Fischer Artificial Ice & Cold Storage Co. v. Iowa State Tax Commission

• Decision Date: 05 March 1957
• Docket Number: No. 49068,49068
• Citation: 81 N.W.2d 437,248 Iowa 497
• Parties: FISCHER ARTIFICIAL ICE & COLD STORAGE COMPANY, a Corporation, Appellant, v. IOWA STATE TAX COMMISSION, Appellee.
• Court: Iowa Supreme Court

Page 437

81 N.W.2d 437

248 Iowa 497

FISCHER ARTIFICIAL ICE & COLD STORAGE COMPANY, a Corporation, Appellant, v. IOWA STATE TAX COMMISSION, Appellee.

No. 49068.

Supreme Court of Iowa.

March 5, 1957.

O'Connor, Thomas, McDermott & Wright, Dubuque, for appellant.

Norman A. Erbe, Atty. Gen., M. A. Iverson, Special Asst. Atty. Gen., for appellee.

GARFIELD, Justice.

The question presented to us is whether plaintiff's purchase and use of electricity for 'sharp freezing' and cold storage of meat and other foodstuffs are exempt from Iowa sales and use tax under chapters 422, 423, Code 1954, I.C.A. Exemption is claimed on the ground the electricity was 'purchased and used in the processing of tangible personal property intended to be sold ultimately at retail' within the meaning of Code section 422.42(3), I.C.A.

It is not clear whether the tax was assessed under chapter 422 upon the sale of the electricity or under chapter 423 upon its use. Defendant state tax commission says it does not contend that if the tax was upon the use plainiff must show, to be entitled to exemption, the electricity was intended to 'become an integral part of other trngible personal property intended to be sold ultimately at retail,' as provided in section 423.1(1). In other words defendant expressly waives any 'integral part' test of the exemption claimed. Defendant admits the exemption provided by section 422.42(3) quoted above is for all practical purposes identical with that contemplated by section 423.1(1) and (4) except for the 'integral part' requirement of 423.1(1) which has been waived here.

It therefore seems immaterial whether the tax was assessed or the exemption is claimed under chapter 422 or 423. Since it is admitted the foodstuffs were 'intended to be sold ultimately at retail' the right to exemption depends on whether the electricity was purchased and used in processing them. The district court denied the exemption. As the parties concede and Code section 422.55, I.C.A. seems to contemplate, our review is de novo under rule 334, Rules of Civil Procedure, 58 I.C.A.

It is true, as defendant says, tax exemption statutes are strictly construed and one claiming an exemption must show his right thereto by evidence which leaves the question free from doubt. Cornell College v. Board of Review of Tama County, 248 Iowa ----, 81 N.W.2d 25, and citations; Peoples' Gas & Elec. Co. v. State Tax Comm., 238 Iowa 1369, 1373-1375, 28 N.W.2d 799, 803, and citations.

However there is no dispute in the evidence. Three witnesses testified for plaintiff. Although defendant cross-examined them it called no witnesses. The matter of strict construction is not so important here is some cases where a tax exemption is claimed. In this respect the case is like Bruce Motor Freight v. Lauterbach, 247 Iowa ----, 77 N.W.2d 613, 621-622, and City of Ames v. State Tax Comm., 246 Iowa 1016, 1026, 71 N.W.2d 15, 21.

Plaintiff manufactures ice and operates a freezing and cold storage business in Dubuque. It purchases its electricity from Interstate Power Co. The electricity used in manufacturing ice is admittedly exempt from sales or use tax. The electricity used to freeze and store foods in lockers is admittedly subject to the tax since it is not intended these foods are to be sold ultimately at retail--they have already been sold to the consumer before they come into plaintiff's possession. The controversy is over taxability of electricity used in what plaintiff claims is processing meat, butter, eggs, and cheese received mainly from packing houses or other wholesalers or distributors.

Plaintiff receives the meat fresh and unfrozen usually at a temperature of 45 to 50 degrees. (All temperatures referred to are Fahrenheit.) It 'hard freezes' the meat in freezer rooms where temperature is zero to 20 degrees below zero. This takes six to eight days. The method plaintiff employs to freeze meat does not differ from that used by Dubuque Packing Company and Rath Packing Company, two of plaintiff's customers. The cold temperatures herein mentioned are generated by the direct expansion method, using liquid ammonia under pressure, compressed by electrically driven motors, and sent through coils or pipes in the freezer rooms.

Plaintiff receives the butter in bulk form in cardboard boxes weighing 60 to 64 pounds, at a temperature of about 50 degrees. It freezes the butter in freezer rooms where the temperature is zero to five degrees below zero. This takes 10 to 12 days. Butter remains in the plant six months to a year. Before delivery to its customers butter is brought from the freezer rooms into warmer temperature of about 50 degrees to facilitate further processing by the customers.

