Hervey v. Tyson's Foods, Inc.

Lyle Brown, Justice. This action was instituted by Tyson’s Foods, Inc., and its wholly owned subsidiary, Tyson’s Feeds, Inc., poultry processors and distributors, to recover gross receipts taxes (sales) and compensating (use) taxes paid under protest. (Throughout the opinion the appellees will be referred to as Tyson.) The audit forming the basis of tax assessments herein treated was for a four-year period. The chancellor held that Tyson was entitled to prevail and recover the full amounts paid under protest. The State Revenue Commissioner appeals. Item I claimed for exemption is based on Ark. Stat. Ann. § 84-1924 (Repl. 1960), which is a feedstuffs exemption statute. It provides that “all feedstuffs used in growing or producing livestock and/or poultry” are exempt from sales tax. Then § 84-1925 (d) defines “feedstuffs” to mean all materials which are commonly known and used as feed for livestock and/or poultry. The items claimed are called “water feed additives,” being fed to the birds through the drinking water rather than mixing with bulk feed, the latter process being ofttimes impracical. Tyson’s total purchases of additives amounted to $706,763.41. There are several such additives. Tyson’s witness described them. Vitamin D3 and Vitamin A are used to obtain maximum growth efficiency. Gallimycin, Terramycin, and Aureomycin belong to the mycin drug family. Funjol is a copper sulfate compound used to prevent mycotic infections. Alpha and Amprol are coccidiostats, added for the prevention of certain infectious diseases. The same is true of Floxaid and Vitalizer. Whit-syn S, S-Q, and S4 are sulpha drugs, used in the treatment of various diseases. Three-Mitro is an inorganic arsenical compound used to promote growth and feed efficiency. Feed efficiency is described as meaning the poultry’s ability to convert feed to body pounds. We have been referred to only one case which deals with the classification of feed additives. Lipman Poultry Co. v. Johnson, Assessor, 138 Atl. 2d 631 (Me. 1958). There the court was called upon to determine whether certain additives came within a tax exemption statute covering feeds. The components were terramycin oil suspension, terramycin animal formula, terramycin poultry formula, and a hormone preparation called “capette pills.” There it was held that those antibiotics and hormones functioned not as feed but as catalysts to assist in assimilation of food. According to the description of these drugs and their uses, it is reasonable to say that by their use alone they would not supply sufficient nourishment while, on the other hand, when these ingredients are administered in conjunction with poultry feed, the result is an accelerated growth of the birds. There seems to be no place in the definition of feed as used in the statute for the inclusion of antibiotics and hormones. It was also pointed out that the additives were used as catalysts in the body to help other reactions take place; that they never become a part of the body frame; and that when they have served their usefulness they are excreted and another supply is then needed. In Peterson Produce Co. v. Cheney, 237 Ark. 600, 374 S.W. 2d 809 (1964), we said: “Let it also be remembered that a tax exemption must be strictly construed, ‘and to doubt is to deny exemption.’ ” In Wiseman v. Madison Cadillac Co., 191 Ark. 1021, 88 S.W. 2d 1007 (1935), we held that the burden is on the claimant “to establish clearly his right to exemption.” In the first place we have reasonable doubt that these additives are commonly known as feeds tuffs. Secondly, appellee has not met the burden of clearly showing the right to exemption. Item II claimed as exempt from sales tax is described by appellees as components “consumed as integral part of the production of broilers.” Under that heading they list the specific items of nest pads, feeder lids, filter flats, litter, vaccine and medicine, and spray. The exemption is claimed under Ark. Stat. Ann. § 84-1904 (Repl. 1960): “Goods, wares, merchandise, and property sold for use in manufacturing, compounding, processing, assembling or preparing for sale, can be classified as having been sold for purposes of resale or the subject matter of resale only in the event such goods, wares, merchandise, or property becomes a recognizable, integral part of the manufactured, compounded, processed, assembled or prepared products.” We do not agree with appellees simply because we are unable to conceive that the items listed become a recognizable, integral part of the finished products. For the last four months of the audit exemption is claimed for the listed Item II under the Acts of 1967, Act 113. The section does not appear in the annotated statutes because it is no longer the law. There the exemption provision says: “Gross receipts or gross proceeds derived form the sale of. . .tangible personal property used for repair, replacement, or expansion of existing manufacturing or processing facilities ...” Manufacturing and processing have been held not to be two distinct operations. Processing is carried out under the manufacturing process. Pellerin v. Cheney, 237 Ark. 59, 371 S.W. 2d 524 (1963). The taxpayer must first qualify as a manufacturer. Scurlock v. Henderson, 223 Ark. 727, 268 S.W. 2d 619 (1954). We have specifically held that a processor of chickens is not a manufacturer. Peterson v. Cheney, 237 Ark. 600, 374 S.W. 2d 809 (1964). For an exhaustive treatise on the last subject see Prentice v. City of Richmond, 90 S.E. 2d 839 (Va. 1956). Item III concerns a claimed exemption from the use tax and is based on a part of Acts 1961, Act 140 (which is no longer the law and is not now incorporated in the annotated statutes.) See footnote to Ark. Stat. Ann. § 84-3106 (Supp. 1971): “Tangible personal property in the form of raw materials or component parts for further processing, manufacturing, or assembling when such goods, wares and merchandise goes into and becomes a recognizable, integral or component part of a manufactured or processed article or end-product for sale either within or without the State of Arkansas.” The items listed for exemption by appellees are egg processing equipment, poultry processing plant equipment, poultry processing plant repairs and replacements, hatchery equipment, feeder lids, trays, pads and cases for baby chicks. For two reasons the claimed exemption is without merit. The claimed items do not become an integral part of the end product. Secondly, as we have heretofore stated, appellees are not manufacturers. For the last four months appellees claim exemption under Act 113 of 1967. What we have said with respect to the exemption claimed during the last four months under Item II applies here. For the reasons stated we conclude that appellees’ claims for exemptions are not authorized by law. Reversed. Byrd and Holt, JJ., dissent. Fogleman and Jones, JJ., concur.