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American Stores Packing Co. v. Peters, 203 Neb. 76, 277 N.W.2d 544

Facts

American Stores, a division of Acme Markets, Inc., is a meat packer and manufacturer located in Lincoln, Nebraska. The company uses cellulose casings purchased from out-of-state suppliers in the production of skinless frankfurters and certain luncheon meats. Although some glycerine from the casings migrates into the meat during processing, the casings themselves are discarded after use and do not become a component of the final product.

American Stores is a meat packer and manufacturer of finished meat products with a plant located in Lincoln, Nebraska. Its products are sold to retail food markets for ultimate resale to consumers. In the process of manufacturing 'skinless' frankfurters and certain luncheon meats, it uses cellulose casings purchased from makers outside the state and brings the casings into this state for use in the process of manufacture of the mentioned meat products.

Issue

Whether cellulose casings used in the manufacture of skinless meat products are subject to the use tax as they do not enter into or become an ingredient or component part of the finished product.

The issue in this case is whether cellulose casings used in the manufacture of skinless meat products such as frankfurters is subject to payment of the use tax prescribed by section 77-2703(2), R.R.S.1943.

Rule

Where the primary function of tangible personal property is to aid in the production of goods manufactured for ultimate retail sale, the property will not be exempt from the use tax merely because some undetermined fraction of the property is absorbed into the retail product during its manufacture.

Section 77-2703(2), R.R.S.1943, provides in part: 'A use tax is hereby imposed on the storage, use, or other consumption in this state of tangible personal property purchased, leased or rented from any retailer on or after June 1, 1967, for storage, use, or other consumption in this state at the rate set as provided in subsection (1) of this section on the sales price of the property . . . .'

Analysis

The court analyzed the role of the cellulose casings in the manufacturing process and determined that, despite some glycerine migrating into the meat, the casings themselves did not become an ingredient or component part of the finished product. The casings served primarily as a mold and were discarded after use, which indicated that they did not contribute to the final product in a meaningful way.

The evidence pertinent to the issue was introduced by stipulation of the parties and the explanatory testimony of a chemist called by American Stores. The testimony is that, during the vinegar shower, an undetermined amount of the glycerine with which the casing is impregnated, moves by osmosis from the casing into the meat and penetrates the meat slightly.

Conclusion

The Supreme Court affirmed the District Court's decision, concluding that the cellulose casings were subject to use tax as they did not enter into or become an ingredient or component part of the finished meat products.

The Tax Commissioner's determination that the cellulose casing did not enter into or become an ingredient or component part of the meat products within the meaning and purpose of section 77-2702(20), R.R.S.1943, was correct and was properly sustained by the District Court.

Who won?

The State Tax Commissioner prevailed in the case, as the court upheld the tax assessment, determining that the cellulose casings did not qualify for exemption from the use tax.

The Tax Commissioner emphasizes that the casings as such do not enter into or become components or ingredients of the product in any real sense and American Stores is the ultimate consumer of the casings.

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