

Applicant manufactures custom orders that are specific to their customers' specifications, and thus are not "products" for the purposes of the manufacturing exemptions in Sections 144.030 and 144.054, RSMo. Therefore, Applicant is not a manufacturer.

ISSUE 2 :

Is Applicant exempt under section 144.054, RSMo, as a manufacturer?

RESPONSE 2 :

No. Applicant is not a manufacturer under section 144.054, RSMo. See Response 1.

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 Associate Counsel J. Ross Shelton, General Counsel's Office, Post Office Box 475, Jefferson City, Missouri 65105-0475 (phone 573-751-0961).

Sincerely,

Wayne Wallingford