In TracFone Wireless, Inc. v. Director of Revenue, SC95785 (Mo. 2017), the Missouri Supreme Court recently held that an out-of-state seller of telecommunications services from Florida to customers in Missouri was not entitled to Missouri’s sales tax exemption for transactions made “in commerce” between Missouri and any other U.S. state. In reaching its conclusion, the Court looked to the “true object” of the transactions to deem them purely local telecommunications service transactions, even though the seller was located outside of and the sales took place outside of Missouri.
TracFone Wireless (“TracFone”) sells prepaid wireless minutes (“Airtime”) and handsets specially programmed to work only with TracFone Airtime. All TracFone’s sales of handsets and Airtime are made from its offices in Florida. TracFone has no warehouses or other facilities in Missouri. TracFone originally collected and remitted Missouri sales tax on its transactions with Missouri customers, but later filed partial refund claims, arguing it was entitled to the sales tax exemption for “retail sales as may be made in commerce between this state and any other state of the United States.” Mo. Rev. Stat. § 144.030.1 (the “in commerce exemption”). TracFone, however, acknowledged it had a responsibility to collect and remit use tax on its use of third-party telecommunication facilities and services in Missouri (TracFone did not operate its own telecommunications facilities but rather contracted with third-party carriers such as AT&T and Verizon). TracFone also appears to have conceded nexus in this case (although the Court’s opinion does not contain any facts regarding an in-state presence sufficient for the imposition of a sales tax).
As a threshold matter, in characterizing TracFone’s sales, the lower court had concluded that the true object of the transactions was the taxable sale of telecommunications access. On appeal, TracFone did not dispute this characterization, but argued the in commerce exemption still applied given the exemption expressly applies to all provisions falling within sections 144.010 to 144.525 of the Missouri Revised Statutes. Telecommunications access is taxable under section 144.020.1, thus falling squarely within the sections contemplated by the exemption. In further support of its case on appeal, TracFone cited numerous cases where the in commerce exemption applied when property was shipped from outside Missouri for use within Missouri.
The Missouri Supreme Court affirmed the lower court’s decision, holding that because the true object of the transactions was the sale of a “local” telecommunications service since access was found to occur largely in Missouri through the use of local cell towers, the transactions in question were not “in commerce.” Importantly, the Court also noted that the record was void of any evidence that any of the TracFone telecommunications services were used outside of Missouri. In reaching its conclusion, the Court relied on cases where the exemption did not apply because the true object of the transactions at issue was the provision of services in Missouri. In each of those transactions, the true object was the provision of a service that either necessarily had to be performed in Missouri (in the case of amusement park admission sold to an out-of-state customer) or travel to other states was incidental to the service that began and ended in Missouri (in the case of scenic boat and train trips that temporarily crossed state lines). Likewise, the Court held that the sale of telecommunications access to Missouri customers who will be using Missouri cell towers, which TracFone made available through its arrangements with third-party providers, is a local transaction that does not qualify for the exemption.
The lower court had acknowledged that more recent Missouri cases involving the in commerce exemption looked at more than just the crossing of state lines to qualify for the exemption; the interstate nature of the transaction had to be an essential feature to the transaction in order for a transaction to qualify as “in commerce”. The lower court found that the essential nature of TracFone’s transactions with Missouri customers was the provision of telecommunications access in Missouri, rendering any interstate component of the transaction unimportant. While the Court did not explicitly reference this part of the lower court’s decision, in a footnote, the Court did acknowledge that to qualify for the in commerce exemption a taxpayer must make a showing that the “out-of-state use was an integral part of the transaction.” This “integral” requirement is not expressly contemplated by the statute. Indeed, notably absent from the Court’s analysis was any substantive discussion of TracFone’s argument that the plain language of the exemption applies to exempt telecommunications access service, regardless of whether the true object of the transaction was services or that the services were ultimately used in Missouri or elsewhere. The statute is quite clear and expressly exempts from sales taxation “retail sales as may be made in commerce between this state and any other state of the United States.” As both parties agreed, TracFone’s sales were made from Florida to Missouri customers. Thus, the Court’s updated interpretation of what qualifies as “in commerce” may render the exemption much more narrow than as drafted ─ a job that should have potentially been left to the Missouri legislature.