Court Opinion

ID: 9524030
Source: CourtListenerOpinion
Date Created: 2023-08-07 02:49:20.718621+00
Date Added: 2024-06-11T13:08:46.059913
License: Public Domain

Cavanagh, J.
(concurring in part arid, dissenting in part). I concur with the result reached by the majority because the Department of Treasury has conceded that all the activity occurring at the Elias Brothers Commissary is industrial processing. If the food processing at issue is indeed industrial processing, then the legislative intent of encouraging manufactur*160ing in Michigan is advanced by exempting the activity from use taxes. However, if not all the departmental operations are really engaged in manufacturing-type processes, but instead are engaged in service-type food preparation, then the industrial processing exemption should not apply. I would hold that the industrial processing exemption, which is to be strictly construed against the taxpayer, should be apportioned in accord with the nature of the activity in the separate departments.
I write separately because I disagree with the majority’s consideration of the internal bookkeeping system used to record the “transfer” of goods from one intracorporate department to another within this single taxpayer’s business. In contrast, I believe that the primary focus of our analysis should be on the difference between food and beverage preparation and industrial processing, with the secondary focus on the difference between wholesale and retail.
i
Use taxes are levied on “the privilege of using, storing, or consuming tangible personal property in this state . . . .” MCL 205.93; MSA 7.555(3). The use tax statute exempts industrial processing. MCL 205.94(g); MSA 7.555(4)(g). 1 In turn, the industrial processing *161exemption excepts “the preparation of food and beverages by a retailer for retail sale.” Id. The latter language was added to the statute by 1970 PA 15. The accompanying legislative history reveals that the Legislature intended to limit the scope of industrial processing to manufacturing-type activity, and to exclude activity characterized as services. 2 1987 PA 141 added the first definition of “industrial processor.” The Legislature again intended to clarify the dis*162tinction between true industrial processing and service-type activity.3
As a preliminary matter, I note that although tax statutes in other jurisdictions use varying terminology, the legislative history reveals that the term “industrial processing” is, for all practical purposes, synonymous with the term “manufacturing.” It has been said that
to constitute manufacturing, or to constitute one a manufacturer, within the meaning of tax statutes, the operation, process, or activity in question must result in the production of a new and different article, product, or commodity, having, according to some cases, a distinctive name, character, or use. “Manufacturing,” in this connection, has also been defined, in terms or substance, as the production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties, or combinations, whether by hand labor or by machinery; or as the production of something by hand or machinery, as distinguished from a natural growth or process; or as the making or conversion of raw or partly finished materials into articles suitable for use or marketing; or as a process which takes something practically unsuitable for any common use and changes it so as to adapt it to such common use. [Anno: What constitutes manufacturing and who is a manufacturer under tax laws, 17 ALR3d 7, § 3, pp 23-25.]
Similarly, the use tax statute provides that an “industrial processor” is one who “transforms, alters, or modifies tangible personal property.” MCL 205.94(g); MSA 7.555(4)(g). As a rule, restaurant food is not considered to be tangible personal prop*163erty because it is a combination of food and service * Additionally, industrial processing means “changing the form, composition, or character of the property.” Id. What the Department of Treasury and the majority have failed to address is whether all the instant taxpayer’s activities are really “changing the form, composition, or character” of the food products with which it starts into something different, as required by the statute.
FOOD AND BEVERAGE PREPARATION
The use tax statute excepts from the industrial processing exemption retail food and beverage preparation. MCL 205.94(g); MSA 7.555(4)(g).4
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 *164expressly excepts “[s]ales to a person performing a service who does not act as an industrial processor while performing the service . . . MCL 205.94(g)(i); MSA 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 A2d 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 inappropri- ■ ate way to describe seafood dishes prepared by a high quality restaurant which prides itself on using fresh and natural ingredients.
*165The Supreme Court in Anheuser-Busch Brewing Association v United States, 207 US 556 [562]; 28 S Ct 204; 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. Stuff-ings 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 (citations omitted).]
Processes that correspond to mechanical baking,8 which require sifting, mixing, and transforming , separate diy and wet ingredients into a single baked good, have been characterized as manufacturing.9 In contrast, processing slabs of meat into hamburger or *166steaks, 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 A2d 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, *16787 Pa Commw 30, 37-38; 486 A2d 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.][12i
*168ELIAS BROTHERS
In the instant case, the parties stipulated that “[t]he food processing activities include a bakery, meat department, sandwich department, ice cream plant, seafood processing department, and a department that produces soup, salad dressing, and pie fillings.” Rather than viewing the Commissary as a single entity, as the majority and the Department of Treasury have done, I think it should have been broken down into departments, with each department analyzed in accord with the cases discussed above.
n
Additionally, I would reject the majority’s rationale that a taxpayer can escape otherwise applicable use taxes simply because it performs the taxable activity at another site and creates a sufficient paper trail to document “transfer” of the food to the site of the sale to the consumer. This argument was rejected in In re Marriott Family Restaurants v New York Tax Appeals Tribunal, 174 AD2d 805; 570 NYS2d 741 (1991). There, the taxpayer manufactured a variety of food products for restaurants. It shipped seventy-six percent of its products to its own restaurants and twenty-four percent to other restaurants operated by licensees. The New York taxing authority allowed a manufacturing exemption from use tax for the *169twenty-four percent, but disallowed it for the seventy-six percent. The taxpayer argued that all the activity should be exempt because “the food [wa]s processed in a manufacturing facility that [wa]s entirely separate and distinct from the restaurant premises where the food [wa]s ultimately sold.” Id. at 807. The court affirmed, explaining:
Notwithstanding petitioner’s argument to the contrary, we find nothing irrational in respondent’s interpretation insofar as it results in similar treatment for machinery and equipment regardless of whether it is used in processing food on the restaurant premises or at a separate facility. Whether the food is processed at a separate facility belonging to petitioner and shipped to petitioner’s restaurants for final preparation or the food processing and preparation occurs entirely within the restaurant, the taxable event is the sale in the restaurant of a combination of food and service, which respondent could rationally view as a “hybrid” transaction rather than the sale of tangible personal property .... [Id. at 807-808 (emphasis added).]
In contrast, the majority here would arguably allow a restaurant to move its kitchen across the street, or even next door, to a “physically” distinct location, and, as long as it creates a sufficient paper trail of “sales” to itself, it will escape otherwise applicable use taxes because its kitchen is a “distinct, identifiable, and clearly severable activity.” Ante at 158-159. This is not what the Legislature intended by industrial processing.
The industrial processing exemption expressly provides: “[s]ales to a person performing a service who does not act as an industrial processor while performing the service may not be excluded under this subdivision . . . .” MCL 205.94(g); MSA 7.555(4)(g) (emphasis added). The restaurant service of providing *170food preparation does not become industrial processing just because it is done in a different location or with a bigger kitchen utensil. It becomes industrial processing when it “chang[es] the form, composition, or character” of the starting product into a new product. Id.
m
In conclusion, I concur with the result reached by the majority, but dissent from its analysis for the reasons stated.
Mallett, J., concurred with Cavanagh, J.
Boyle, J., took no part in the decision of this case.

