Did the historical interstate-food exemption cover ice used to cool poultry before packaging, sharp-freezing, storage, and shipment?

Plain-English summary

California concluded that ice used in poultry cooling tanks was part of processing before packing and shipping, not exempt packing or transportation ice. The birds were slaughtered, cleaned, eviscerated, cooled for at least eight hours or to 40 degrees, dried, packaged, sharp-frozen, and stored for one to 120 days before shipment.

Even for turkeys eventually shipped interstate, further steps remained after the cooling-tank use. The historical exemption was strictly construed and did not cover processing or storage merely because interstate shipment followed later. The letter recommended redetermination without adjustment.

That was a staff recommendation after a preliminary hearing, not a supplied final Board decision. The sellers conceded that approximately half the audited ice sales were taxable, but the exact amount had not been determined.

Petitions, audit concession, and processing facts

The letter addresses multiple redacted taxpayers that had petitioned for redetermination after audits disallowed deductions for ice sales to one redacted poultry processor. It says the only question in each matter was whether certain ice sales qualified under former section 6359.5. The petitions, preliminary-hearing record, audit schedules, resale certificates and tax computations are absent.

The processor slaughtered, packed and sold poultry in interstate and intrastate commerce. The sellers conceded ice connected with intrastate poultry was taxable and estimated that concession at about 50 percent of the ice sales treated as taxable in audit, but the exact amount remained undetermined.

The source describes live birds being slaughtered, cleaned, inspected, eviscerated, washed, graded and packed into ice-filled cooling tanks. The cited federal rules required them to remain there at least eight hours or until their internal temperature was reduced to the source's stated at least 40 degrees F. Counsel understood the pre-May 1, 1958 audit-period procedure to be substantially the same as the later regulated process, but no audit period or supporting records are supplied.

After cooling, birds spent at least 19 minutes on a drip line; the processor used about 30 minutes. They then entered the packing room, where each was weighed and placed in a plastic bag marked with weight, sex, grade and the USDA inspection stamp. Interstate birds went into master packages holding two or more, were sharp-frozen, and remained in storage for one to 120 days before shipment.

Sellers' arguments, strict construction, and recommendation

The processor purchased the ice from the various taxpayer-sellers under resale certificates. Each seller deducted its ice sales from gross receipts and challenged the audit disallowance. They argued that ice connected with interstate storage should be exempt because section 6359.5 was incidental to section 6359. They also argued cooling followed rather than formed part of processing, citing former 7 CFR section 81.50(a)'s direction that prepared or processed poultry be cooled immediately after processing.

Associate Tax Counsel John H. Murray rejected both positions. He treated the cooling as a necessary prelude to freezing and packing because a bird frozen warm might not freeze completely and could spoil. Citing Good Humor, he strictly construed the exemption and read it as limited to ice used in packing and shipping or transporting, not storage.

Counsel further reasoned that the ice was outside the exemption because product steps still remained before shipment. He recommended that the Board redetermine the tax without adjustment and invited the sellers to request an oral Board hearing if they disagreed. No election, hearing, order or final liability appears.

Live annotation and source differences

The live 400.0360 annotation retains the pre-sharp-freezing use, one-to-120-day storage period, strict exemption reading and remaining-product-steps test. It refers to current section 6359.7, while the 1959 source quotes former section 6359.5.

The live annotation also retains the source's reasoning that joining shipping or transporting to packing with and shows a narrow meaning, whereas a broad meaning would have used disjunctive or.

The live summary omits poultry and turkeys, the multiple petitions and preliminary hearing, resale certificates and deduction disallowance, approximate 50-percent concession, federal cooling and drip-line details, packaging labels and master packages, both seller arguments, Good Humor, recommendation posture, hearing offer and missing final action.

The official three-page PDF has a clean rendered text layer and only a small seal image. Both fresh downloads and extractions matched, and the original-text tail remains byte-identical after removal of only pdftotext's terminal newline and form feed. The sole case citation, Good Humor Company v. State Board of Equalization, independently resolves at the printed 152 Cal.App.2d 873.

