Sales and Use Tax
BEFORE THE UTAH STATE TAX COMMISSION
PETITIONER, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW,
Petitioner, ) AND FINAL DECISION
v. ) Appeal No. 00-0964
AUDITING DIVISION OF )
THE UTAH STATE TAX ) Tax Type: Sales and Use Tax
) Judge: Phan
R. Bruce Johnson, Commissioner
Jane Phan, Administrative Law Judge
For Petitioner: PETITIONER REP
For Respondent: Susan Barnum, Assistant Attorney General
Gil Naisbitt, Tax Audit Manger
Scott Smith, Auditing
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on June 5, 2001. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Petitioner is appealing an assessment of additional sales and use tax made by Respondent for the audit period of January 1, 1997 through December 31, 1999. The Statutory Notice of the assessment was dated April 25, 2000. The additional tax assessed was $$$$$. Interest calculated to the date of the Statutory Notice was $$$$$.
2. Petitioner is appealing only the portion of the audit assessment that pertains to the March 1997 purchase of equipment, an oven and proofer, purchased for use at Petitioner's newly opened business located on XXXXX Street. The issue in this appeal is whether or not the purchases of these items of machinery and equipment are exempt from sales tax pursuant to the manufacturers' exemption set forth in Utah Code Ann. '59-12-104(15).
3. In 1997 Petitioner, who had other locations at that time, opened a new business location on XXXXX Street. At the XXXXX Street location a retail, PRODUCT shop was at the front of the building where PRODUCTS were sold for immediate consumption either on or off the premise. In the rear portion of the building was a production facility. This is where the items of equipment at issue in this appeal were placed into service. Generally the retail business operated during the day while the production facility operated during the night and early morning hours.
4. The XXXXX Street production facility produced the PRODUCTS which were sold at retail at the front of the XXXXX Street location. It also produced PRODUCTS which Petitioner sold on a wholesale basis and PRODUCTS which were sold at Petitioner's STREET location. Petitioner's representative testified that the XXXXX Street production facility produced from 4000 to 4500 PRODUCTS daily. Of this less than 1000 were sold at the XXXXX Street retail location. Some 300 to 400 were sold wholesale to hotels and other businesses. The remainder were produced for sale at Petitioner's STREET retail location. At the time the equipment was purchased there was no formal system of invoicing between the XXXXX Street production facility and the STREET location.
5. During the audit period Petitioner was organized as a limited liability company and all the retail locations and the XXXXX Street production facility operated under this one legal entity. They used the same bank accounts. Petitioner maintained different cost centers for each store. There was only one payroll. However, separate employees worked the retail side of the XXXXX Street operation from the employees who worked the production side.
6. Petitioner's PRODUCT production and PRODUCT retail sales activities at its XXXXX Street operation consisted of one single unit of economic operation.
7. A large majority of the PRODUCTS produced at the XXXXX Street operation were shipped to other retail locations and were not sold on the premises. The XXXXX Street operation was primarily engaged in the manufacture of PRODUCTS which were not sold on the premises.
The issue presented to the Commission in this appeal is whether or not Petitioner's XXXXX Street operation is a manufacturing facility and meets the other requirements of the manufacturers' exemption set out at Utah Code Ann. '59-12-104 (15) so that Petitioner is exempt from sales tax on purchases of the subject oven and proofer. The statute provides a sales tax exemption to manufacturers who purchase machinery and equipment if the following requirements are met: 1) the equipment is used in a qualifying manufacturing facility in the state; 2) the equipment is used in a new or expanding operation; and 3) the machinery and equipment purchased is used in the manufacturing process, has an economic life of three or more years and is used to manufacture an item sold as tangible person property.
It is not disputed that Petitioner meets the requirements of numbers 2 & 3 listed above. The issues before the Commission are whether Petitioner is a qualifying manufacturer and whether or the equipment is used in a qualifying manufacturing facility.
"Manufacturer" is defined as a person who functions within the activities included in SIC codes 2000-3999 of the 1987 Standard Industrial Classification Manual, of the Federal Executive Office of the President, Office of Management and Budget ("SIC"). Utah Administrative Rule R865-19S-85(4). "Manufacturing facility" is defined as an "establishment" described in SIC Codes 2000 to 3999. Utah Code Ann. Sec. 59-12-102(12)(1997). "Establishment" was defined as an economic unit of operations that is generally at a single physical location in Utah where qualifying manufacturing activities are performed. The rule goes on to indicate that where distinct and separate economic activities are performed at a single physical location each activity should be treated as a separate establishment. Utah Administrative Rule R865-19S-85(5) 
The first step of this analysis is to determine which portion of Petitioner's business constitutes the "establishment." From the factual evidence presented the Commission cannot find evidence of two distinct and separate economic activities, thus, the entire XXXXX Street operation including both the retail and production activities is a single establishment.
