- Washington State Supreme Court Gives Meaning to "Processing Perishable Meat Products" -- Refund Opportunities May be Available
- January 20, 2005
- Law Firm: Perkins Coie LLP - Seattle Office
On January 13, the Washington Supreme Court reinstated a trial court judgment awarding a B&O tax refund to Agrilink Foods, Inc. (n/k/a Birds Eye Foods, Inc.), concluding a nearly 15-year battle over the proper tax rate applicable to the company's chili-making activities. Agrilink Foods, Inc. v. Washington Department of Revenue, Docket No. 74478-5. In its unanimous opinion, the Supreme Court expressly held (as had the trial court) that Agrilink's processing of raw beef into chili con carne unambiguously fell within the plain language of the tax rate imposed on, among other things, "processing perishable meat products."
Throughout the litigation several issues of statutory construction were contested. Both parties claimed that the statute unambiguously supported their position and disagreed as to what principles would apply if the statute were ambiguous. The trial court judgment expressly held that if the statute had been ambiguous, Agrilink would still prevail under the principle that ambiguous tax statutes must be construed against the taxing authorities and in favor of the taxpayer. In a footnote at the end of its opinion, the state Supreme Court affirmed that holding as well, stating "were we to conclude that RCW 82.04.260(4) is ambiguous, Agrilink would then be entitled to the general presumption that ambiguous tax statutes must be construed in favor of the taxpayer." Interestingly, at trial the Department of Revenue had not disputed the application of that principle, other than to assert that the statute is not ambiguous. On appeal the Department claimed for the first time that, if ambiguous, the statute should be treated as a deduction or exemption and construed against the taxpayer merely because it imposes tax at a rate lower than that imposed in other tax classifications.
The current dispute had its origins in a 1991 refund claim based on application of the tax rate for processing perishable meat products. In 1997 the Department settled Agrilink's claim on favorable terms, and the company thereafter began reporting its chili-making activities as processing perishable meat products. In 1999, during an audit the Department asserted that the classification was not applicable and that Agrilink should pay tax at the higher rate applicable to general manufacturing. At trial, the Department's primary theory was that chili con carne is not a meat product because it is not pure meat but also contains non-meat ingredients. The trial court flatly rejected that argument, expressly holding that chili is a meat product. The Department did not appeal that holding. The Department's other argument at trial had been that it was not sufficient that Agrilink process perishable meat products; it must also sell perishable meat products. The statute identifies four different activities that qualify for the tax rate: "slaughtering, breaking, and/or processing perishable meat products and/or selling the same at wholesale." The trial court expressly held that the statutory term "and/or" is disjunctive, so a taxpayer qualifies for the rate as long as it performs any one of the four listed activities. The Department did not appeal this holding either.
At the Court of Appeals, the Department relied on a number of new arguments it had not asserted at trial, chief among them that the phrase "processing perishable meat products" only applies to activities that result in a perishable end product. Despite expressly acknowledging that the plain meaning of the statutory term processing "includes subjecting perishable meat to a special process that converts it into nonperishable (canned) meat," the Court of Appeals nevertheless proceeded to conclude that the phrase requires a perishable end product. In reversing the Court of Appeals and reinstating the Superior Court's judgment, the Supreme Court noted that the Department's "continued reliance on the strained reasoning is unavailing."
An issue impacting a broader group of companies, but not technically addressed by the court, is whether someone that processes a perishable meat product into a non-perishable product out of state and sells it in Washington is entitled to the lower rate on the wholesale sales. Taxpayers with such an issue and currently paying at the wholesale rate should consider whether a refund claim is appropriate. However, caution is advised. There are many open issues and there is a risk that a flurry of refund claims might cause the Department to seek a retroactive legislative change. Therefore, we encourage a managed approach to any refund claims.