By: Andrew M. Fauble
Kansas City Chiefs Football Club, Inc. v. Dir. of Revenue, 602 S.W.3d 812 (Mo. 2020) (en banc)
When the Kansas City Chiefs (“Chiefs”) entered into an agreement to create a project to renovate their stadium, they purchased various items with purported tax-exempt status.1 The Missouri Director of Revenue then audited the project and found the Chiefs liable for sales and use tax on many of those items, arguing the economic reality of the situation made them the purchaser of the items.2 To be liable for the tax, the Chiefs had to be the purchaser of the items.3 The Court held that the Chiefs were not the purchaser and therefore not liable to pay the taxes handed down by the Director.4
In its discussion of this issue, the Court narrowed the previously expanding doctrine of economic realities. The Court reduced its power to decide tax law cases on the basis of the economic realities of the actions, leading to its finding that the Chiefs did not have to pay taxes on the items.5 The impact of this decision, however, will have broad implications not just for the Chiefs, but for Missouri taxpayers generally. The resulting economic realities doctrine after this decision will provide a safety net to prevent fraudulent tax avoidance in the state, while at the same time encouraging economic activity.
II. FACTS AND HOLDING
The Chiefs are an NFL football franchise that play their home games at Arrowhead Stadium (“Stadium”) in Jackson County, Missouri (“County”).6 The Stadium is part of the Harry S. Truman Sports Complex (“Sports Complex”), which is owned by the County.7 The County leases the Sports Complex to the Jackson County Sports Authority (“Sports Authority”), which in turn subleases the Stadium to the Chiefs.8
In 2006, the County, the Sports Authority, and the Chiefs made an agreement that the County would renovate the Stadium and its facilities in consideration for a 25-year extension of the sublease.9 Once the sublease extension was executed, the County and Sports Authority entered into a development agreement (“Development Agreement”) with the Chiefs.10 The County created a “Project Fund” (“Fund”) to hold the Project’s finances.11 The three parties to the Project also entered into an agreement with the Finance Board for the issuance of tax credits.12 Together, the Development Agreement, the Fund, and the tax credit agreement served as the “governing agreements,” and controlled the ownership, operation, and funding for the project.13
The Development Agreement specifically provided that the County would be the owner of the Project,14 while the Chiefs, County, and Sports Authority secured funding for it.15 Under the terms of the indentured trust created, the money in the Fund belonged solely to the County.16 To manage the various sources of financing, the Fund contained multiple accounts, including one for the Chiefs.17 All disbursements for the renovation of the Stadium were to come from the Fund.18 As agreed, the County sold the tax credits to third parties, and the Team donated the proceeds of those sales to the Project Fund.19 To do this, the Chiefs transferred the money from the sales to the trustee–the only one who could make disbursements–20 who then placed the balance in the Fund.21
To receive disbursements or reimbursements from the Fund for the purchase of Fund-approved items, the development agreement and the trust indenture required the Chiefs to provide documentation of purchases.22 Since the County and the Sports Authority are tax-exempt entities, the Chiefs received a tax exemption certificate which they would present to the vendor when purchasing items for the renovation.23
The Missouri Director of Revenue then conducted an audit of the project and determined that the Chiefs were obligated to pay tax on several of the renovation purchases.24 The Team appealed the decision to the Administrative Hearing Commission (“AHC”).25 In January of 2019, the AHC found the Chiefs liable for almost a million dollars in taxes for the contested items, plus statutory interest.26 The AHC reasoned that the Chiefs maintained an interest in the tax credits granted to them by the Finance Board, and thus were the owner of the funds in the Chief’s subaccount.27 The Chiefs appealed the decision of the AHC to the Missouri Supreme Court,28 arguing that the Team did not provide consideration for, and did not own, the contested items.29
On appeal, the Director argued that the Chiefs were the legal purchaser of the contested items because the Team made advanced payments.30 The Director further argued that even if the Chiefs followed the governing state statutes and did not control the money used to purchase the items, it would ignore the “economic realities” of the situation to not hold the Chiefs liable for the taxes.31 The Missouri Supreme Court overturned the decision of the AHC, holding that the Director did not carry his burden to establish the Chiefs as purchaser of the contested items. Therefore, the Chiefs did not owe the assessed taxes.32
