Telephone companies may get $130 million from court ruling

JEFFERSON CITY, Mo. -- State and local governments could end up paying telephone companies operating in Missouri as much $130 million in tax refunds and interest as a result of a state Supreme Court ruling, government officials said Wednesday.

The ruling stems from a case brought by Southwestern Bell, Missouri's largest local telephone service provider, which claimed that taxes were wrongly imposed on the purchase of equipment used to transmit telephone calls.

In a June 11 ruling, the Supreme Court agreed that a sales and use tax exemption for equipment used in manufacturing should apply to telephone companies -- even though their product isn't as tangible as traditional consumer goods.

While signing the state budget Wednesday, Gov. Bob Holden said the court case could result in an unexpected $50 million hit on state general revenue.

Cost to the state

But officials in the state taxation division said later that Holden's figure did not include interest nor the potential refunds of local government sales taxes.

"It could cost as much as $130 million in total state and local funds," said state taxation division director Stan Farmer.

About 100 tax refund claims already have been filed by telephone companies or the vendors who sold them products, Farmer said. More could be filed because of the court ruling.

The final cost to governments may not be known for some time, because the Supreme Court sent the case back to an administrative hearing commission to decide -- on an item-by-item basis -- which of Southwestern Bell's equipment purchases should be exempt.

The state would then have to take those decisions and apply them to other tax refund claims, Farmer said.

Southwestern Bell is still trying to calculate how much money it believes it is owed, said spokeswoman Nancy Pollock.

Customers aren't likely to share in the refund because the taxes were never incorporated into consumer bills, she said.

The Southwestern Bell case stemmed from 1992 purchases of equipment used to provide its basic telephone service and other perks, such as caller identification and call waiting. The company filed a tax refund claim in 1995.

An administrative hearing commission rejected the claim, concluding telephone service was not "manufacturing."

Upon appeal, the Supreme Court reversed the decision as well as its own precedent from a separate 1989 case.

People cannot normally talk to each other from one home to another, much less from one town to another, the court said.

"The listener requires that the voice be 'manufactured' into electronic impulses that can be transmitted and reproduced into an understandable replica," the court said in an opinion written by Judge William Ray Price Jr. Thus "basic telephone service and the various (other) services ... are intangible products that are manufactured."

As a manufactured product, telephone services should be eligible for the same sales and use tax exemptions given to others, the court concluded.

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On the Net:

State tax division: http://dor.state.mo.us/tax

Missouri judiciary: http://www.osca.state.mo.us

Southwestern Bell: http://www.southwesternbell.com/