PETITION FOR REVIEW OF A DECISION OF THE ADMINISTRATIVE HEARING COMMISSION. Honorable Paul R. Otto, Commissioner
Conagra Poultry Company filed a petition before the Administrative Hearing Commission (AHC) seeking a determination that Conagra was not liable for the sales tax, interest, and additions to tax that the Director assessed on Conagra's sales of wood shavings to its turkey-farming contractors. Conagra asserted that the sales were exempt as sales of fertilizer. § 144.030.2(1), RSMo 1986. The Commission determined that Conagra is liable for the sales tax, interest, and additions as assessed. Conagra appealed. The decision of the Commission is affirmed in part and reversed in part.
Conagra is in the business of processing turkeys. It contracts with independent farmers in Missouri to raise turkeys. Conagra owns the turkeys it provides to the growers to raise. Conagra pays the growers a cash price after the growers raise the turkeys.
In partial consideration of the farmers' growing the turkeys, Conagra purchases wood shavings from a supplier and has the shavings delivered to the growers. The growers use the wood shavings to line the floor of the structures in which the turkeys are housed. The shavings absorb turkey droppings, a practice essential to maintaining the health of the turkeys. Before absorbing turkey droppings, the wood shavings have no value as fertilizer.
After the wood shavings absorb a sufficient amount of droppings, the combination, "litter," is used to fertilize the growers' crops. The growers feed some of the crops on which they use the litter to their own livestock. Conagra selects its contractors, in part, on the basis of their ability to use all of the litter their turkey raising operation will produce. Use of litter is ecologically sound; once the wood shavings become saturated with the organic nutrients from the droppings, the shavings allow a gradual release of the nutrients into the soil, lessening the risk of violating water pollution laws.
From August 1, 1988, through March 31, 1989, Conagra paid $458,094.60 for wood shavings that were subsequently delivered to various turkey farmers. Conagra paid no sales tax on the transfer of these shavings to the growers. Conagra did not receive exemption certificates from its contract growers during 1988 and 1989. In 1991, Conagra prepared exemption certificates for each grower in anticipation of an audit by the Director of Revenue. In over ninety percent of the exemption certificates no ground was stated for the exemption. The remaining certificates stated as grounds for the exemption, "acquisition of wood shavings pursuant to single 'litter' agreement; wood shavings are used to collect turkey droppings to produce fertilizer which is exempt from Missouri sales/use tax pursuant to 144.030.2(1) and Missouri Sales Tax Rules 10-3.282." Conagra requested that each grower sign an exemption certificate. The Director of Revenue eventually assessed $29,089.02 sales tax, $9,897.06 interest, and a $1,454.46 penalty.
Conagra filed a petition with the AHC, appealing the Director's tax assessment. After a hearing, the AHC held that the transfers of wood shavings were not exempt from sales tax pursuant to the fertilizer exemption of § 144.030.2(1). The AHC refused to accept the exemption certificates as evidence of the tax-exempt use of the shavings, holding that the certificates were not received in good faith. The AHC further held that Conagra was liable for interest pursuant to § 144.170, RSMo 1986, and for a penalty pursuant to § 144.250, RSMo 1986.
Conagra asserts that the AHC erred by not finding that the transfers of wood shavings qualify for the fertilizer exemption of § 144.030.2(1). Conagra contends that the items come within the term "fertilizer" as used in § 144.030.2(1) because, if an item is purchased as an ingredient or component of fertilizer and, in fact, is combined with other ingredients and used as fertilizer for exempt purposes, then the item should be exempt.
Conagra's position disregards the plain language of the statute at issue. Tax exemptions are to be strictly construed against the party claiming the exemption. May Dep't Stores Co. v. Director of Revenue, 791 S.W.2d 388, 389 (Mo. banc 1990). The primary rule of statutory construction requires courts to ascertain the intent of the legislature by considering the plain and ordinary meaning of the words used in the statute. Jones v. Director of Revenue, 832 S.W.2d 516, 517 (Mo. banc 1992). Section 144.030.2(1), RSMo 1986, exempts from sales tax "seed, limestone, or fertilizer which is to be used for seeding, liming, or fertilizing crops which when harvested will be sold at retail or will be fed to livestock or poultry to be sold ultimately in processed form at retail." The statute uses the term "fertilizer." The legislature's intention was to exempt "fertilizer" from sales tax if used for the proper purposes. Section 144.030.2(1) does not state that the component parts of fertilizer are also exempt from sales tax.
When the legislature intends to exempt from sales tax a component part or ingredient, it specifically so states. Section 144.030.2(2), enacted in the same legislative act as the current § 144.030.2(1), RSMo Supp. 1992, specifically exempts:
(2) Materials, manufactured goods, machinery and parts which when used in manufacturing,...become a component part or ingredient of the new personal property resulting from such manufacturing,...and materials and manufactured goods which are ultimately consumed in the manufacturing process by becoming, in whole or in part, a component part or ingredient of steel products....
See Laws of Mo. 1991, p. 509-13. (emphasis added). Section 144.030.2(1) includes no similar language. A legislative intent to exclude from sales tax exemption the component parts of fertilizer is thus clearly indicated by the legislature's failure to include within subsection 1 of § 144.030.2 the specific language, or similarly ...