III. LEGAL BACKGROUND
In Missouri, a use tax “is imposed for the privilege of storing, using or consuming within this state any article of tangible personal property purchased.”33A sales tax is imposed “[u]pon every retail sale in this state of tangible personal property.”34 A “sale” is the transfer “of the ownership of, or title to, tangible personal property to the purchaser, for use or consumption and not for resale in any form as tangible personal property, for a valuable consideration.”35 To be a “purchaser” in Missouri, a party must acquire title or ownership of property in exchange for valuable consideration.36 A party cannot be liable for sales or use tax if they are not deemed to be a purchaser.37
But, there is another way one may be liable for sales tax: the “economic realities” doctrine.38 The doctrine, first stated in Petition of Union Elec. Co. v. Missouri,39 states that “[i]n the field of income taxation . . . it is important to penetrate beyond legal fictions and academic jurisprudence to the economic realities of the cases.”40 The Court in Petition of Union found that the economic reality of the situation showed that the dividends and interest on the bonds, issued outside of Missouri, were not income from within the state.41 Thus, the plaintiff was not liable for income tax.42
Then, in Scotchman’s Coin Shop, Inc. v. Administrative Hearing Commission, the Court expanded the doctrine to encompass the merits of revenue cases generally, including sales taxes.43 In that case, a coin shop had sold various silver coins and bars without paying taxes, and argued that the silver was currency not subject to sales tax under Missouri statute.44 The Court reasoned that the economic reality of the transaction showed that the silver was purchased for its tangible value, not for its value as currency.45 Accordingly, the items were determined to be tangible personal property, and the coin shop was liable for sales tax.46
Looking to the economic realities of a case for tax purposes is not a doctrine unique to Missouri. The United States Supreme Court has used similar terminology and analysis in determining the validity of state taxes under the Commerce Clause of the Constitution.47 Considering these cases, the economic realities doctrine is well established.48 It is apparent that in contested tax cases courts maintain much discretion in determining when the economic realities of a case could warrant tax liability.49 However, courts would soon defer much of this discretion to the state legislature, narrowing the scope and reducing the power of the economic realities doctrine.50
IV. INSTANT DECISION
The Court in the current case reversed the AHC’s decision, finding that the Chiefs were not the purchaser of the contested items for tax purposes because they were not the source of consideration.51 Under Missouri law, a taxpayer must both provide consideration and acquire ownership of the property in order to be deemed the purchaser.52 If the Director could not prove there was consideration, then the Team could not be the purchaser.53 The Court rejected the Director’s argument that the advance payments made by the Chiefs made them the purchaser of the contested items.54 It pointed to the fact that, according to the governing agreement, the Chiefs would make advance payments for items acquired for the County-owned Project and then be reimbursed from the Fund.55
The real issue, the Court determined, was whether the money in the Fund belonged to the Chiefs or the County/Sports Authority.56 If the money was not owned by the Chiefs, they could not have been the ones to provide consideration for the purchases.57 In deciding this issue, the Court noted that the County provided money to the Project Fund through the sale of bonds and that the proceeds from the sale of the tax credits were placed into the Project Fund before the purchases in question were made.58 It was only the proceeds from these sales, and not the tax credits themselves, that remained in the Project Fund.59 The Court found that the AHC was incorrect in its conclusion that the Team retained an interest in the Project Fund because of the tax credits.60 It reasoned that the Chiefs lost all rights associated with the tax credits when they were transferred to the County and sold to third parties.61 Accordingly, the Court held that the tax credits constituted no legal basis for concluding the Chiefs owned money in the Project Fund.62 In sum, the money in the Project Fund was not owned by the Chiefs because the Chiefs were not the party who provided consideration for the purchases.63 As such, the decision of the AHC was not authorized by law and was therefore reversed.64
This Part will explore the effects of the Court’s decision on the Director of Revenue, as well as the effects on Missouri taxpayers.
