State and Local Tax Alert - September 2016

September 2016

Missouri Issues Sales Tax Notice to Taxpayers Regarding Potential Changes to the Taxability of Delivery Changes

Download PDF Version


Summary

The Missouri Department of Revenue recently issued a notice to taxpayers regarding the Missouri Supreme Court’s decision in Alberici Constructors, Inc. v. Director of Revenue, 452 S.W.3d 632 (Mo. 2015) concerning the taxability of delivery charges for sales tax purposes.  A 2015 law change requires the Department to send such a notice if a decision of the Department, the Administrative Hearing Commission, or a court modifies the taxability of an item, and a reasonable person would not have expected the decision based on prior law or regulation.  However, the notice is unclear as to the modification to the law, and its format raises a concern that future notices could be similarly confusing.
 

Details

The Notification Requirement
The notification requirement was enacted in 2015 in response to a perceived abuse by the Department, whereby it assessed small business taxpayers for sales tax on items the Department had previously treated as exempt.  The notification requirement law requires the Department to notify taxpayers via United States mail, email, or other electronic means of direct communication when a decision of the Director of Revenue, the Administrative Hearing Commission, or a court modifies the taxability of an item, and a reasonable person would not have expected the decision solely on prior law or regulation.  Further, the law waives liability for taxes for taxpayers actively selling the type of items affected by the decision on the date the decision was issued until receipt of notice of the law change, unless the taxpayer had previously remitted tax on the items subject to the decision or had prior notice of its sales tax collection and remittance responsibility.  See the BDO SALT Alert that discusses the notice requirement and other law changes.
 
Taxability of Delivery Charges
In Alberici Constructors, Inc. v. Director of Revenue, the Supreme Court upheld the denial of a use tax refund sought by the taxpayer on a separately stated charge for the delivery of a rented crane, where the delivery charge was negotiated as part of the transaction, but the agreement indicated that the purchaser had the option of using a third-party carrier.  The taxpayer had challenged the refund denial based on the Department’s regulation, which provides that if the purchaser is required to pay for a delivery charge as “part of the sales price,” the entire sales price is subject to tax, but if the purchaser is not required to pay for the delivery charge as “part of the sales price,” the service is not subject to tax if separately stated.  See Mo. Code Regs. tit. 12, § 10-103.600(3)(A) (emphasis added).  The taxpayer had interpreted this provision to mean that a delivery charge is not taxable when the charge is not required to be paid as part of the sales price, which is consistent with the Department’s earlier rulings.  For example, in Letter Ruling No. LR 7268 (May 23, 2013), the Department ruled that a separately stated pizza delivery charge is not taxable because the purchaser has the option to avoid the charge by picking-up the order at the seller’s location.
 
The Missouri Supreme Court in Alberici Constructors upheld the Administrative Hearing Commissions’ decision that the separately stated charge for delivery of a rented crane was taxable because the parties agreed to the delivery charge as part of the sale.  The court reasoned that the taxpayer’s interpretation of the regulation was at odds with the intent of the legislature to impose tax on a delivery charge that is part of the sale as per the definition of “sales price” in the statute.  See Mo. Rev. Stat. § 144.605(8) (Sales price means “the consideration including the charges for services … that are a part of the sale”) (emphasis added).  The court had held in an earlier decision, May Dep’t Stores v. Director of Revenue, 791 S.W.2d 388 (Mo. 1990), that separately stated delivery charges were excluded from tax, unless the service is part of the sale and the intention of the parties is the determining factor when assessing whether the service is part of a sale.  In Alberici Constructors, the court found the taxpayer’s receipt of the crane and payment of the delivery charge within 16 days after the date of the agreement to be evidence in support of the parties’ intention to include the delivery charge as part of the sale.
 
In light of the decision in Alberici Constructors, the Missouri Department of Revenue recently ruled that a separately stated pizza delivery charge was taxable because “[t]he customer requests such service when placing the order, and both parties intend it to be a feature of the transaction.”  See Letter Ruling No. LR 7722 (Jul. 29, 2016).  The Department so ruled even though the purchaser had the option of avoiding the charge by picking-up the pizza at the seller’s location, which contradicts its earlier ruling regarding the taxability of a similar separately stated pizza delivery charge.
 
The Department’s Notice
The Department’s notice does not specifically state that the decision in Alberici Constructors court modifies the taxability of an item.  Rather, the notice merely directs the taxpayer to Alberici Constructors and warns that the decision may require collecting and remitting taxes on delivery charges.  The notice then provides the following factors to consider when determining whether a delivery charge is part of the sale: (i) when title passes from the seller to the purchaser; (ii) whether the delivery charges for separately stated; (iii) who controls the cost and means of delivery; (iv); who assumes the risk of loss during delivery; and (v) whether the seller derives financial benefit from the delivery.  These factors are consistent with Department’s rulings and Southern Red-E-Mix v. Director of Revenue, 452 S.W.2d 632 (Mo. 1995).
 

BDO Insights

  • The Department sent the notice, the first of its kind to be issued under the notification law, to nearly 100,000 registered taxpayers.  However, there arguably has been no change in the sales tax treatment of delivery charges since before and after Alberici Constructors, the intent of the parties controls the taxability of a delivery charge, regardless of whether the charge is separately stated.  Further, the Director issued the notice without specifically stating how the court’s decision modified the existing sales tax law, and yet, as evidenced by its recently issued letter ruling regarding pizza delivery charges, has decided that any delivery charge resulting from a request by the customer for delivery is subject to tax.  Accordingly, this first notice from the Department does not bode well for taxpayers’ desire for alerts that inform them of changes to the sales tax law, and the notice’s format and lack of specificity, if followed in future notices, might result in confusion rather than clarity.
  • Whether the Department was required to send a notice is questionable given that Alberici Constructors did not result in a change in the taxability of an item.  However, the decision in Alberici Constructors (and earlier decisions) seemingly invalidates the portion of the Department’s regulation relating to the taxability of delivery charges.  See Mo. Code Regs. tit. 12, § 10-103.600(3)(A).  Accordingly, the Department may have issued the notice as a precursor to assessing sales tax on all untaxed delivery charges without the risk that a taxpayer may challenge the assessment on the grounds that the Department failed to provide the required notice in light of its earlier rulings.
 
 

For more information, please contact one of the following regional practice leaders:
 

West:   Atlantic:
Rocky Cummings
Tax Partner

 
  Jeremy Migliara
Tax Managing Director

 
Paul McGovern
Tax Managing Director
  Jonathan Liss
Tax Managing Director

 
Northeast:   Central:
Janet Bernier 
Tax Partner

 
  Angela Acosta
Tax Managing Director

 
Matthew Dyment
Tax Principal

 
  Nick Boegel
Tax Managing Director

 


Southeast:
  Joe Carr
Tax Principal

 
Ashley Morris
Tax Managing Director

 
  Mariano Sori
Tax Partner

 
Scott Smith
Tax Managing Director

 
  Richard Spengler
Tax Managing Director

 
Tony Manners
Tax Managing Director






 
 

Southwest:

Gene Heatly
Tax Managing Director

Tom Smith
Tax Partner