Case Name: McDonnell & McDonnell, Respondent, v. The State of Washington, Appellant; Allen V. Smith, Inc., Respondent, v. The State of Washington, Appellant; McDonnell Seed Company, Inc., Respondent, v. The State of Washington, Appellant
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1963-07-18
Citations: 62 Wash. 2d 553
Docket Number: No. 36407
Parties: McDonnell & McDonnell, Respondent, v. The State of Washington, Appellant. Allen V. Smith, Inc., Respondent, v. The State of Washington, Appellant. McDonnell Seed Company, Inc., Respondent, v. The State of Washington, Appellant.
Judges: 
Reporter: Washington Reports
Volume: 62
Pages: 553–560

Head Matter:
[No. 36407.
En Banc.
July 18, 1963.]
McDonnell & McDonnell, Respondent, v. The State of Washington, Appellant. Allen V. Smith, Inc., Respondent, v. The State of Washington, Appellant. McDonnell Seed Company, Inc., Respondent, v. The State of Washington, Appellant.
The Attorney General, Timothy R. Malone and James A. Furber, Assistants, for appellant.
Parr & Baker, for respondents.
Reported in 383 P. (2d) 905.

Opinion:
Finley, J.
The taxpayers, respondents in these consolidated causes, have challenged the action of the State Tax Commission in imposing a business and occupation tax respecting manufacturing activity as defined in RCW 82.04-.120, and have petitioned for a refund of taxes paid thereunder.
The State Tax Commission has taken the position that the preparation or processing of dried split peas by the taxpayers comes within the scope of the definition of "manufacturing activity," as set forth in the aforementioned statute. The trial judge sustained the taxpayers' contentions that their activities did not constitute manufacturing within the statutory definition, and rendered judgment voiding imposition of the tax. It should be pointed out that these lawsuits were heard and determined by the trial court prior to the decision in Bornstein Sea Foods, Inc. v. State (1962), 60 Wn. (2d) 169, 373 P. (2d) 483.
The taxpayer is engaged in a business involving the acquisition from farmers of raw, dried, field peas in bulk. These are then processed preparatory to disposition by sale on the wholesale market, both within and without the state of Washington. The record establishes that the processing or preparation is as follows:
The peas are removed from their pods prior to being acquired by the taxpayer. After the peas are received by the taxpayer, they are placed and kept in storage for three or four weeks. The peas are thereafter put through a machine called a clipper cleaner, whereby the undersized peas, parts of stalks, pods, vines, and any other less useful or foreign materials are removed. The next step in the preparation or processing is to put the peas through a gravity cleaner. This machine utilizes air pressure and a shaking motion to remove substandard and defective weevily peas. The weevily peas are infected with a small organism, actually a small beetle of the Rhyneophora group, which, during the three to four week period of storage referred to above, literally eats its way out of the peas. This results in the weevily peas being lighter, and this difference in specific gravity makes possible the separation by the gravity cleaner of the weevily peas from those uninfected. At the conclusion of these operations, approximately two thirds of the peas are bagged as whole peas and sold on the wholesale market. The tax commission has not attempted to tax these operations, relative to the processing of the whole peas, as a manufacturing activity.
We are concerned with the remaining third of the peas which are destined to become split peas. These are subjected to further processing through a screw type conveyor, a part of a machine or apparatus called the steam auger. As the peas are carried through a steam chamber, the steam treatment softens the hulls or shells to facilitate their removal and the subsequent splitting of the peas. Thereafter, the peas go through a splitter, which consists of a rotary drum with vertical plates. The peas are fed into the top of the splitter machine, where, by the exertion of centrifugal force, they are thrown against the side of the drum and split. The trial court found that on occasion it was necessary to rerun the peas through the splitter to complete the splitting of all the peas. However, the taxpayer's exhibits (these include samples of peas which have been through the splitter once and twice, respectively) and the testimony of a witness for the taxpayer clearly indicate that the peas usually must be processed through the splitter at least two or three times to accomplish splitting of all of the peas. The split peas next go through a machine similar to the clipper cleaner for the purpose of grading and further removal of undesirable portions. Then, after going through an apparatus or machine for polishing and improving the appearance of the peas, they are packed for shipment.
