Wetterau, Inc. v. Director of Revenue

ULRICH, Judge. The issue presented in this appeal from the Administrative Hearing Commission is whether maintaining frozen meat in its frozen state constitutes “processing” as intended by § 144.030.2(12), RSMo Supp. 1991. The statute exempts from sales tax electrical energy used in the actual primary processing or secondary processing or fabricating of a product if the total cost of electrical energy so used exceeds ten percent of the total cost of production, exclusive of the cost of electrical energy used.1 Maintaining frozen meat in its frozen state is not “processing” as intended by the statute. The decision of the Administrative Hearing Commission is reversed. Wetterau, Incorporated, d/b/a Wetterau Food Distribution and Common Item Warehouse (Wetterau), filed applications for electrical energy direct pay authorizations for the years 1987, 1988 and 1989. The Director of Revenue denied the applications, contending that Wetterau was not processing foods but was maintaining food in the condition in which Wetterau received it. When the applications were denied, Wetterau filed its complaint with the Administrative Hearing Commission seeking review of its applications. The Administrative Hearing Commission conducted a hearing and issued its findings of fact and [367] conclusions of law. The commission ruled that Wetterau was entitled to the electrical pay authorization exemption for the years 1987, 1988 and 1989. The Director of Revenue seeks review. Wetterau stores and maintains frozen and refrigerated food as a business. Wet-terau receives frozen meat, maintains it in its frozen state, and transfers it to other businesses, which distribute the meat to consumers. Occasionally, Wetterau purchases unfrozen food and freezes it. Wet-terau also refrigerates fruit and vegetables and operates “banana rooms” where it maintains bananas in a green state by refrigeration and controlled humidity. When desired, the natural ripening of the green bananas stored by Wetterau is accelerated by introducing heat and ethylene gas. However, the relatively small amount of unfrozen food received by Wetterau that the company freezes is a very small part of its business, and the amount of electrical energy purchased to freeze unfrozen meat or to maintain or refrigerate other unfrozen foods is not in evidence. Wetterau’s evidence at trial established that meat and other foods decay or decompose naturally as time elapses. Meat spoils when bacteria in contact with the meat grow and multiply. The increased amount of bacterial metabolic waste causes meat to spoil. Enzymes within the live animal’s tissue gradually break down the meat tissue after the animal is slaughtered, contributing to spoilage. When food spoils, the decomposition is irreversible. Freezing is one mechanism used to arrest the natural spoiling process. To the extent possible, freezing preserves meat in its prefrozen state. To be effective, freezing must be constant. Spoilage occurs when frozen food attains an elevated temperature. The freezing process removes heat from the food being frozen. The food’s reduced temperature must be maintained continuously to inhibit its natural degradation. Section 144.030.2(12), RSMo Supp.1991, exempts from state and local sales and use taxes electrical energy used in the primary or secondary processing of a product if the cost of the electrical energy exceeds the stated statutory amount. The statute specifically states that the exemption applies to taxes incurred for: 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; .... § 144.030.2(12) (emphasis added). Tax exemptions are strictly construed against the party claiming the exemption. GTE Automatic Elec. v. Director of Revenue, 780 S.W.2d 49, 50 (Mo. banc 1989). Wetterau has the burden of proving entitlement to tax exempt status. See Sunday Sch. Bd. of the Southern Baptist Convention v. Mitchell, 658 S.W.2d 1, 4 (Mo. banc 1983). However, to effectuate the legislative intent, the “reasonable, natural and practical interpretation in light of modern conditions” is applied to the statute. Barnes Hosp. v. Leggett, 646 S.W.2d 889, 893 (Mo.App.1983). The Administrative Hearing Commission’s decision will be affirmed “if [the decision is] supported by the law and competent and substantial evidence on the whole record, and ... [if the decision is] not clearly contrary to the reasonable expectations of the General Assembly.” L & R Egg Co. v. Director of Revenue, 796 S.W.2d 624, 625 (Mo. banc 1990); see also, § 621.193, RSMo 1986. Both parties propose definitions for the word “processing” within section 144.030.2(12). Wetterau advocates a more inclusive definition. Wetterau proposes “processing” means to subject an item to some activity in order to produce a certain result, not necessarily to transform or fundamentally change the item processed. The Director of Revenue advocates a more restrictive definition of the word “processing” that would require transformation or reduction of an item to a different state or thing. [368] The Supreme Court of Iowa considered whether freezing and refrigeration of food constitutes “processing” under an Iowa exemption statute in Fischer Artificial Ice & Cold Storage Co. v. Iowa State Tax Comm’n, 81 N.W.2d 437 (Iowa 1957). The court considered whether a company that conducted a freezing and cold storage business was entitled to exemption from sales tax on electricity on the ground that the electricity used by the company was “used in the processing of tangible personal property” within the meaning of the Iowa sales tax law. Id. at 438. The court determined that “processing” meant subjecting “products to special treatment in preparation for the market,” and transforming them to a different state or condition. Id. at 440-41. The court determined that after food was “hard” frozen, maintaining it in its frozen state was not processing within the meaning of the statute. Id. at 441-42. This Court previously defined processing as “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.” State ex rel. Union Electric Co. v. Goldberg, 578 S.W.2d 921, 924 (Mo. banc 1979). The operations performed by the Meramec Mining Company in transforming mined ore into hardened iron/bentonite pellets and in separating non-magnetic minerals from the ore constituted processing within the meaning of the exempting statute. Id. Consistent with the rationale of the Iowa Supreme Court in Fischer Artificial Ice & Storage Company and this Court’s definition of “processing” in Union Electric, maintaining frozen meat in a frozen state does not transform or reduce the meat to a different state and is not “processing” as the word is used in section 144.030.2(12). The meat is frozen when received by Wet-terau, and it is kept by the company in the same frozen state. Wetterau maintains frozen meat in the same status that it receives it. Wetterau does not process the frozen meat after it receives it, and Wetter-au is not, therefore, entitled to the statutory exception sought from the Director of Revenue for years 1987, 1988 and 1989.2 The decision of the Administrative Hearing Commission is reversed. ROBERTSON, C.J., and COVINGTON, HOLSTEIN and THOMAS, JJ., concur. PRICE, J., dissents in separate opinion filed. LIMBAUGH, J., concurs in opinion of PRICE, J. BENTON, J., not sitting. Footnotes [1] The Director of Revenue does not contest that the electrical energy cost used by Wetterau to maintain frozen meat in its frozen state exceeds ten percent of the total cost of production, either primary or secondary, exclusive of the cost of electrical energy so used. § 144.030.2(12). [2] Whether initially freezing food constitutes processing within the meaning of section 144.-030.2(12) is not determined.