Does Missouri's sales and use tax exemption for research and development apply to a business whose R&D activities (experimentation, prototyping, and testing) are not connected to manufacturing, processing, or producing a product?

Plain-English summary

The Missouri Department of Revenue ruled that a Greene County business focused on innovation, testing, and development of new products or technologies does not qualify for Missouri's sales and use tax exemption for research and development. The business had argued that its experimentation, prototyping, and research activities typically qualify for exemption because they are distinct from manufacturing -- involving testing and development rather than production of goods for commercial sale.

The Department disagreed. Missouri's exemption under Section 144.054.2, RSMo, covers electrical energy, gas, water, chemicals, machinery, equipment, and materials, but only when they are used "in research and development related to manufacturing, processing, compounding, mining, or producing any product." The exemption is tied to R&D that supports manufacturing-type production activity -- it is not a general exemption for all research and development. Because the Applicant did not manufacture, process, or produce a product and its R&D was not connected to any such activity, its purchases fell outside the exemption entirely.

In reaching this conclusion, the ruling cites three Missouri Supreme Court cases that have shaped how courts read this exemption: DST Systems, Inc. v. Director of Revenue, 43 S.W.3d 799 (Mo. banc 2001); Southwestern Bell Tel. Co. v. Director of Revenue, 78 S.W.3d 763 (Mo. banc 2002); and Southwestern Bell Tel. Co. v. Director of Revenue, 182 S.W.3d 226 (Mo. banc 2005). The Department affirmed that its application of the exemption is consistent with those decisions.

The bottom line: standalone R&D -- experimentation, prototyping, and testing of new products or technologies that is not connected to manufacturing, processing, compounding, mining, or producing a product for commercial sale -- is subject to Missouri sales and use tax on the equipment, materials, and utilities used in it.

What this means for you

R&D-focused businesses that don't manufacture

If your business's core activity is innovation, prototyping, or testing new products or technologies, but you do not manufacture, process, compound, mine, or produce a product yourself, Missouri's R&D sales tax exemption will not shield your equipment and materials purchases. The label "research and development" alone does not get you the exemption -- the R&D has to be related to an actual manufacturing/production activity.

Manufacturers with in-house R&D

If your company both manufactures a product and runs R&D that supports that manufacturing (developing or improving what you produce), this ruling does not disturb your exemption -- Section 144.054.2, RSMo, and the case law it cites still protect machinery, equipment, and materials used in R&D that is related to your manufacturing. The key distinction is whether the R&D is tied to production of a product, not merely whether the activity can be labeled "research."

Accountants and tax professionals advising R&D companies

When evaluating whether a client's R&D purchases are exempt, look past the R&D label and ask whether the client also manufactures, processes, compounds, mines, or produces a product, and whether the R&D purchases in question relate to that activity. This ruling is a reminder that the Department (and the courts, per DST Systems and the two Southwestern Bell decisions) reads the exemption narrowly to require that manufacturing/production connection.

Common questions

Q: Does Missouri exempt all research and development purchases from sales tax?
A: No. Section 144.054.2, RSMo exempts electrical energy, gas, water, chemicals, machinery, equipment, and materials only when used in research and development that is related to manufacturing, processing, compounding, mining, or producing a product. R&D that stands apart from those production activities does not qualify.

Q: Why did this Applicant's R&D not qualify?
A: The Applicant did not engage in manufacturing or any qualifying production activity in connection with its research and development. Its work was experimentation, prototyping, and research aimed at new products or technologies, but it was not shown to relate to manufacturing, processing, compounding, mining, or producing any product.

Q: What if my facts are different from this Applicant's?
A: This ruling is binding on the Department only with respect to this specific Applicant, only for three years from its date, and only as long as the facts don't change and the underlying law isn't changed by the General Assembly or the courts. No other taxpayer can rely on it -- it shows how the Department applies the law, but you should get your own ruling or advice if you want certainty for your own situation.

Q: What cases does the Department rely on to interpret this exemption?
A: The ruling cites DST Systems, Inc. v. Director of Revenue, 43 S.W.3d 799 (Mo. banc 2001), and two Southwestern Bell Tel. Co. v. Director of Revenue decisions, 78 S.W.3d 763 (Mo. banc 2002) and 182 S.W.3d 226 (Mo. banc 2005), and affirms that its application of Section 144.054.2, RSMo is consistent with how the Missouri Supreme Court has construed that exemption in those cases.

Citations and references

Statutes, regulations, and cases:

• Section 144.054.2, RSMo (R&D exemption tied to manufacturing, processing, compounding, mining, or producing a product)
• Section 536.021.10, RSMo (authority for letter rulings)
• 12 CSR 10-1.020 (letter ruling procedure)
• DST Systems, Inc. v. Director of Revenue, 43 S.W.3d 799 (Mo. banc 2001)
• Southwestern Bell Tel. Co. v. Director of Revenue, 78 S.W.3d 763 (Mo. banc 2002)
• Southwestern Bell Tel. Co. v. Director of Revenue, 182 S.W.3d 226 (Mo. banc 2005)

Subject

Taxability of Research and Development Not Related to Manufacturing

Source

• Landing page: Missouri DOR Rulings Search
• Ruling: LR 8358

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 18, 2025.

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

Applicant is a business located in Greene County Missouri.   The activities focused on by Applicant are innovation, testing and development of new products or technologies, which Applicant states typically qualify for exemption from Missouri sales tax. Applicant states that its activities are distinct from manufacturing as they involve experimentation, prototyping, and research rather than production of goods for commercial sale.

ISSUE:

Are Applicant and its experimentation, prototyping, and research activities exempt from Missouri state sales and use tax ?

ANSWER:

No. Applicant and its experimentation, prototyping, and research activities are not exempt from Missouri state sales and use tax.

Section 144.054.2, RSMo , provides:

In addition to all other exemptions granted under this chapter, there is hereby specifically exempted from the [sales and use tax laws] […] electrical energy and gas, whether natural, artificial, or propane, water, coal, and energy sources, chemicals, machinery, equipment, and materials used […] in research and development related to manufacturing, processing, compounding, mining, or producing any product.   The construction and application of this subsection as expressed by the Missouri supreme court in  DST Systems, Inc. v. Director of Revenue , 43 S.W.3d 799 (Mo. banc 2001);  Southwestern Bell Tel. Co. v. Director of Revenue , 78 S.W.3d 763 (Mo. banc 2002); and  Southwestern Bell Tel. Co. v. Director of Revenue, 182 S.W.3d 226 (Mo. banc 2005), is hereby affirmed.

Applicant does not engage in manufacturing or any qualifying activities in relation to its research and development and does not qualify for an exemption from Missouri's sales and use tax laws.

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 Senior Counsel, Kent L. Brown, General Counsel’s Office, Post Office Box 475, Jefferson City, Missouri 65105-0475, phone (573) 751-0961, e-mail [email protected].

Sincerely,

Trish Vincent