Case Name: The BEARE COMPANY, Appellant, v. TENNESSEE DEPARTMENT OF REVENUE, Appellee
Court: Tennessee Supreme Court
Jurisdiction: Tennessee
Decision Date: 1993-07-12
Citations: 858 S.W.2d 906
Docket Number: 
Parties: The BEARE COMPANY, Appellant, v. TENNESSEE DEPARTMENT OF REVENUE, Appellee.
Judges: DROWOTA, DAUGHTREY and ANDERSON, JJ., concur.
Reporter: South Western Reporter Second Series
Volume: 858
Pages: 906–911

Head Matter:
The BEARE COMPANY, Appellant, v. TENNESSEE DEPARTMENT OF REVENUE, Appellee.
Supreme Court of Tennessee, at Nashville.
July 12, 1993.
Ellen B. Vergos, Waring Cox, Memphis, for appellant.
Charles W. Burson, Atty. Gen. & Reporter, Daryl J. Brand, Asst. Atty., Nashville, for appellee.

Opinion:
OPINION
REID, Chief Justice.
This appeal presents for review the denial by the Department of Revenue of The Beare Company's application for authorization to purchase water, electricity, and natural gas at the reduced sales tax rates provided by T.C.A. § 67-6-206(b)(l). The chancery court made findings of fact, which substantially conformed to the findings made by the administrative law judge. The court held that, under the statute, the taxpayer is not entitled to the exemption and affirmed the decision of the administrative law judge.
The concurrent findings of fact of the administrative law judge and the trial court are conclusive on appellate review. C.F. Industries v. Tennessee Public Service Comm'n, 599 S.W.2d 536, 540 (Tenn.1980). However, the construction of the statute and application of the law to the facts is a question of law. See T.C.A. § 4-5-322(h)(1) (1991); Moto-Pep v. McGoldrick, 202 Tenn. 119, 303 S.W.2d 326, 330 (1957).
The pertinent portion of the Chancellor's findings of fact are as follows:
The Beare Company is engaged in the business of preserving food products by freezing and cold storage. Beare operates plants at Humboldt, Tennessee, and Jackson, Tennessee. Each plant includes facilities for "blast freezing" and also what are referred to as "holding freezers." Beare is not in the business of producing or selling food, but provides freezing and storage services for its customers.
[T]he Beare Company's revenues derive from four types of activities: "blast freezing," "handling," "preservation," and "special services." Each of these activities is stated on Beare's bills to its customers as a separate and distinct service. .
"Blast freezing" is performed on food products received by Beare in a fresh or raw condition. Such goods are blast frozen by Beare by drastically lowering the temperature of the products to zero degrees Fahrenheit or below within a period of 72 hours. During the course of such blast freezing, the food products undergo certain chemical and/or molecular changes....
"Handling" includes the physical movement of goods from loading docks into Beare's facilities, and then later moving the goods back to the trucks for shipment.
"Preservation" is the storage of already frozen goods in "holding freezers," where the products are maintained in a frozen state. The purpose of preservation storage is to maintain the low temperature of the products to prevent deterioration or spoilage. Storage in the holding freezers does not cause further changes in the product, but is intended to prevent change and to maintain the product as is....
"Special services" include miscellaneous activities such as wrapping, stamping and stenciling, employee overtime, assisting government inspectors, and "trichinosis certification."
The record shows the amount of revenue received with regard to fresh food which is blast frozen and maintained, and food which is received in a pre-frozen state and maintained until redelivered by Beare to its customers. The percentage of total revenue attributed to each service from November 1, 1987, through July 31, 1988, at each plant was, as follows:
Humboldt Jackson
Blast freezing raw products s© t — i OO
Maintenance of products blast frozen tr^ oo tO
Maintenance of prefrozen products ai 05
Handling blast frozen products ^ bo ÜI
Handling prefrozen products oq co ÍO
Special services re blast frozen products '«⅜ ' CO
Special services re prefrozen products o tA K
The reduced tax rates apply only to water and energy fuels "sold to or used by manufacturers." T.C.A. § 67-6-206(b)(1) (1989). A "manufacturer" is defined "as one whose principal business is fabricating or processing tangible personal property for resale." T.C.A. § 67-6-206(b)(2). If at least 51 percent of a taxpayer's revenues at a given location are derived from fabricating or processing tangible personal property for resale, the taxpayer is considered to be a manufacturer at that location. Tennessee Farmers Cooperative v. State, 736 S.W.2d 87, 91-92 (Tenn.1987). The determinative issue then is which, if any, of the activities performed by the taxpayer constitute "processing." Processing is not defined by the sales tax statutes; consequently, it must be given its ordinary and commonly accepted meaning. Western Pipeline Constructors, Inc. v. Dickinson, 203 Tenn. 248, 254, 310 S.W.2d 455, 458 (1958). Courts of other states have defined processing for purposes of determining sales tax exemptions. The term was defined in Gressel Produce Co. v. Kosydar as follows:
["Processing" is] essentially a transformation or conversion of materials or things into a different state or form from that in which they originally existed — the actual operation incident to changing them into marketable products.
