Appeal from the Order of the Board of Finance and Revenue in the case of In Re: Kirks Milk Products, Inc., Docket No. R-1610.
Sherill T. Moyer, with him Frank A. Sinon, Rhoads, Sinon & Hendershot, for petitioner.
Robert Patrick Coyne, Deputy Attorney General, for respondent.
President Judge Crumlish and Judges Wilkinson, Jr., Mencer, Rogers, Craig, Williams, Jr. and Palladino. Judges Blatt and MacPhail did not participate. Opinion by President Judge Crumlish. Judges Wilkinson, Jr. and Rogers dissent. This decision was reached prior to the expiration of the term of Judge Wilkinson, Jr.
[ 58 Pa. Commw. Page 230]
Kirks Milk Products, Inc., appeals from a Board of Revenue and Finance determination that the production of skim milk powder and buttermilk powder does
[ 58 Pa. Commw. Page 231]
not constitute "manufacturing"*fn1 or "processing"*fn2 within the capital stock tax exemption. We reverse.
The stipulated facts follow: Kirks Milk Products, Inc. (Taxpayer) is a Pennsylvania corporation engaged in the storage, production, and wholesale-retail purchase and sale of milk, cream, butter, cheese and, for our purposes, buttermilk powder and skim milk powder. The taxpayer's total powdered dairy products output, approximately 91% powdered skim milk and 9% powdered buttermilk, is sold at wholesale and constitutes $566,008 and $54,041, respectively, of
[ 58 Pa. Commw. Page 232]
$1,763,880 in total gross receipts*fn3 for the tax period, November 1, 1973 through October 31, 1974.
Filing its Capital Stock Tax Report to reflect tax liability of $207.11, taxpayer asserted that buttermilk and skim milk powders were produced through "manufacturing," concluded that receipts therefrom were derived from the use of exempt assets, and reported its tax liability based only upon its non-manufacturing gross receipts or the raw milk purchased and resold at wholesale. However, the Department of Revenue settled the capital stock tax liability in the amount of $1,201.48 by denying exempt status for certain assets and adding in gross receipts for skim milk powder, buttermilk powder, and cream to taxable assets.
Since the sole question involved in this case is whether Taxpayer's production of buttermilk powder and skim milk powder constitutes "processing" or "manufacturing" for purposes of exemption under Article VI of the Tax Reform Code of 1971, a discussion of the legal background will be followed by a detailed review of the production process.*fn4
[ 58 Pa. Commw. Page 233]
It was said in Commonwealth v. Weiland Packing Co., 292 Pa. 447, 450, 451, 141 A. 148, 149, that 'the process of manufacture brings about the production of some new article by the application of skill and labor to the original substance or material out of which such new product emerges. If however there is merely a superficial change in the original materials or substances and no substantial and well signalized transformation in form, qualities and adaptability in use, quite different from the originals, it cannot properly and with reason be held that a new article or object has emerged -- a new production been created.' Nor it is of legal significance in this connection that the operations thus conducted require large and extensive plants and organizations, trained men and intricate machinery, for even though the labor be skilled, the operations delicate, a large plant involved, and expensive machinery ...