What this means for you

Poultry processors and ice sellers

Map exactly where ice enters the production, packing, freezing, storage and delivery sequence. A later interstate shipment did not convert this earlier cooling-tank use into packing-and-shipping ice under the historical analysis.

Accountants and tax professionals

Reconcile interstate and intrastate quantities, certificates, deductions, production records, storage days and shipping documents. The source's approximate concession and recommendation do not establish a final taxable measure.

Common questions

Did USDA-required cooling become exempt packing?

No. The opinion treated it as a necessary prelude to packaging and freezing.

Did eventual interstate shipment make the cooling ice exempt?

No.

Was storage ice covered?

No. The historical exemption was not read to cover food storage.

Did the opinion cover intrastate poultry?

The parties conceded ice associated with intrastate shipments was taxable.

How much of the audited ice was conceded taxable?

Approximately 50 percent of the ice sales considered taxable in audit, but the source says the exact amount had not been determined.

What happened after staff recommended no adjustment?

The sellers could request an oral Board hearing. The source supplies no request, hearing, final decision, payment or refund outcome.

Does the live annotation use the same statute number as the 1959 source?

No. It substitutes successor section 6359.7 for the source's former section 6359.5 while retaining the source's and-versus-or explanation.

Citations and references

• Former California Revenue and Taxation Code sections 6359 and 6359.5 — historical food and ice exemptions discussed and section 6359.5 quoted
• California Revenue and Taxation Code section 6359.7 — current section named by the live annotation, not the supporting source
• Former 7 CFR part 81 and section 81.50(a) — poultry inspection, cooling and after processing language described or quoted
• Good Humor Company v. State Board of Equalization, 152 Cal.App.2d 873, 879 — strict construction of tax exemptions cited; the printed reporter resolves to the named case
• Taxpayers, processor and petitions; preliminary-hearing record; resale certificates; audit period and schedules; ice-sale total and exact conceded amount; poultry, ice, customer and shipment records; invoices and prices; tax measure and rate; determinations; Board-hearing election; payment; claim; refund and final action — described or implicated but not included

Verbatim support

From the official March 11, 1959 letter:

The exemption must be limited by its terms, and, accordingly, cannot be considered as exempting ice used in the storage of food products.

In its broadest meaning, the word “packing” could include all steps in the preparation of the article which is packaged. But in Section 6359.5, the Legislature used the word in a narrower sense. This is apparent from the joining of “shipping or transporting” with “packing” by the conjunction “and”. If the broad meaning were intended, the disjunctive “or” would have been used. Thus, the exemption applies to ice used in “packing and shipping”, and it is limited to ice used in connection with both packing and shipping; where, as here, the ice is used and thereafter something remains to be done to the product prior to the shipping, the exemption is inapplicable.

For foregoing reasons, we shall recommend to the Board that the tax be redetermined without adjustment. If you disagree with the conclusions and desire an oral hearing before the Board, please advise us and we shall schedule the petitions for such a hearing.

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Live annotation: Annotation 400.0360
• Original supporting opinion: 400.0360 PDF

Original ruling text

400.0360

STATE OF CALIFORNIA

STATE BOARD OF EQUALIZATION

March 11, 1959

Attention: X-------Re:

X---------

Gentlemen:
We have considered the information presented at the preliminary hearing in support of the petitions for redetermination filed on behalf of the above taxpayers. It is our understanding that the only question involved in each of the above matters is whether certain sales of ice to [X] were exempt from tax under Section 6359.5 of the Sales and Use Tax Law. The facts concerning the use of the ice, as presented at the preliminary hearing and in petitions for redetermination are as follows:
[X] is engaged in the business of slaughtering, packing, and selling poultry in interstate and intrastate commerce. The poultry is brought to [X] plant where it is slaughtered, cleaned, eviscerated, packed, sharp-frozen and placed in cold storage until the poultry is shipped. It is conceded that ice used in connection with poultry shipped intrastate is not exempt under Section 6359.5, but you contend that the exemption applies with respect to ice used in connection with turkeys, which are eventually shipped in interstate commerce. We understand that approximately 50% of the ice sales considered taxable in the audit are conceded to be taxable. The exact amount has not been determined. The processing procedure required by the Department of Agriculture under its “Regulations Governing the Inspection of Poultry and Poultry Products,” 7 CFR Pt. 81, effective May 1, 1958, is followed by [X]. From the information given, it appears that [X]’s processing procedure during the audit period and prior to the effective date of the Department of Agriculture regulations was substantially the same as that now being followed. The birds are delivered to [X] alive. They are slaughtered, cleaned, inspected, eviscerated, washed, graded and packed in cooling tanks. The ice in question is used in these tanks. The U.S.D.A. regulations require that the birds remain in the ice for a minimum of eight hours, or until the internal temperature is reduced to at least 40 degrees F. Thereafter the birds are removed from the ice and put on a drip line to dry. They remain on the drip line for a minimum of 19 minutes, but, in the process used by [X] approximately 30 minutes. The drip line conveys the birds into the packing room, at which point they are weighed and put into plastic