A. The Court’s decision has already narrowed the Director of Revenue’s ability to assess taxes under the economic realities doctrine.
After the Chiefs holding, the AHC on appeal of David Zimmer, Petr., Mo. Admin held that the Missouri resident did not owe sales taxes on the vehicles, despite the Director’s economic realities contention.65 The AHC relied upon the statement in the Chiefs case that the court “is not free to simply ignore the laws governing donations and the relevant tax statutes because the Director does not like the fact that the team ultimately benefited from the project the team helped fund.”66 The AHC concluded that examination of the economic realities here shows that an LLC, not the resident, was the purchaser of the items.67 As such, the Director of Revenue’s economic realities argument was rejected, and the Missouri resident was not liable for the taxes.68
B. The future of the economic realities doctrine will have a wide range of effects on Missouri taxpayers.
Much of how the evolution of this doctrine will affect Missouri taxpayers remains unknown. This holding certainly makes it difficult for the Director of Revenue to assess taxes under an economic realities theory. After the Chiefs holding, it seems likely the Commission and high court will continue to disfavor the theory.69 Such disfavor would tend to make the Director less likely to raise the issue in future tax cases, further reducing the breadth of the economic realities doctrine in Missouri tax law.
By giving more deference to the legislature and less to the Court’s own analysis of economic realities, the Court here reduced the role of the judiciary in its oversight of Missouri tax law. The Court will look more favorably towards the position of taxpayers as long as they have a valid statutory justification for their position, regardless of what the economic realities of the situation appear to be. One potential consequence of this may be the opening of the door for more lucrative and suspicious business practices being conducted in Missouri. For example, it may harm the state that residents can avoid Missouri sales taxes by forming LLCs in other states while conducting all of their business in Missouri, as in Zimmer,70 thus creating loopholes to avoid paying taxes in the state.
Despite this, it seems likely that the narrowing of the economic realities doctrine will also have a positive economic impact on Missouri. After all, statutory creations like the Finance Board exist in order to promulgate investment in the state, in part by taking away the burden of taxes.71 Taxpayers in Missouri will benefit from a Court that does not uphold taxes imposed by the Director of Revenue simply because he “does not like” that the taxpayer benefited from the relevant statutory scheme.72 It will also protect taxpayers who want to invest in the state from the fear that, even if they adhere to statutory rules, they may nonetheless be liable for taxes because of the economic realities. As such, the Court limiting the scope of this doctrine while not overruling its existence, is a net benefit for Missouri taxpayers.
The Chiefs in this case were not liable for the sales and use taxes originally assessed by the Director of Revenue.73 The Court held that the Team did not provide consideration for the items because it was not the owner of the money used in those purchases.74 The Court rejected the Director’s argument that regardless of this conclusion under the relevant tax laws, the Chiefs should have to pay taxes because of the economic reality that the Chiefs would benefit from the items purchased.75
In its discussion, the Court significantly narrowed the economic realities doctrine and made it much more difficult for the Director of Revenue to tax people and businesses based upon the economic realities of the situation. What was once a doctrine to assess the merits of all revenue cases became one that may now potentially only apply to assessing the true number of transactions. The significance of this change has broad implications not just for professional sports teams, but potentially any Missouri taxpayer.
Time will tell whether the Missouri Supreme Court will continue to scale back the economic realities doctrine or leave it in its now narrow form. The decision will weigh on the power of the Court, the deference provided to the legislature, the ability of the Director of Revenue to assess taxes, the tax revenue of the state, the economic climate in Missouri, and the rights of Missouri taxpayers.
 Kansas City Chiefs Football Club, Inc. v. Dir. of Revenue, 602 S.W.3d 812, 817 (Mo. 2020) (en banc).
 Id. at 817, 822.
 Id. at 814.
 Id. at 822.
 Id. at 814.
 Id.; Jackson County is a political subdivision of the state of Missouri, and the Sports Authority is a political subdivision of the State created by Jackson County. Id.
 Id. at 815.
 Id.; The Chiefs, on the other hand, were to “manage and oversee the planning, design, development, construction, completion, and making operational of the project.” Id.
