Hudson Foods, Inc. v. Director of Revenue, State of Mo., 78397

• Decision Date: 28 May 1996
• Docket Number: No. 78397,78397
• Citation: Hudson Foods, Inc. v. Director of Revenue, State of Mo., 924 S.W.2d 277 (Mo. 1996)
• Parties: HUDSON FOODS, INC., Appellant, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent.
• Court: Missouri Supreme Court

Page 277

924 S.W.2d 277

HUDSON FOODS, INC., Appellant, v. DIRECTOR OF REVENUE, STATE OF MISSOURI, Respondent.

No. 78397.

Supreme Court of Missouri En Banc.

May 28, 1996.

Juan D. Keller, John P. Barrie, Carole Lewis Iles, St. Louis, for Appellant.

Jeremiah W. (Jay) Nixon, Attorney General, Jefferson City, Andrew J. Lay, Assistant Attorney General, St. Louis, for Respondent.

LIMBAUGH, Judge.

Hudson Foods, Inc. (Hudson) appeals the decision of the Administrative Hearing Commission (AHC) upholding the Director of Revenue's denial of Hudson's application for a direct pay authorization and sales tax exemption under § 144.030.2(12), RSMo 1994. Specifically, Hudson takes issue with the AHC's determination that the chilling, partial freezing, and solid freezing of dressed turkeys and chickens does not constitute secondary processing as that term is used in the statute. Because this case involves the construction of § 144.030.2(12), a revenue statute, we have jurisdiction. Mo. Const. art. V, § 3. The decision of the AHC is reversed and the case is remanded for a new hearing.

I.

Hudson has four poultry processing facilities in Missouri, one in Dexter and one in Noel, and two separate facilities in Springfield, one on Main Street and the other on Jefferson Street. At the Dexter, Noel, and Main Street plants, Hudson receives live birds. These live birds are then "dressed," meaning they are stunned, killed, bled, scalded, defeathered, and eviscerated. At this point, about 5% of the birds are culled because they are unsuitable for further processing. The remaining dressed birds then enter a chill system, basically a large vat full of ice and cold water, where the birds' temperature is lowered from approximately 80 to 90 degrees down to 40 degrees or less. This chilling inhibits enzymatic activity and bacterial growth, thereby reducing spoilage and increasing shelf life of the product, and some of the product is sold on the market as "fresh" birds. Those birds that are not sold are either crusted or frozen. A crusted bird has been further chilled to approximately 28 degrees, producing a thin frozen crust on the bird while the interior of the bird remains soft and unfrozen. Those remaining birds that are not crusted are then frozen solid. Both procedures extend the birds' shelf life and end all enzymatic activity and bacterial growth. Hudson claims that the production of unchilled, dressed birds constitutes primary processing while chilling, crusting, or freezing the birds constitutes secondary processing. ¹

The Jefferson Street plant in Springfield receives whole dressed turkeys and boneless turkey from the Main Street plant and boneless chicken from other sources. This meat is ground and roasted. Some of this meat is then smoked or fried. All of the cooked meat is then either chilled to 40 degrees, crusted, or frozen solid prior to sale. Hudson claims the cooking, be it frying, smoking, roasting, etc. of the meat, is primary processing while the chilling, crusting, or freezing of the cooked meat constitutes secondary processing.

Hudson applied for a direct pay authorization and sales tax exemption for the sales tax on its electricity purchases ² associated with the chilling and freezing. The Director of Revenue (the Director) denied Hudson's request on the ground that material costs had not been included in the total production figures for the chilling/freezing process. Hudson appealed to the AHC, which found, like the Director, that each of Hudson's plants engaged in only one unitary operation, with no separation between the alleged primary and secondary processing. Thus, material costs should have been included in the calculations, in which case Hudson could not qualify for the exemption.

II.

Section 144.030.2(12) provides a sales tax exemption for the following:

Electrical energy used in the actual primary manufacture, processing, compounding, mining or producing of a product, or electrical energy used in the actual secondary processing or fabricating of the product, if the total cost of electrical energy so used exceeds ten percent of the total cost of production, either primary or secondary, exclusive of the cost of electrical energy so used.

As stated, Hudson seeks the exemption for its chilling and freezing procedures.

In Mid-America Dairymen v. Director of Revenue, decided today, we held that in order to qualify for the exemption under the aforementioned statute, the taxpayer must prove that the stage of production in question works a transformation on the subject matter and results in something which has a new identity, use, and market value. Because neither the parties nor the AHC had the benefit of this clarifying definition of processing, we reversed and remanded the case for a new hearing. A new hearing is necessary in this case, as well, except as to one issue for which the record is sufficient to permit our review. That issue is whether the chilling, crusting, and freezing procedures may constitute processing. We find that they may, but decline to determine on this record whether Hudson engages in both primary and secondary processing, and instead remand that issue for a new hearing by the AHC, as we shall explain hereafter.

This Court has never addressed whether the cooling or freezing of materials constitutes processing. The AHC concluded that freezing and crusting may constitute processing but that chilling does not. It based its conclusion on the Iowa Supreme Court's decision in Fischer Artificial Ice & Cold Storage Co. v. Iowa State Tax Comm'n, 81 N.W.2d 437 (Iowa 1957), in which the court observed:

The foodstuffs ... are transformed from their fresh, natural state into a hard-frozen state that prevents spoilage and decay and preserves them for long periods ....

It occurs to us there is a close analogy between applying heat to foodstuffs in order to sterilize and preserve them and subjecting food to below zero temperatures for several days for a similar purpose. Freezing appears to be as clearly processing as cooking does. All concede pasteurizing milk is processing.... What was done here ... seems analogous to pasteurization.

Id. at 441....