Topics:

PROCESSING.
MANUFACTURING.
TAXATION (EXEMPTION).
TAXATION (SALES & USE).

Summary conclusion

Only certain activities of meat packing plants constitute manufacturing. The slaughtering and preparation of meat for sale by the cutting of carcasses into commercially useful pieces does not constitute manufacturing. This activity is processing and is not encompassed by the sales tax exemption for "machinery and equipment purchased and used to establish new . . . manufacturing, . . . plants . . . ." Section 144.030.3(4), RSMo 1969.

In cases in which a substantial transformation of the original raw material occurs, these activities constitute manufacturing and the machinery used to expand or establish new plants for these purposes is exempt from sales tax, pursuant to Section 144.030.3(4), RSMo 1969, if the machinery is used directly in manufacturing a product which is intended to be sold ultimately for final use or consumption.

November 21, 1972

Mr. Henry Maddox, Director
Division of Commerce and Industrial Development
Post Office Box 118
Jefferson City, Missouri 65101

Dear Mr. Maddox:

 You recently asked:

 The statutory provision to which you refer states:

 Subsection 3 of Section 144.030 contains fourteen other subparagraphs exempting diverse types of personal property from the sales and use tax. Subparagraphs (1), (5), (11) and (12) of subsection 3 exempt certain tangible personal property used in manufacturing or processing. In answering your question, we must therefore ask whether meat packing is processing and not manufacturing? This is the contention of the Department of Revenue of the state of Missouri. We must also determine if either term, manufacturing or processing, adequately describes all of the activities of a meat packer or whether there can be a segregation of these activities. Finally, it must be determined whether, if we conclude that meat packing includes processing, the term manufacturing, as used in subparagraph (4), was intended to include both the concepts of manufacturing and processing.

 In construing the word manufacturing as used in the Missouri Sales Tax Law, we must look to the intent and purpose of the legislature in enacting the particular statute and provision in which the term is found. Further, we are dealing here with a tax exemption clause, thus requiring a strict construction of the provision but not a construction so narrow as to defeat or destroy the intent and purpose of the particular enactment.

 Unfortunately, there is no definition of "manufacturing" or "processing" in the Missouri Sales Tax Act. Nor has any reported Missouri court decision decided the particular point at issue in this opinion. However, two recent cases dealing with sales tax exemptions do offer some guidance.

 The decision of West Lake Quarry & Material Co. v. Schaffner, 451 S.W.2d 140 (Mo. 1970) dealt with the question of whether quarrying was mining as that term is used in Section 144.030.3(4), RSMo 1969. The court held that the operation of removing rock from the ground was within the term "mining" as used in the exemption provision. The court then stated:

 The court's decision did not decide the question of whether, once them; ,rock is mined, it is then "processed" or "manufactured." The decision does not analyze these separate conceptions in a meaningful way. The court did state that:

 Thus the court was apparently stating that the crushing and pulverizing of the rock was a process that made the end product significantly different from the raw material used in the process because of the shape, size and adaptability changes. In so doing, the court adopted the following definition of manufacturing:

 The question of whether printing is encompassed by the term "manufacturing" as used in the statutory provision under examination in this opinion request was presented to the Supreme Court of Missouri in Heidelberg Central, Inc. v. Director of the Department of Revenue, 476 S.W.2d 502 (Mo. 1972). That decision reached the conclusion that such printing was manufacturing. In so doing, it rejected the dictionary definition of manufacturing ("to make into a product suitable for use . . . to make from raw materials by hand or by machinery . . .") as being too broad. The court observed that the purpose of the exemption statute was to promote manufacturing business in the state of Missouri by exempting manufacturers from sales taxes on the equipment they purchased in view of the fact that sales taxes would be paid on the finished products (at 506). The court stated:

 Again, the distinction between-Processing and manufacturing was not argued before the court. Thus, the two most closely related Missouri court decisions do not answer the precise question asked by this opinion request.

 Numerous cases in other jurisdictions have grappled with the issue of whether the preparation of animal products for consumption is manufacturing. Most of the cases arose when a merchant's tax was imposed upon the packer. In these cases, the packer would claim a manufacturing exemption. In such situations, numerous courts have held that a packer is not a merchant but a manufacturer. See State v. Magnolia Packing Co., 35 So.2d 422 (La. 1948); Ballard v. Kentwood Ice Mfg. & Bottling Works, Ltd., 85 So. 598 (La. 1920); Commissioner_ of Corporations and Taxation v. Assessors of Boston, 71 N.E.2d 874 (Mass. 1947).; Neuhoff Packing Co. v. Sharpe, 240 S.W. 1101 (Tenn. 1922); Commonwealth v. Meyer, 23 S.E.2d 353 (Va. 1942); Morris & Co. v. Commonwealth, 83 S.E. 408 (Va. 1914); Annots. 17 A.L.R.3rd 7 (1968); 116 A.L.R. 1111 (1938); 10 A.L.R. 1273 (1921). Most of the above-quoted decisions dealt with the preparation of pork products. The Ballard decision, supra, noted:

 In Bornstein Sea Foods, Inc. v. State, 373 P.2d 483 (Wash. 1962), the taxpayer, a fish filleter, argued that he was merely a processor. The court in that case, relying on an expansive definition of manufacturing in the Washington statutes, held that he was a manufacturer because a new and commercially valuable end product was produced by the activities of the taxpayer.