 The current use tax statute provides:
The tax levied does not apply to the following:
(g) Property sold to the following:
(i) An industrial processor for use or consumption in industrial processing. Property used or consumed in industrial processing does not include tangible personal property permanently affixed and becoming a structural part of real estate; office furni*161ture, office supplies, and administrative office equipment; or vehicles licensed and titled for use on public highways other than a specially designed vehicle, together with parts, used to mix and agitate materials added at a plant or jobsite in the concrete manufacturing process. Industrial processing does not include receipt and storage of raw materials purchased or extracted by the user or consumer, or the preparation of food and beverages by a retailer for retail sale. As used in this subdivision, “industrial processor” means a person who transforms, alters, or modifies tangible personal property by changing the form, composition, or character of the property for ultimate sale at retail or sale to another industrial processor to be further processed for ultimate sale at retail. Sales to a person performing a service who does not act as an industrial processor while performing the service may not be excluded under this subdivision, except as provided in subparagraph (ii). [Emphasis added.]
Subsection (ii) concerns computer usage. The sales tax statute also exempts industrial processing. MCL 205.54a(g); MSA 7.525(g).

 The purpose of this amendment is to limit the exemption to persons who are actually engaged in the manufacturing of a product for eventual resale.
As the law now stands, many persons engaged in a service-type of activity are claiming the exemption. Some examples are:
4. Retail vending companies ....
The proposed change in the law will reduce, to some degree, the question of non-manufacturers trying to qualify for exemption. [Executive Legislative Analyses, SB 1092 and 1093, November 7, 1969, pp 5-6.]