Plaintiff receives fresh whole eggs at an average temperature of 50 degrees. They are kept six to ten days in a cooler with temperature of 32 to 34 degrees. The eggs are then moved from the cooler into a somewhat warmer room so they may be removed from the shells and the whites and yolks readily separated--the whites harden or 'set up.' The owner of the eggs, not plaintiff, then breaks and powders them, runs them through a churn, adds various formulae and places them in cans holding 30 pounds. The cans at a temperature of 50 degrees are then placed in plaintiff's 'sharp freeze' room where it is 20 to 30 degrees below zero for three to five days. They are then kept frozen six weeks in temperature from zero to 15 degrees below zero before shipment. A chemical reaction goes on in the eggs during this period which thickens them or brings about gelation and changes their flavor.

Plaintiff receives in 70-pound tubs cheese, mostly cheddar, in the 'green' stage, not fit for human consumption, and places it in a cooler room with temperature between 30 and 40 degrees for about a year. When outdoor temperature is below that plaintiff maintains for cheese it uses an electric heater to raise the temperature to the required level. By the end of this year a mold forms on the cheese, a result that is desired. At the end of the period the cheese is edible.

The head of the chemistry department at Loras College testified 'processing' has a readily acceptable meaning in the field of chemistry and he would think of it as involving some form of treatment applied to material for a purpose. In answer to hypothetical questions based on the evidence of plaintiff's handling of the meat, butter, eggs and cheese, the witness expressed the opinion it constituted processing of these products.

Neither chapter 422 or 423 defines processing. It seems clear the term should be given its usual, ordinary and commonly understood meaning or, as Code section 4.1(2), I.C.A. requires, the meaning that accords with 'the approved usage of the language.' See Borden v. World War II Serv. Comp. Bd., 243 Iowa 892, 903-904, 54 N.W.2d 496, 503, and citations; Daily Record Co. v. Armel, 243 Iowa 913, 917-918, 54 N.W.2d 503, 506, and citations; 82 C.J.S., Statutes, §§ 329, b, p. 639; 50 Am.Jur., Statutes, section 238.

One of the most widely cited precedents on the meaning of processing is Kennedy v. State Board of Assessment and Review, 224 Iowa 405, 407, 276 N.W. 205, 206. The case holds the use of fertilizer in the ground to promote the growth of vegetables is not processing of tangible personal property--the growing of crops is not processing. The opinion quotes the definition of processing in Webster's International Dictionary, Second Ed., 1934, as follows: "To subject to some special process or treatment.' 'To subject (esp. raw material) to a process of manufacture, development, preparation for the market, etc.; to convert into marketable form, as livestock for slaughtering, grain for milling, cotton for spinning, milk by pasteurizing, fruits and vegetables by sorting and repacking.'

'The same Dictionary defines a processor as follows: 'One who or that which processes; specif., one who is in the business of converting any agricultural commodity into a marketable form.''

The Kennedy opinion also refers to processing as 'a change in the form of the article itself by artificial or natural means' and as 'some change made in the natural product as the curing of meats, canning of vegetables and * * * the glazing of an eggshell to better preserve the egg * * *.'

Rule 25.2 of defendant tax commission, entitled 'Electricity Used in Processing--When Exempt,' incorporates the definition of processing found in Webster's New International Dictionary. It includes that quoted above in our Kennedy opinion (from which defendant says it took this part of the rule) and some in addition. Following the initial clause, 'To subject to some special process or treatment,' there appears: 'Specif. A. To heat, as fruit, with steam under pressure, so as to cook or sterilize.'

The commission's rule 26 contains a partial list, as an illustrative guide, of activities that are considered processing. It includes pasteurizing milk, cooking food and keeing it warm until served and purification of water. The rule says refrigeration, ventilation and airconditioning are not regarded as processing. It has been poited out the essential part of Webster's definition of processing is in substance to prepare raw material for the market. Moore v. Farmers Mutual Mfg. & Ginning Co., 51 Ariz. 378, 77 P.2d 209, 211-212; Michigan Allied Dairy Ass'n v. Auditor General, 302 Mich. 643, 5 N.W.2d 516, 517; Bay Bottled Gas Co. v. Michigan Dept. of Revenue, 344 Mich. 326, 74 N.W.2d 37, 39. The Michigan Allied Dairy case holds the pasteurization and subsequent refrigeration of milk, thereby protecting it against contamination and rendering it marketable, is processing, and the use of cans and bottles in the course of the operation is exempt from tax. A like decision as to electricity used in pasteurizing is Reeves v. Fenley's Model Dairy, 314 Ky. 380, 235 S.W.2d 995, 997. Huron Fish Co. v. Glander, 146 Ohio St. 631, 67 N.E.2d 546, 548, quotes this part of the Oxford...