Sales Tax Slice: Test Tube Chicken: Tax Treatment of Futuristic Food


Chicken

Lab-grown meat production attracted media coverage last week when it was revealed that big name billionaires had signed on as investors. Also known as “clean meat,” this slaughter-free initiative boasts several benefits. In addition to eliminating the foremost ethical concern, it has the potential to cut down on pollution (no greenhouse gas emissions from livestock), use fewer resources than traditional farming (particularly reducing land and water consumption), and promote health (by eliminating antibiotic or hormone use). However, the investors’ collective contribution of $17 million to one such company, Memphis Meats, may not be enough to make this a viable industry just yet. Production costs are still too high to compete with conventional meat prices, as illustrated by the Washington Post’s comparisons. So far, states have not issued sales and use tax guidance addressing the concept, making this an interesting time to consider whether exemptions for research, agriculture, or manufacturing could apply.

Research and development exemptions in particular may have the power to lessen financial burdens for those in the race to a lower price point. In California, where Memphis Meats is based, qualified tangible personal property purchased by qualified persons for use in biotechnology research and experimental development is eligible for a reduced sales tax rate of 3.3125 percent. This partial exemption rate went into effect in 2014 and could possibly already be in use for the production of lab-grown meat. In addition to reducing cost, other goals that clean meat researchers have identified include expanding animal selection (they have already advanced from beef to chicken) and moving toward “‘thicker cuts’” of meat, such as from patties to steak. A sales tax break on items used in this research could help to accelerate bringing clean meat to the consumer market.

The availability of agricultural exemptions varies depending on how states define “farmer” and corresponding farming or agricultural activities. Kentucky, like many states, reserves this exemption for those regularly engaged in the business of producing crops, raising livestock or poultry, producing milk, or breeding certain animals. Purchases of livestock and feed for animals are also generally exempt. Some states limit application to specific animals while others like Nevada are more inclusive, exempting sales of “any form of animal life … the products of which ordinarily constitute food for human consumption.” Co-founder of Memphis Meats Uma Valeti has likened himself to a farmer, as reported by the Financial Times, where he said “[w]e breed those cells that are the most effective and growing—just like a farmer would do with animals,” perhaps indicating that the industry will pursue the tax exemptions available to farmers at some point in the future.

Once the product is ready for market, companies may be interested in exploring exemptions for mass manufacturing. Similar to the analysis above, eligibility will depend on how “manufacturer” and “manufacturing activities” are defined by states. Though this type of exemption often includes several elements, the term “manufacture” generally involves the transformation or conversion of materials into tangible personal property. The clean meat production process currently entails “harvest[ing] meat cells from live animals and grow[ing] those in a lab for between four to six weeks,” according to CNBC. These cells eventually create fibers, which must be manually joined with thousands of other fibers in order to fashion a recognizable form of meat, such as a burger patty. Can these activities be considered manufacturing? While it is important to note that charges for labor are generally excluded from the exemption, it is possible that material and equipment used to facilitate the growth of the cells would qualify.

Though the idea still faces many challenges, it is certainly a creative take on meat sustainability, and it will be interesting to see what positions states adopt if the industry continues to expand.

Continue the discussion on the BBNA State Tax Group on LinkedIn: What is the most fitting exemption for clean meat production? Should states consider providing specific tax benefits for the producers of lab-grown meat?

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