 Senate Fiscal Agency Analysis, SB 323 (Second Analysis), July 14, 1987.

 Under a sales tax exemption for sales of machinery, equipment, parts, tools, and supplies used or consumed directly and predominantly in the production of tangible personal property for sale, the benefit of these exemptions is not available in the purchase of machinery, equipment, supplies and utilities used by a food processing plant which manufactures a variety of food products for use in restaurants. Food products manufactured at a taxpayer’s processing plant and shipped elsewhere for sale in the taxpayer’s restaurants are not tangible personal property within the meaning of the manufacturing exemptions. [68 Am Jur 2d, Sales and Use Tax, § 162, p 146.]

 By comparison, the sales tax statute excludes “food for human consumption, except prepared food intended for immediate consumption.” MOL 205.54g(l)(a); MSA 7.525(7)(l)(a). “Prepared food intended for immediate consumption” is expressly defined as retail sales of what can be loosely summed up as restaurant or catered food. MCL 205.54g(4); MSA 7.525(7)(4). Consequently, the ultimate sale of restaurant food to the consumer generally will be subject to sales tax.

 [T]he process of cooking or preparing food does not, by itself, constitute manufacturing for purposes of tax statutes. [Id. at 76.]
*164See HED, Inc v Powers, 84 NC App 292; 352 SE2d 265 (1987) (food prepared by Hardee’s restaurants on the premises was not entitled to a manufacturing tax break).

 See, e.g., Arkansas Beverage Co v Heath, 257 Ark 991, 1002; 521 SW2d 835 (1975) (producing and bottling Pepsi products were held to be manufacturing processes).

 State v Lanasa, 151 La 706; 92 So 306 (1922).

 Fleet Pizza, Inc v Pennsylvania, 119 Pa Commw 463, 469; 547 A2d 523 (1988) (a caterer preparing pizza, which the court found analogous to baking, was entitled to the manufacturing exemption).

 The court in McDonald’s Restaurants of Mass, Inc v Comm’r of Revenue, 393 Mass 1008, 1008-1009; 473 NE2d 1120 (1985), stated:
Despite McDonald’s argument that its cooking process and assembly of the constituent parts of its hamburger, chicken, and fish sandwiches and other food-products is a species of manufacturing, the case is governed entirely by our decision in York Steak House Syss v Commissioner of Revenue, 393 Mass 424; 472 NE2d 230 (1984), in which we held that the process by which commercial grade cuts of beef become restaurant-quality steaks was not manufacturing.
However, killing an animal and converting it into food products has been held to be manufacturing. Wilson & Co, Inc v Revenue Dep’t, 531 SW2d 752, 754-755 (Mo, 1976). See also McDonald’s Corp v Oklahoma Tax Comm, 563 P2d 635, 636, 641 (Okla, 1977) (shake maker, drink dispenser, soda factory, grills, toasters, french fry assembly, and fish assembly were not used in manufacturing).

 Processed honey, like- other' foods which are washed, heated and filtered, may be more suitable for certain uses, but processed foods generally, including honey, remain essentially what they were before they were treated. [Id,.]

 In Muhlenberg Twp v Clover Farms Dairy Co, _ Pa Commw _; 665 A2d 544 (1995), the taxpayer produced fruit juice, fruit drinks, and iced tea, which the court held was not manufacturing. The court recapped additional determinations by Pennsylvania courts:
[Cheating pickled and smoked meats, raw hide and skins, and bacon from carcasses was not manufacturing, because only a superficial change occurred since the original products were not substantially transformed into new products. Similarly, the pasteurization of milk is not manufacturing; but making cream, butter and skim milk is. [T]he production of tapioca and decaffeinated and instant coffee was held not to be manufacturing. . . . [Cjutting up *168a calf carcass into raw pieces of veal does not constitute manufacturing.
There are cases which hold that the processing of certain food items is manufacturing: . . . converting potatoes into potato chips[,] . . . milling wheat into flour[,] . . . [and] processing buttermilk and sldm milk into powdered milk. [Id., 665 A2d 546, n 5 (citations omitted).]