During the process resulting in splitting of the peas, the hulls and hearts (the latter being a small stem in the pea) are removed. These scrap pieces, combined with the pea chips, constitute a by-product referred to as offal. Offal does not result from the processing of whole peas. The removal of the hull in the splitting process results in an end product, i.e., split peas, which differs in color from the original whole pea with the hull intact.
There are differences in the demand for the respective products—whole peas v. split peas—the demand dependent in part upon the personal preferences of the ultimate consumers. Without such a difference in demand, there would be no practical reason to engage in the operation of splitting peas. In passing, we might observe that the trial judge erred in refusing to permit testimony in regard to the price received by the taxpayer for split peas as contrasted with the price for whole peas. By this we do not mean that a change in value is the factor in determining whether a new, different or useful substance has resulted, but it is a factor.
The argument, in effect, that "pigs is pigs," or that peas are peas, and an identical substance—whether whole as at the inception or split as at the conclusion of the pea-splitting process—and, therefore, the processing should not be considered as manufacturing, was made and rejected in Bornstein, supra. There the change was from fish to fish fillet. In fact, in the Bornstein case (page 176) the court, referring to another case in which a manufacturer's tax was imposed, stated that " . . . the taxpayer performed a process on peas . . . and, after the process, he still had peas."
The preparation or processing of the peas and the effect upon them closely approximates the situation with respect to the preparation and processing of bottom fish involved in the Bornstein case. We are convinced that the reasoning and the holding in Bornstein is applicable and controlling in the instant case.
We realize that the criterion stressed in Bornstein— namely, whether there has been a significant change—is somewhat general in nature and may seem easier as a matter of articulation than as a matter of application. Nevertheless, as we stated in Bornstein, the end product—that is, the product or substance as it is released or sold by the one performing the process—must be compared with the substance initially received by that processor. In making this comparison, consideration should be given to the following factors: among others, changes in form, quality, properties (such changes may be chemical, physical, and/or functional in nature), enhancement in value, the extent and the kind of processing involved, differences in demand, et cetera, which may be indicative of the existence of a "new, different, or useful substance."
In utilizing the aforementioned factors, it is necessary to bear in mind the admonition in Bornstein that "In short, we have come to the position now where we are classifying as 'manufacturing' activities which realistically are not manufacturing in the ordinary sense at all." That is, the definition in RCW 82.04.120 of the term manufacture and its tax scope is subject to legislative determination. This determination is not necessarily confined to a classical or orthodox definition of manufacturing, which, in common understanding, usually would connote a spinning, knitting, sewing, sawing, synthesizing, assembly or other fabrication process.
The instant case has been presented to this court as though the only question to be resolved upon this appeal is whether the respondents are engaged in "manufacturing" within the definition set forth in RCW 82.04.120. Both parties have apparently assumed that if the activity constitutes manufacturing then that activity may be taxed under RCW 82.04.240 (tax on manufacturers). However, both parties have apparently overlooked RCW 82.04.440:
". . . That persons taxable under RCW 82.04.250 or 82.04.270 shall not be taxable under RCW 82.04.230, 82.04-.240 ." (Italics ours.)
It has been conceded that the respondents are engaged in wholesaling both within and without the state; therefore, with regard to their wholesaling activity within the state they are taxable under RCW 82.04.270. Those activities being taxable under RCW 82.04.270 cannot be taxed under RCW 82.04.240. However, those sales made without the state are not taxable under RCW 82.04.270; therefore, the manufacturing of those products may be taxed under RCW 82.04.240. Crown Zellerbach Corp. v. State (1954), 45 Wn. (2d) 749, 278 P. (2d) 305.
This cause should be remanded to the trial court for a determination as to what portion of the respondents' manufacturing activity is distributed by wholesaling outside of the state, since only that portion of the respondents' manufacturing activity can be taxed under RCW 82.04.240. The judgment should reflect this determination and should conform to the views otherwise expressed herein. It is so ordered.
Ott, C. J., Donworth, Rosellini, Hunter, and Hale, JJ., concur.
It was stipulated at the time of trial that the processing of peas was the same for each of the respondents; therefore, in narrating the facts the singular form of taxpayers will be used.
This conclusion has been derived from an examination of Plaintiffs' exhibits No. 3 and 6.