 Id. at 816. The indentured trust was created between Jackson County and Wells Fargo Bank, with the bank serving as trustee. Id. The Chiefs were not a party to the trust, but rather a third-party beneficiary of its disbursement procedures. Id. at 816 n.8.
 Id. at 816. This account contained a bond proceeds subaccount, a non-bonds proceeds subaccount, and an investment earnings subaccount. Id.
 Id. at 820–21.
 Id. at 817.
 Id. The Administrative Hearing Commission is composed of up to five administrative judges appointed by the Governor. Each judge is called a Commissioner and conducts hearings individually in disputes between a state agency and a private party. The Commissioners have the authority to make legal and factual determinations in these hearings and operate independently from the state agency involved in the dispute. The Commission has statutory authority in over 100 specified matters, including state tax. All decisions by the Commission are subject to judicial review. State of Mo. Admin. Hearing Comm’n, https://ahc.mo.gov/ (last visited Nov. 19, 2021).
 Kansas City Chiefs Football Club, Inc., 602 S.W.3d at 817.
 Id. at 820.
 The Jackson Country Sports Complex Authority was also a party in the appeal acting as intervenor-appellant. Id. at 812. The Missouri Supreme Court has exclusive jurisdiction in all cases concerning the construction of Missouri revenue laws. Mo. Const. art. V, § 3. The sales and use taxes at issue in this case are among those laws. Armstrong-Trotwood, LLC v. State Tax Comm’n, 516 S.W.3d 830, 834 (Mo. 2017) (en banc).
 Kansas City Chiefs Football Club, Inc., 602 S.W.3d at 818.
 Id. at 819.
 Id. at 822.
 Id. at 814.
 Mo. Rev. Stat. § 144.610.1 (2014).
 Mo. Rev. Stat. § 144.020 (2010).
 Mo. Rev. Stat. § 144.010(10) (2018).
 Becker Elec. Co., Inc. v. Dir. of Revenue, 749 S.W.2d 403, 407 (Mo. 1988).
 See Petition of Union Elec. Co. v. Missouri, 161 S.W.2d 968 (Mo. 1942).
 Id. at 971.
 Id. at 972–73.
 Scotchman’s Coin Shop, Inc. v. Admin. Hearing. Commn., 654 S.W.2d 873, 874 (Mo. 1983) (en banc).
 Id. at 874. The coin shop made this argument under Mo. Rev. Stat. § 144.020 (2019).
 Scotchman’s Coin Shop, Inc., 654 S.W.2d at 875–76.
 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
 See, e.g., Petition of Union Elec. Co. v. Missouri, 161 S.W.2d 968 (Mo. 1942); Scotchman’s Coin Shop, Inc. v. Admin. Hearing. Commn., 654 S.W.2d 873, 874 (Mo. 1983) (en banc); Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977).
 See Becker Elec. Co., Inc. v. Dir. of Revenue, 749 S.W.2d 403, 408 (Mo. 1988).
 See Kansas City Chiefs Football Club, Inc. v. Dir. of Revenue, 602 S.W.3d 812 (Mo. 2020) (en banc).
 Id. at 824.
 Becker Elec. Co., Inc., 749 S.W.2d at 407.
 Kansas City Chiefs Football Club, Inc., 602 S.W.3d at 819.
 Id. The Chiefs made advanced payments to 3 of the 9 vendors at issue on appeal. Id.
 Id. at 820–21.
 Id. at 820.
 Id. at 818.
 David Zimmer, Petr., Mo. Admin. 18-0487, 15 (Mo.Admin.Hrg.Comm. Feb. 9, 2021).
 Id. at 10.
 Id. at 12.
 Id.; Edward Francis Eiskina, Petr., Mo. Admin. 20-1597 (Mo.Admin.Hrg.Comm. June 10, 2021).
 Zimmer, supra note 65; Eiskina, supra note 69.
 Mo. Rev. Stat. § 100.270(8) (2006).
 Kansas City Chiefs Football Club, Inc., 602 S.W.3d at 822.
 Id. at 824.