The second step is to determine whether the "establishment," including both activities together, fits with the specified SIC codes so as to qualify as a "manufacturing facility." To qualify it must fit with SIC codes 2000 to 3999. Respondent suggests that Petitioner fits under SIC 5812, which describes "establishments primarily engaged in the retail sale of prepared food and drinks for on-premise or immediate consumption." SIC Code 5461 also may be applicable as it is for establishments primarily engaged in the retail sale of bakery products. If at the XXXXX Street "establishment," Petitioner sold 10% or less of its product wholesale and the rest retail during the audit period, Petitioner would clearly fit within SIC 5461 and would not qualify for the exemption. However, Petitioner provided evidence at the Formal Hearing, which had not been provided to Respondent earlier in the proceedings, that the vast majority of the PRODUCTS produced at the defined "establishment" were shipped to Petitioner's STREET location where they were sold at retail. Since the STREET Store is a separate physical location from the XXXXX Street store it can be considered a separate establishment. SIC Code 2051 describes establishments "primarily engaged in manufacturing" fresh or frozen bread and bread-type products and specifically mentions PRODUCTS. It goes on to state, "Establishments producing bakery products primarily for direct sale on the premises to household consumers are classified in Retail Trade, Industry 5461." From the reading of the SIC codes it appears to make a difference whether Petitioner sold its PRODUCTS produced at the XXXXX Street location at retail on the premises, or whether Petitioner sold the PRODUCTS at a different location to retail consumers.
Utah Code Ann. '59-12-104 (Supp. 1997) states in pertinent part:
The following sales and uses are exempt from the taxes imposed by this chapter:
. . .
(15) (a) the following purchases or leases by a manufacturer on or after July 1, 1995:
(I) machinery and equipment:
(A) used in the manufacturing process;
(B) having an economic life of three or more years; and
(I) to manufacture an item sold as tangible personal property; and
(II) in new or expanding operations in a manufacturing facility in the state;
. . .
"Manufacturing facility" is defined at Utah Code Ann. '59-12-102(12) (1997) as follows:
an establishment described in SIC Codes 2000 to 3999 of the 1987 Standard Industrial Classification Manual of the Federal Executive Office of the President, Office of Management and Budget:
. . .
Utah Administrative Rule R865-19S-85 (Supp 1994), effective March 14, 1994 through July 2, 1997, states in pertinent part:
A. 5. AEstablishment@ means an economic unit of operations that is generally at a single physical location in Utah where qualifying manufacturing activities are performed. Where distinct and separate economic activities are performed at a single physical location, each activity should be treated as a separate establishment.
. . . .
CONCLUSIONS OF LAW
1. The amendment to Utah Administrative Rule R865-19S-85(5) which had an effective date of July 3, 1997, is not applicable to the determination of whether Petitioner qualified for the sales tax exemption. The Commission must apply the rule in effect at the time of the purchases. In this case the purchases at issue occurred prior to the effective date of the rule.
2. The Commission has made a factual determination that the XXXXX Street operation including both the production and retail portions was one single "establishment." However, the Commission has also determined that, taken as one establishment, it was primarily engaged in manufacturing PRODUCTS. As an establishment primarily engaged in manufacturing PRODUCTS which are not sold on the premises, Petitioner's XXXXX Street establishment is a manufacturing facility pursuant to the descriptions set out in the 1987 Standard Industrial Classification Manual, SIC Code 2051.
3. Petitioner's purchase of the subject equipment qualifies for exemption from sales tax pursuant to the manufacturers's exemption provided in Utah Code Ann. '59-12-104 (15).
DECISION AND ORDER
Based upon the foregoing, the Tax Commission abates the portion of the audit assessment which pertains to the sales tax on the March 1997 purchase of the oven and proofer. Interest is to be adjusted accordingly. It is so ordered.
DATED this 20th day of August , 2001.
Administrative Law Judge
BY ORDER OF THE UTAH STATE TAX COMMISSION:
The Commission has reviewed this case and the undersigned concur in this decision.
DATED this 20th day of August , 2001.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson
For Clarity and convenience the manufacturers= exemption will be referred to at Utah Code Ann. '59-12-104(15). In 1998 and 1999 the subsections of Utah Code Ann. '59-12-104 were renumbered and the manufacturers= exemption was moved to '59-12-104(14).
This is the rule that was in effect at the time of the purchase of the equipment at issue. The rule was subsequently amended and the amendment was effective as of July 3, 1997. However, it is the Commission's position that since the purchase occurred prior to the effective date of the amended rule, the amended rule would not be applicable.
If there was both a Amanufacturing@ and a Aretail@ establishment at the State Street location, the equipment in question would also qualify.