House Tax Reform Committee Passes Manufacturing Inputs Sales Tax Exemption

(February 6, 2007) The Missouri House Special Committee on Tax Reform, chaired by Rep. Bryan Stevenson (R-128, pictured at right), today passed Taxpayers Research Institute of Missouri legislation that will bring true reform to the tax treatment of manufacturers, recyclers and research and development facilities in Missouri. Passage of the bill is one of the highest priorities of the Institute for the 2007 legislative session.

The bill is sponsored by sponsored by Rep. Shannon Cooper (R-120, pictured below). Ray McCarty, executive director of the Institute testified, "This bill accomplishes what other states have accomplished: finally returning sales tax law to its originally intended purpose of taxing only final retail sales to customers by eliminating taxes on manufacturing and processing inputs such as utilities, chemicals, and materials." McCarty also drafted an amendment that was also adopted by the committee that includes machinery and equipment used in manufacturing, recycling, and research and development.

The utility portion of this exemption will cost approximately $8.25 million. Purchases of electricity by manufacturing operations whose electricity costs are more than 10% of total production costs and by manufacturers that use more than 25% recycled materials as raw materials are already exempted from sales tax under current Missouri law. However, if gas, coal or another type of energy is used rather than electricity, no exemption is allowed. Gas was exempt if used in steelmaking from 1985 until that exemption was phased out in 2003.

Missouri may be losing manufacturing jobs to other states, like Kansas, that allow manufacturers to purchase nearly all utilities exempt from sales tax. Total sales taxes from utility receipts total approximately $55 million in Missouri. More than 85% of utility usage is already exempt or is not used in manufacturing or processing that would be exempted by this proposal. If it is assumed that the remaining 15% would be exempted by this proposal, this portion of the proposal would initially cost the state $8.25 million. This is estimated to be the largest cost in the proposal.

Chemicals and other materials that are used in manufacturing or processing are exempt under current law if they are used in certain processes (like firebrick, gases and slagging materials used in steelmaking) or if they become an ingredient or component of a finished product. Some processes require chemicals and other materials that are not present in the finished product. Such chemicals and materials are taxable in Missouri under current law. Missouri is one of only 15 states to tax chemicals that are consumed in the manufacturing process and none of our bordering states tax such chemicals, placing Missouri at an immediate competitive disadvantage.

Finally, the Missouri Supreme Court recently drew an imaginary line of distinction between research and development and manufacturing. Machinery and equipment that was used directly in the research and development phase of manufacturing was held to not be included in Missouri’s sales tax exemption for manufacturing machinery and equipment. McCarty asked the committee to consider adding this machinery and equipment to the list of exempt items in the bill to correct this interpretation error by the Court. "By adding this machinery and equipment to the bill," said McCarty, "you will help make Missouri’s manufacturing environment inviting to manufacturers and processors that are looking for the best place to produce their goods with the lowest possible overhead." Because this case was just decided in November 2006, fiscal impact of the exemption would be negligible because manufacturers had not been paying the tax prior to the decision, and many may not be paying it now as they may not yet be aware of the decision.

The current sales tax law leaves much to the imagination of tax auditors and allows decisions such as these to be rendered by the courts. By passing a complete exemption for manufacturing inputs, the Missouri legislature has a chance to achieve an often mentioned goal of simplifying the tax code and eliminating guesswork on the part of the taxpayer and the tax collectors. This bill will also return Missouri’s tax code to its originally intended purpose: to tax only final sales to consumers.

"The dividends that will be paid in new, family supporting manufacturing jobs have the potential to greatly outweigh the small cost of this exemption in a short period of time as manufacturers seek out the best place to locate their next plant or processing line," McCarty testified.

The legislation will now be referred to the House Rules Committee and will then be eligible for debate by the Missouri House of Representatives. For more information on the bill, please contact Ray McCarty at rmccarty@aimo.com.