 Other courts have found that there is not a substantial distinction between the terms "manufacturing" and "processing." E.g., State v. Advertiser Co., 59 So.2d 576 (Ala. 1952); Moore v. Farmers Nut. Mfg. & Ginning Co., 77 P.2d 209 (Ariz. 1938); Peterson Produce Co. v. Cheney, 374 S.W.2d 809 (Ark. 1964); National Tube Co. v. Glander, 105 N.E.2d 648 (Ohio 1952).

 Other cases have held that meat packing is not manufacturing. E.g., Stone v. Sullivan, 227 A.2d 76 (Conn. 1967); Armour & Co. v. City of Pittsburg, 69 A.2d 405 (Pa. 1949); Prentice v. City of Richmond, 90 S.E.2d 839 (Va. 1956); Annots. 17 A.L.R.3rd 7 (1968); 116 A.L.R. 1111 (1938); 10 A.L.R. 1273 (1921). In the Stone case, supra, the court applied the definition of manufacturing used in Connecticut--"the making or changing of articles or material into suitable forms for use or consumption for profit or gain," to the di.tsion of meat into its constituent parts for resale. The court ruled that this was not manufacturing. It concluded that if this were to be deemed manufacturing, practically every butcher would then be a manufacturer as he cuts meat for his customers. In the Prentice decision, supra, a taxpayer sought to claim exemption as a manufacturer. His business consisted of buying, killing, cleaning, chilling and the sale and delivery of poultry to various wholesalers and jobbers. The court drew a distinction between manufacturing and processing, as follows:

 The Armour case, a license tax decision, enumerated a lengthy list of articles that had been deemed not to be manufactured products. The Pennsylvania decisions have held that the cutting up of meat into marketable size and the subjection of portions of that meat to such operations as cleaning, drying, pickling, salting, smoking, boiling, baking and the like did not constitute manufacturing (at 408). Another decision observed that ". . . cattle were processed when they were slaughtered, dressed and cured, and thereby made ready for human consumption." Colbert Mill & Feed Co. v. Oklahoma Tax Commission, 109 P.2d 504 (Okla. 1941).

 Like the above-cited courts, it is apparent that the Missouri legislature recognized a distinction between processing and manufac uring. Until 1961, there were few exemptions in the Missouri Sales and Use Tax Law. Much of what is now Section 144.030, subsection 3, was enacted in 1961. See Laws of Missouri 1961, p. 623. Subparagraph (4) was initially enacted at that time and has remained unchanged to the present date. As we have noted, the exemption applies to machinery purchased for use in manufacturing, mining, or fabricating plants. Subparagraphs (1) and (5) of this same enactment grant an exemption for "materials used in maufacturing, processing, compounding, mining, producing or fabricating" (subparagraph (1)) or "manufacturing, processing, modification or assembly" (subparagraph (5)). The insertion of the term "processing" in these two subparagraphs and its exclusion from subparagraph (4) and certain other subparagraphs indicates clearly that the legislature intended to distinguish between processing and manufacturing. Further, it indicates a clear intent to exempt property used in processing only pursuant to the terms of subparagraphs (1) and (5). Therefore, to determine whether a meat packing plant falls within the exemption granted by subparagraph (4), we must determine whether its activities constitute manufacturing.

 We have set forth previously in this opinion some of the leading cases on the issue of whether meat packing is manufacturing. It is our opinion that the better view is expressed by those cases which hold that meat packing, insofar as it involves only the slaughtering and preparation of meat for market by the cutting of carcasses into commercially useful configurations, does not constitute manufacturing and is only processing. In support of this conclusion, we find the reasoning of Stone v. Sullivan, supra, and Prentice v. City of Richmond, supra, persuasive. We find that the slaughtering and cutting of meat is merely a rearrangement of the raw materials and not a substantial transformation in form, quality and adaptability. On the other hand, we also hold that certain activities commonly associated with meat packing do constitute manufacturing because they result in a product that is a substantial transformation of the original raw material. In reaching this conclusion, we rely on a number of cases that, although license tax decisions, do delineate an extensive transformation of the original raw material. This is especially true in the case of the preparation of pork. For example, Commissioner of Corporations and Taxation v. Assessors of Boston, supra; Commonwealth v. Meyer, supra; and the A.L.R. annotations previously cited. The Meyer decision, supra, for example, held that the curing of pork to make ham and bacon and the making of sausage constituted manufacturing. Basically, there is little resemblance between the hog on the hoof that goes into this process and the end product. Therefore, we hold that the curing and smoking of bacon and ham, the manufacture of lard, the production of sausages and other activities common to meat packing that result in a substantial qualitative change of the raw material constitute manufacturing.

 We would further point out that the requirement of subparagraph (4) is that the machinery be used "directly" in manufacturing ". . . a product which is intended to be sold ultimately for final use or consumption." In each case it must be determined whether the machinery is used directly in a process that produces a manufactured article. See West Lake Quarry & Material Co. v. Schaffner, supra.

CONCLUSION

 It is the opinion of this office that only certain activities of meat packing plants constitute manufacturing. The slaughtering and preparation of meat for sale by the cutting of carcasses into commercially useful pieces does not constitute manufacturing. This activity is processing and is not encompassed by the sales tax exemption for "machinery and equipment purchased and used to establish new . . . manufacturing, . . . plants. . . ." Section 144.030. 3(4), RSMo 1969.

 In cases in which a substantial transformation of the original raw material occurs, these activities constitute manufacturing and the machinery used to expand or establish new plants for these purposes is exempt from sales tax, pursuant to Section 144.030.3(4), RSMo 1969, if the machinery is used directly in manufacturing a product which is intended to be sold ultimately for final use or consumption.

 The foregoing opinion, which I hereby approve, was prepared by my assistant, Peter H. Huger.

Very truly yours,

John C. Danforth
Attorney General