Opinion ID: 2032122
Heading Depth: 1
Heading Rank: 1

Heading: Food and Beverage Preparation

Text: The use tax statute excepts from the industrial processing exemption retail food and beverage preparation. M.C.L. § 205.94(g); M.S.A. § 7.555(4)(g). [5] The underlying rationale is that many techniques for preparing and cooking various foods are not manufacturing-type processes, but rather service-type activities. See 17 ALR3d 7, § 29, pp. 76-83. [6] Perhaps more significantly, the industrial processing exemption also now expressly excepts [s]ales to a person performing a service who does not act as an industrial processor while performing the service.... M.C.L. § 205.94(g)(i); M.S.A. § 7.555(4)(g)(i). I believe that in deciding whether the taxpayer will be entitled to the industrial processing exemption, in whole or in part, the focus should be on the statutory distinction between manufacturing-type processing and service activity. Many courts have addressed various food production methods in relation to tax law. The process by which a taxpayer changes the starting product into the final product determines whether the taxpayer is engaged in a manufacturing-type activity or merely food preparation service activity. My research has revealed what can be described as a continuum, with highly technical operations at one end qualifying as manufacturing-type processes, [7] and simple washing and serving at the other end being labeled as simple food preparation activities. An instructive case is Phillips Harborplace, Inc. v. State Dep't of Assessments & Taxation, 65 Md.App. 461, 501 A.2d 92 (1985). There, the restaurant specialized in crab dishes. The court observed: For a product to be labeled as manufactured, it must go through a substantial transformation in form and uses from its original state. This seems a singularly inappropriate way to describe seafood dishes prepared by a high quality restaurant which prides itself on using fresh and natural ingredients.
The Supreme Court in Anheuser-Busch Brewing Association v. United States, 207 U.S. 556 [562], 28 S.Ct. 204 [206-07], 52 L.Ed. 336 (1908) provides insight to our problem, stating: Manufacture implies a change, but every change is not manufacture, and yet every change in an article is the result of treatment, labor, and manipulation. But something more is necessary.... There must be transformation; a new and different article must emerge, `having a distinctive name, character, or use.' To cook or boil or otherwise prepare a fish or a crustacean is to change the creature, certainly, but it is far from manufacturing it. The name of the final product, be it crab imperial, lobster tail, or stuffed shrimp, implies a close linkage to its original state. The character of the productits freshness, its natural tasteenforces this linkage. Stuffings and other additives may enhance the flavor of the food, but do not change its essential character. The reason fish, crabs, and the like are delivered to Phillips is that they will be used as food, and this use remains unchanged.
We hold that it would be stretching the plain and popular meaning of the word past its breaking point if we were to say that appellant uses its kitchen equipment in the manufacturing of seafood. Kitchen equipment is not manufacturing equipment. [ Id. at 465, 467-468, 501 A.2d 92 (citations omitted).] Processes that correspond to mechanical baking, [8] which requires sifting, mixing, and transforming separate dry and wet ingredients into a single baked good, have been characterized as manufacturing. [9] In contrast, processing slabs of meat into hamburger or steaks, turning chicken parts into chicken sandwiches, changing fish into fish sandwiches, and cooking french fries have been held not to be manufacturing. [10] In Stewart Honeybee Products, Inc. v. Pennsylvania Bd. of Finance & Revenue, 525 Pa. 222, 226, 579 A.2d 872 (1990), the court held that the term manufacturing required that the starting substance be substantially changed into a new, different and useful item. Consequently, the court determined that processing honey was not manufacturing. [11] Likewise, preparing salads and similar foods, including potato, macaroni, bean, and egg salads, pudding, and clam chowder, have been found not to be manufacturing because the final product retains the same essential qualities as its ingredients. Van Bennett Food Co. v. City of Reading, 87 Pa.Commw. 30, 37-38, 486 A.2d 1025 (1985), explained: Thus, we must determine first whether the preparation methods used for the food products at issue consists of the application of a high degree of skill, science and labor; and second, whether there has been a substantial transformation in form, qualities and adaptability in use so as to produce a new, different and useful article. With respect to the food products at issue in the instant case, the record indicates that the preparation of cole slaw, pepper cabbage, health salad, tuna salad, and cranberry relish all involve a similar process consisting of cutting, chopping or dicing the primary ingredients, blending them together in a prepared dressing and packaging the final product. We do not find that the preparation of these products constitutes manufacturing as that term has been defined. We fail to see how the preparation of these products requires a high degree of skill, science or labor. It can certainly be done in the home on a smaller scale. Moreover, although the method of preparation altered the size, shape and, in some instances, color of the original ingredients, these ingredients had not been changed to new and useful articles, substantially different in qualities and adaptability in use. The ingredients retained their same essential qualities and surely the final product is not to be put to a use not intended for the original ingredients. [Emphasis added, citation omitted.][ [12] ]