Perdue Foods, Inc. v. State Dept. of Assessments and Taxation

Decision Date08 March 1972
Docket NumberNo. 238,238
Citation288 A.2d 170,264 Md. 672
PartiesPERDUE FOODS, INC. v. STATE DEPARTMENT OF ASSESSMENTS AND TAXATION.
CourtMaryland Court of Appeals

K. Donald Proctor and Robert L. Karwacki, Baltimore, for appellant.

Charles E. Hearne, Jr., and Hearne, Fox & Bailey, Salisbury, on the brief, Delmarva Poultry Industry, amicus curiae.

E. Stephen Derby, Asst. Atty. Gen. (Francis B. Burch, Atty. Gen., Baltimore, on the brief), for appellee.

Argued before HAMMOND, C. J., and BARNES, McWILLIAMS, SINGLEY, SMITH and DIGGES, JJ.

SMITH, Judge.

We shall here reverse an order of the Maryland Tax Court which held that a chicken processing plant was not engaged in manufacturing so as to bring it within the tax exemption provided in Code (1957, 1969 Repl.Vol.) Art. 81, §§ 9(23) and 9(24). Appellant, Perdue Foods, Inc., (Perdue), objects to a determination by appellee, State Department of Assessments and Taxation (the department), denying it an exemption on its 1969 tangible personal property tax return.

Perdue operates what it described as 'a fully integrated operation in Wicomico County in which chickens are processed for market.' It was testified that Perdue's was one of nine such plants operated in the counties of Talbot, Caroline, Wicomico, and Worcester employing between 3600 and 3800 people. 1

The Perdue plant covers most of a city block in Salisbury, being approximately 100,000 square feet in area. It employed approximately 700 people, working on two shifts, at the end of the year 1969. Its machinery and equipment represent an investment in excess of $800,000.

Perdue presented an expert witness, Ernest Matthews, a representative of Delmarva Poultry Industry. His associations with the broiler industry included growing broilers beginning in 1936, continuing through the operation of his own processing plant at Laurel, Delaware, until 1963, and the management of the plant now operated by Perdue when it was owned by Swift and Company. He said that 'as counsel for the processors' committee of the Delmarva Poultry Industry' he was 'in the plant frequently,' with there seldom being a month in which he was not there. The witness had helped to develop the blueprints for remodeling of the plant after it was acquired by Perdue from Swift in June, 1967. He was familiar with this and 14 other processing plants on the Delmarva Peninsula.

Matthews described the evolution which has taken place in the broiler industry. 2 In the early days poultry was sold live and one had his own butcher kill it or 'took it home and killed it.' As Mr. Matthews put it:

'Volume (production) required something else. So they kosher-killed, which we refer to, by slitting the jugular vein-it was the acceptable move in going to (fresh killed chickens)-in particular with the kosher trade-(most operations in the poultry market area) actually had the rabbi do the killing. The demand for this type of poultry grew in addition to the kosher business. So we had New York dress plants, so called, because that's where the demand originally grew from. The New York dress is simply-kill them, take the feathers off, chill them-and here you have to still come below the 40 degrees in order to remove the body temperature-but chill them and ship them feet intact, head intact, and the viscera intact.'

The Perdue plant processes approximately 12,000 chickens per hour. This begins when a truck picks up live chickens from broiler houses and brings them to the plant. By use of an electro-magnetic device 12 coops at a time are removed from each truck. 3 Live chickens are hung by their feet on two mechanized conveyor lines which convey them through each of the various steps in the production cycle. They are automatically killed. Then they go through a blood tunnel for bleeding. The blood is accumulated for purposes of pollution control, and processed for animal feed and fertilizer. They enter what is called a 'scalder' where water at a temperature of 127 degrees is applied to help remove the feathers. The chickens then move to a series of picking machines. Mr. Matthews said of these, '(T)here are no employees other than a maintenance man (in the picking area). This is a completely separate area, entirely mechanized.' 4 In another area the surplus feathers are washed off the chickens with water which has been chlorinated in order to remove bacteria from the skin. This stream of cool water is also intended to start reducing the temperature of the chicken from its live temperature of 105 degrees. Feet are cut off automatically. The chickens then drop onto a conveyor belt which carries them to another point where they are rehung by their hocks on yet another automatic conveyor line. At that point employees called 'pinners' proceed to remove 'the few pin feathers that may be left on some individual chicken,' there being employed two to ten people depending on the size of the operation. Mr. Matthews said, 'The machine gets them 99% plus clean.'