[X]

-2-

March 11, 1959
400.0360

bags on which is marked the weight, sex, and grade of each bird together with the U.S.D.A. inspection stamp. The birds which are to be shipped in interstate commerce are put into master packages containing two or more. The birds are then sharp-frozen and stored until shipment, which may be from one to 120 days after freezing. While the cooling of the birds prior to packaging and freezing is now required by U.S.D.A. regulations, the reason for this precooling is to lower the body temperature of the birds so that they may be frozen solid. It is a necessary prelude to packing because, if a bird is frozen while warm, the interior may not freeze completely and there may be spoilage. The ice in question was purchased by [X] from the various taxpayer under resale certificates. In reporting for sales tax purposes, each taxpayer claimed these sales as a deduction from gross receipts. This deduction was disallowed in the audits. It is your contention that the ice used in the cooling tanks is exempt from tax under Section 6359.5 to the extent that the birds cooled in those tanks are shipped in interstate commerce. Section 6359.5 provides as follows: “As incidental to the exemption provided for in Section 6359, there are exempted from the taxes imposed by this part, the gross receipts from the sale of and the storage, use, or other consumption in this State of ice or dry ice used or employed in packing and shipping or transporting food products for human consumption between a point or points within and a point or points without this State.” You contend that:

1. Since 6359.5 by its terms is incidental to the exemption under 6359, ice used
   in connection with storage of food products should be considered as exempt.
2. The ice used in the cooling tanks is used or employed in the packing of the
   birds and not in the processing, and that the processing of the birds is complete prior to the time they are placed in the tanks as is indicated by U.S.D.A. Regulation 81.50 (a) which provides in part as follows: “All poultry that is prepared or processed in the official establishment shall be cooled immediately after processing so that the internal temperature is reduced to 40 degrees F or less…” From the provision, you conclude, it is apparent that the processing must be completed before the poultry is placed in the cooling tanks and, therefore, the cooling must be a part of the packaging.

[X]

-3-

March 11, 1959
400.0360

The exemption contained in Section 6359.5 must be considered in the light of the wellestablished rule that exemptions from taxes are to be strictly construed against the taxpayer. Good Humor Company vs. State Board of Equalization, 152 Cal. App. 2d 873, 879. The exemption contained in Section 6359.5 is for ice used or employed in “packing and shipping or transporting food products” under certain conditions. The exemption must be limited by its terms, and, accordingly, cannot be considered as exempting ice used in the storage of food products. In its broadest meaning, the word “packing” could include all steps in the preparation of the article which is packaged. But in Section 6359.5, the Legislature used the word in a narrower sense. This is apparent from the joining of “shipping or transporting” with “packing” by the conjunction “and”. If the broad meaning were intended, the disjunctive “or” would have been used. Thus, the exemption applies to ice used in “packing and shipping”, and it is limited to ice used in connection with both packing and shipping; where, as here, the ice is used and thereafter something remains to be done to the product prior to the shipping, the exemption is inapplicable. For foregoing reasons, we shall recommend to the Board that the tax be redetermined without adjustment. If you disagree with the conclusions and desire an oral hearing before the Board, please advise us and we shall schedule the petitions for such a hearing. Very truly yours,

John H. Murray
Associate Tax Counsel
JHM:o’b
cc:

Fresno – Administrator