Modern technology confronts decades-old sales tax statute

A Kansas City company is asking the Missouri Supreme Court to interpret a law that hasn’t quite caught up with advancing technology.

The Missouri Department of Revenue appealed an Administrative Hearing Commission’s decision that Western Blue Print’s sales to its customers were not subject to sales tax. The Missouri Supreme Court will hear oral arguments Wednesday on whether Western Blue Print’s sale of CDs is exempt from taxation under a Missouri statute that applies to “computer output.”

A sign on the side of Western Blue Print's building in Kansas City highlights the business' history. The company is taking a case to the Missouri Supreme Court that highlights the problems new technology sometimes encounters under older laws. Photo by Scott Lauck

Western Blue Print scans its customers’ documents and puts the scanned images on CDs for its customers. It also indexes the scanned images. Western Blue Print charges a specific price per page for each scanned item and a separate $15 per CD it provides to its customers. The company does not collect or pay the state sales tax on the amount it receives from customers for these services.

In 2006, the Revenue Department said the company owed more than $41,000 in unpaid sales tax. The company appealed the decision to the Administrative Hearing Commission, which concluded that neither the services provided by Western Blue Print nor the CD were subject to sales tax.

The commission determined that the “true object” of its customer transactions was providing services in making paper documents available to customers in electronic form, and that the CDs were just the medium for the transaction. The commission also determined the CDs Western Blue Print produced were computer output, which is expressly exempt from taxation under state law.

In its appeal, the Revenue Department argued that Western Blue Print’s transactions were retail sales, which are subject to sales tax. In briefs, the agency argued that Western Blue Print could use other ways of transmitting the electronic files but that its contracts preclude this, “demonstrating that the CDs themselves have value to the customers – perhaps because they provide stable, long-term storage of the images,” Solicitor General James R. Layton wrote.

But Western Blue Print disagrees.

“The simple fact that a CD may be chosen as the delivery vehicle for electronic data is wholly incidental and cannot transform what is otherwise a non-taxable service into a taxable sale of tangible property,” attorney William Quirk, of Polsinelli Shughart, wrote in briefs. Calls to Quirk were not returned.

Ted Farnen, a spokesman for the Department of Revenue, said the department does not typically comment on pending litigation.

Also on appeal, the Revenue Department argues that while the statute excludes “computer output,” that exclusion does not apply to CDs. The full exemption states that “such computer printouts, computer output on microfilm or microfiche and computer-assisted photo compositions shall be considered as the sale of a service and not the sale of tangible personal property.”

In its briefs to the court, the department argued that since the law was passed in 1976, no legislative action has been taken to add advancing technology to the statute.

“When or whether to extend the language to exclude means of transmission from one machine to another – whether by modern CDs, DVDs, USB drives, or external hard drives, or by archaic magnetic or paper tape – is for the General Assembly, not the courts, to decide,” Layton wrote.

However, Western Blue Print argued that the General Assembly made a typographical error in the statute – the General Assembly replaced the word “or” with “on.” The statute should have read “computer output or microfilm or microfiche,” Western Blue Print said. The company cited a Missouri Supreme Court opinion in which the court says that the statute applies to exempt all computer output. It also notes that microfilm and microfiche are not associated with computer output.

“Typically, microfilm and microfiche are simply analog pictures of existing documents that are greatly reduced in size,” Quirk wrote. “There is no discernable connection between these formats and any sort of computer output, which is typically digital rather than analog in nature.”

In his reply brief, Layton said the court has cited the statute previously with no hint there could be a typographical error, and that extending the statute to apply to all “computer output” would broaden the statute beyond recognition because much of what is sold now could be construed as computer output.

The case is Western Blue Print Co. v. Director of Revenue, SC90172.