Gressel Produce Co. v. Kosydar, 297 N.E.2d 532, 535 (Ohio 1973) (cleaning, cooling, sorting, and application of oil to eggs did not constitute "processing" because there was no change in the state or form of the eggs). In another case, the Ohio courts emphasized that mere enhancement of the value of a product, absent a change in "state or form" from that in which it originally existed, does not constitute "processing." Sauder Woodworking Co. v. Limbach, 527 N.E.2d 296, 297 (Ohio 1988) (packaging material in which furniture is shipped and sold is not used during the manufacturing or processing period, and is therefore not exempt from sales and use taxes).
Courts in other states have recognized that changing the condition of raw foods is processing. See e.g. Comm'r of Carroll County v. B.F. Shriver Co., 146 Md. 412, 126 A. 71 (1924) (corn husked, sorted, washed, cut from the cob, and canned); Stokely-Van Camp, Inc. v. State, 50 Wash.2d 492, 312 P.2d 816 (1957) (vegetables sorted, cleaned, cut, blanched, packaged, and frozen); Bornstein Sea Foods, Inc. v. State, 60 Wash.2d 169, 373 P.2d 483 (1962) (filleting, packaging, and freezing fish); Perdue Foods, Inc. v. State Dept. of Assessments, 264 Md. 672, 288 A.2d 170 (1972) (chickens slaughtered, dressed, packaged, and cooled); Bain v. Dept. of Revenue, 293 Or. 163, 646 P.2d 12 (1982) (production of fish using "mechanical, chemical and electronic processes"). After considering several definitions of "processing," the Iowa Supreme Court has concluded that "there is a close analogy between applying heat to foodstuffs in order to sterilize and preserve them and subjecting food to below zero temperatures for several days for a similar purpose. Freezing appears to be as clearly processing as cooking does." Fischer Artificial Ice & Cold Storage Co. v. Iowa State Tax Comm'n, 248 Iowa 497, 81 N.W.2d 437, 441 (1957).
This Court has recognized the distinction between "processing" and material handling or storage. Woods v. General Oils, Inc., 558 S.W.2d 433, 436 (Tenn.1977). Oth er courts have also distinguished between "processing," on the one hand, and preservation or storage on the other. In Warren v. Fink, 146 Kan. 716, 72 P.2d 968 (1937), a grocer claimed exemption for electricity used to operate refrigeration equipment in which he stored meat, milk, vegetables, and other perishables held for sale to his customers. Warren argued, as does The Beare Company here, that he was a "processor" because the cooling system was necessary to preserve the food products in suitable condition for sale. Id. 72 P.2d at 969. The court ruled that Warren was not a "processor," and denied the exemption, because:
What is done is to preserve these commodities in substantially the same condition. It is quite different from the use of refrigeration to make ice cream from milk and other ingredients, or from making a new or different article by heat.
Id. at 970.
Based on these definitions, the initial blast freezing, together with the maintenance of that frozen condition and the handling and special services related to the blast frozen products constitute "processing" within the meaning of the statute, while the mere preservation of the prefro-zen condition and the handling and special services related to those products do not constitute "processing."
Processing, then, at the Humboldt plant produces more than 51 percent of that plant's total revenue, while processing at the Jackson plant produces less than 51 percent of the revenue. The result is that the Humboldt plant qualifies for the reduced rate, but the Jackson plant does not.
The judgment of the Chancery Court is partially reversed in accordance with this opinion, and the case is remanded to the trial court.
Costs are taxed one-half to The Beare Company and one-half to the Department.
DROWOTA, DAUGHTREY and ANDERSON, JJ., concur.
O'BRIEN, J., dissents.