The birds, as Mr. Matthews often referred to them, enter the eviscerating room by four separate conveyor lines. A water flush trough runs under the conveyor line to catch and carry away the inedible material or offal. This is sold to a rendering plant. The oil sac is first cut off the tail of each chicken. The abdominal cavity is opened with a knife. The viscera are pulled out and hung 'in a particular position on the hip of the bird' in order that Federal inspectors may inspect them while they are attached to the chicken. 'He can see into the body cavity of the bird and see the viscera (at the same time).' There are two Federal inspectors 'on each line.' 'Each bird is inspected for wholesomeness and any bruises or damage to the bird has to be trimmed off.' Any birds which the veterinarian wishes to examine more closely are removed from the line in order to provide him that opportunity. The gizzards and liver are removed from the carcasses manually. The gall is trimmed from the liver. The livers then go 'into a water flush trough that carries them into a chilling system and salvaged to be rewrapped and put in the birds later.' The gizzards are put 'in a mechanical gizzard cutter.' It has an inverted blade that cuts them from the underneath side. Water flushes all the grit and waste out of the gizzards. They, too, are wrapped and placed with the liver in the abdominal cavity of a chicken, but not necessarily in the chicken from which they were removed. The necks then 'are cut off automatically.' After the head is removed the necks are also returned to the abdominal cavity. After the neck is removed 'a big vacuum lung-gun machine * * * goes in and sucks out the lungs.' The lungs are automatically carried by vacuum to a point where they 'join the other offal products that are going to the rendering plant. They are never touched by hand.'

From that point the chickens are moved to a 'chilling operation.' Mr. Matthews said, 'These birds are dropped from automatic trip shackles into the ice water brine and carried through the length of the chilling system so that when they come out the other end some 20 to 30 minutes later they will be at a temperature-well, they must be at a temperature of less than 40 degrees. In this particular operation, they require that it be less than 35 degrees.' From this point the chickens pass onto a conveyor line for grading where tags identifying the grade are placed on a wing of each chicken. They then pass on the conveyor belt to a sizer which automatically sorts the chickens by size. They drop off the conveyor by weight size into different size bins. The chickens are then packed in lined, wooden boxes by size and grade on four separate lines. Each box contains approximately 24 chickens. These boxes are moved by conveyor to the icing station which automatically weighs out a given quantity of ice. The box liners are then folded in and the lid turned over on the box. From there the box goes to an automatic closing machine which closes it and clinches the wires. These boxes are then conveyed to a cooler where they are placed on pallets, approximately 30 boxes to the pallet. Temperature on trucks transporting the processed chicken to market is held at 35 degrees or less.

Twenty-five per cent of the chickens processed at Perdue are cut up into separate pieces and packed in the same manner as whole chickens. Approximately 1% of the Perdue chicken is frozen. It was conceded at argument before us that the department usually regards frozen chicken as within the manufacturing exemption. There was no concession made in the Perdue case for the portion which is frozen, nor is that an issue before us.

At one point Mr. Matthews said:

'An interesting thing to you fellows may be that when we started processing in 1943 this many birds you couldn't find in a plant. It takes about the same people to completely process 12,000 now as it did to kill and take the feathers off of maybe 3,000 thirty years ago. That's how much it has become mechanized.'

The statutes here under consideration exempt from taxation '(r)aw materials on hand and manufactured products in the hands of the manufacturer' and 'machinery, manufacturing apparatus or engines used in manufacturing' in those instances where local subdivisions pass appropriate resolutions or ordinances. Machinery in such case is exempt from State taxation regardless of whether a resolution is passed. Wicomico County has acted to provide the exemption.

The history of this exemption was set forth for the Court by Judge (later Chief Judge) Henderson in Kimball-Tyler Co. v. City of Baltimore, 214 Md. 86, 133 A.2d 433 (1957). The genesis of the present act is found in Chapter 528 of the Acts of 1914 which, as pointed out by Judge Pattison for the Court in Carroll County Com'rs v. B. F. Shriver Co., 146 Md. 412, 126 A. 71 (1924), included in its titling that it was intended 'to encourage the development of manufacturing industries in the state of Maryland.'

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