Mid-America Dairymen, Inc. v. Director of Revenue, MID-AMERICA

• Decision Date: 28 May 1996
• Docket Number: No. 78372,MID-AMERICA,78372
• Parties: DAIRYMEN, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.
• Court: Missouri Supreme Court

Page 280

924 S.W.2d 280

MID-AMERICA DAIRYMEN, INC., Appellant, v. DIRECTOR OF REVENUE, Respondent.

No. 78372.

Supreme Court of Missouri,

En Banc.

May 28, 1996.

Steven W. Koslovsky, Richard A. Yawitz, Clayton, for Appellant.

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

LIMBAUGH, Judge.

Mid-America Dairymen, Inc. (Mid-America) appeals the decision of the Administrative Hearing Commission (AHC) upholding the Director of Revenue's denial of Mid-America's application for a direct pay authorization under § 144.030.2(12), RSMo 1994. Mid-America had requested the direct pay authorization and a corresponding sales tax exemption for the sales taxes imposed on its purchases of electricity used in the processing of raw milk into various dairy and related food products. We are asked to determine whether the AHC erred in holding that Mid-America's water filtering, spray-drying, and chilling procedures were not discrete primary or secondary processes as contemplated by the statute for purposes of qualifying for the exemption. Because the resolution of that question requires 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.

Mid-America sought direct pay authorizations under § 144.030.2(12), which provides an exemption for sales tax on 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.

The burden of proof of entitlement to the exemption rests upon Mid-America. Wetterau, Inc. v. Director of Revenue, 843 S.W.2d 365, 367 (Mo.1992). The AHC found that each of Mid-America's production lines constituted one unitary process, with no separation between primary and secondary processing. That being the case, the AHC then found that Mid-America should have included material and other production costs in calculating its total cost of production for purposes of seeking the exemption. Once those costs were included in the total cost of production, the cost of electricity fell below the 10% threshold. On the other hand, Mid-America contends that the procedures for which it sought the exemption--water filtering, spray-drying, and chilling--constituted discrete, independent processing for which the cost of materials and other costs need not be included. These costs, as Mid-America explains, are not attributable to the discrete processes at issue.

There is no argument that for the purposes of proving entitlement to the exemption, material and other costs incurred in "primary processing" need not be included in the total costs of production associated with "secondary processing." McKinley Iron, Inc. v. Director of Revenue, 888 S.W.2d 705, 708 (Mo. banc 1994); State ex rel. Union Elec. v. Goldberg, 578 S.W.2d 921, 923 (Mo. banc 1979). If Mid-America correctly characterized its production stages as discrete primary and secondary processing, it would not have had to include the cost of materials that were part of the primary processing in the total production costs associated with the secondary processing.

Formulating a definition for processing has proved to be problematic. In Goldberg, we stated that processing is "a mode of treatment of certain materials to produce a given result. It is an act, or a series of acts, performed upon the subject matter to be transformed and reduced to a different state or thing." Goldberg, 578 S.W.2d at 924. This definition, however, provides little guidance for delineating between primary processing and secondary processing. ¹ That question was addressed by this Court in McKinley Iron, Inc. v. Director of Revenue, 888 S.W.2d 705 (Mo. banc 1994), a case involving a taxpayer that produced densified scrap metal for sale to foundries. The taxpayer first sorted and graded the scrap metal, cutting some pieces to more manageable sizes. Id. at 706. At this point, approximately 10-20% of the scrap was suitably densified and was sold as such, and the other 80-90% was then "densified" by five electric-powered machines. Id. The taxpayer in McKinley Iron maintained that the sorting, grading, and cutting was a "primary" process because the procedure allegedly enhanced the value of the scrap metal and produced a product for which there was a market, as evidenced by the 10-20% of the scrap that was sold at that point. Densification, it was claimed, was a "secondary" process. Id.

To distinguish primary from secondary processing, the Court, while first citing the Goldberg definition of "processing," observed that:

Although most processing consists of a "series of acts," any one of which may, technically speaking, transform the material to a "different state or thing," it is not each transformation of the material that, in and of itself, constitutes processing. Instead the parameters of processing are determined by the 'given result' or the 'different state or thing' sought to be produced. Indeed, processing is not complete until the end product is produced.

Id. at 707.

In so stating, McKinley Iron establishes that a mere transformation is insufficient to constitute processing and that something additional must be found, namely, an end product. Despite this holding from McKinley Iron, this Court has yet to fully define "processing" because the necessary characteristics of processing output--the end product--have been left unspecified.

The Court has, however, provided a more explicit description of what the output must be in defining a related term, manufacturing. In the recent case of Galamet, Inc. v. Director of Revenue, 915 S.W.2d 331 (Mo. banc 1996), this Court defined "manufacturing" in the context of § 144.030.2(5), the sales tax exemption for purchases of machinery and equipment used directly in manufacturing. This exemption is part of the same statute and goes hand-in-hand with the sales tax exemption for purchases of electricity used in manufacturing and processing at issue here. We stated in Galamet that "[m]anufacturing consists of the alteration or physical change of an object or material in such a way that produces an article with a use, identity, and value different from the use, identity, and value of the original." (emphasis added). Id. at 333.

This complete definition of manufacturing applies equally well to the...