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Ruling 92-11

Sales and Use Taxes
Materials Used in Fabrication

FACTS:

A Connecticut meat packing company (hereinafter "Company") purchases live horses from various sources throughout the country. The Company then slaughters the horses, butchers the carcasses and wraps and packages the meat in nylon net stockings, plastic wrap or cardboard boxes. It ships the majority of the meat to Europe for human consumption. Those horses not scheduled for immediate slaughter upon arrival at the Company's plant are given feed and hay.

ISSUE:

Whether the feed and hay and the packaging products used by the Company are exempt from sales and use taxes as materials used in an industrial plant in the actual fabrication of a finished product to be sold, under Conn. Gen. Stat. §12-412(18) and Conn. Agencies Regs. §12-412(18)-1.

DISCUSSION:

In its ruling request, the Company asserts that it is engaged in a manufacturing production process that begins with the purchase of livestock and ends with the packaging of meat. It has not asked for a ruling on whether it is a manufacturer; however, in order to determine which of its purchases may be tax-exempt, it is first necessary to address the Company's presupposition that it is a manufacturer.

Conn. Agencies Regs. §12-412(34)-1(c) defines "manufacturing" as

an operation or an integrated series of operations that substantially transforms, by physical, chemical or other means, the form, composition or character of raw or finished materials into a product possessing a new name, nature and use which is intended for sale . . . If the transformation is not substantial, the process may only constitute fabrication. In such event the sale, and the storage, use or other consumption, of machinery used directly in such process will not be exempt from sales and use taxes. However, the sale, and the storage, use or other consumption, of materials, tools or fuel used directly in such fabrication in an industrial plant will be exempt from sales and use taxes. . . .

In the case of American Frozen Foods v. Dubno, No. 301353 (Conn. Super. Ct. April 30, 1987), the Connecticut Superior Court addressed the issue of whether the processing of beef carcasses into individual consumer portions of meat by cutting, trimming, wrapping, labeling, weighing and flash freezing constituted manufacturing. The court focused on the key requirements of the definition of manufacturing found in the regulation then in use (Conn. Agencies Regs. §12-426-11b), which requirements are also part of the above-cited regulation now in effect, namely that there be a "substantial" transformation of "form, composition or character" of materials into a product having a "new name, nature and use." The court found that the plaintiff's process fell short of manufacturing.

First, the court determined that the taxpayer's process did not meet the requirement of substantial transformation, concluding, "this Court does not believe that the division into constituent parts in this case results in a substantial change of form of the original beef carcass." Id., at 11. Nor could the court conclude that the result was a product having a new name, nature and use:

The product remains the same article throughout the process. Although the meat goes through a complex series of operations which reduce the meat and make it suitable for individual consumption, no new or different articles have been produced. Moreover, while the operation of the plaintiff may produce individual and distinct names for the various cuts of meat, all these cuts were essential parts of the original product. The essential identity or nature of the meat has not been changed by the plaintiff's operations either. Nor does the use of the final products differ from the use of the original.

Id., at 12.

In the instant case the Company, evidently in an effort to show that a substantial change occurs, and that the final name, nature and use of its product differs from the "raw material," contends that its "manufacturing process" begins with the acquisition of live horses and ends with packaged meat. This contention is insupportable under the regulation. Conn. Agencies Regs. §12-412(34)-1(d) defines "manufacturing production process" as

the activities or series of activities of which manufacturing consists, beginning with the movement of materials, after their receipt, inspection and storage, to the first production machine and ending with the packaging of the manufactured product for its sale to the ultimate consumer. The process does not include activities, such as the weighing, inspection and storage of materials, prior to the movement of materials to the first production machine (the first production stage), and does not include activities, such as the casing and loading of the manufactured product, subsequent to packaging (the last production stage).

It is evident that the Company's process begins no sooner than at the time of the killing of the horse (the first production stage), and does not include the time during which the live animal is "stored" and fed. Upon its slaughter the horse is nothing more than a whole carcass, which is then divided into parts; the Company's activities are therefore indistinguishable from those of the plaintiff in American Frozen Foods, supra, and, under the holding of that case, do not rise to the level of "manufacturing."

The Company also attempts to support its contention that it is a manufacturer by noting that it is classified by the Connecticut Department of Labor as a "manufacturing process." In response to a similar assertion made by the plaintiff in American Frozen Foods, supra, the court said:

Even though an agency of the State of Connecticut perceives the nature of the plaintiff's business as manufacturing, this factor alone is not dispositive of the issue. [Citation omitted.] A mere label of "manufacturing" by a Connecticut state agency does not necessarily mean that business constitutes a "manufacturing" operation [for sales and use tax purposes].

Id., at 17. See also Ziperstein v. Tax Commissioner, 178 Conn. 493, 502 (1979).

Although the Company does not engage in manufacturing, and can therefore purchase none of its machinery tax-exempt under Conn. Gen. Stat. §12-412(34), Conn. Agencies Regs. §12-412(18)-1 provides that certain activities, while not rising to the level of manufacturing, may be "fabrication," and that materials, tools and fuel used in such fabrication may be exempt from sales and use taxes under Conn. Gen. Stat. §12-412(18). Conn. Agencies Regs. §12-412(18)-1(f) states:

"actual fabrication" means an operation or an integrated series of operations that alter or modify a manufactured product or raw materials, whether or not a change in the identity of the product or materials occurs.

The regulation requires further that fabrication must take place in an industrial plant, that the finished products must be intended for sale, and

[the process must be commonly regarded as fabrication. By way of example and not limitation, fabrication includes assembling, cutting, perforating, painting, coating and similar operations. Where materials, tools or fuel are used directly in an industrial plant in the actual fabrication of a finished product to be sold, the sale, and the storage, use or other consumption, of such materials, tools or fuel will be exempt from the sales and use taxes.

Conn. Agencies Regs. §12-412(18)-1(f)(3). "Industrial plant" is defined, at Conn. Agencies Regs. §12-412(18)-1(e)(1), as "an establishment which has actual fabrication . . . as it predominant purpose and that is generally recognized as such.

It appears that the Company's butchering and cutting up of horse carcasses meets the regulatory requirements to be considered "fabrication," even though it is not manufacturing. However, only the materials, tools and fuel used by the Company "directly" in this "actual fabrication" qualify for the tax exemption. Thus, feed and hay, purchased for use prior to actual fabrication, and wrapping and packaging materials, purchased for use after the actual fabrication, are not exempt under Conn. Gen. Stat. §12-412(18).

RULING:

The butchering and cutting up of horse carcasses at a packing plant into portions of meat to be sold for human consumption is not manufacturing, but constitutes the "actual fabrication of a finished product to be sold," for purposes of Conn. Gen. Stat. §12-412(18) and Conn. Agencies Regs. §12-412(18)-1. Hay and feed used to feed animals prior to slaughter are materials used prior to actual fabrication and packaging products used to wrap and package the meat are materials used after actual fabrication, and are not tax-exempt.

LEGAL DIVISION

July 17, 1992