BEFORE THE STATE TAX
COMMISSION OF UTAH
_____________________________________
XXXXX
Petitioners, :
v. : INFORMAL DECISION
AUDITING
DIVISION OF THE : Appeal Nos. 87-3228
UTAH STATE TAX COMMISSION, : to
87-3230
Respondent. :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for an informal hearing on
XXXXX. James E. Harward, Hearing
Officer, heard the matter for and in behalf of the Tax Commission. XXXXX appeared representing the
Petitioners. Petitioner XXXXX were also
present. XXXXX appeared representing
the Respondent.
Petitioners
are farmers in XXXXX County, Utah whose primary crop is potatoes. The farm acreages under cultivation for
potatoes range from 120 to 5000 acres.
Potatoes at harvest are dug from the soil and placed in environmentally
controlled storage cellars located on the farm until sold. When the potatoes are sold, they are graded
and shipped from the storage
cellar to the various purchasers, usually
warehouses or processing plants. The
environmental controls require heavy use of electricity. Until XXXXX, the electricity consumed by the
Petitioners was exempt from sales tax.
The
Respondent concluded that the electricity use was not an exempt sales because
the potatoes had moved from the production stage to "warehousing,"
which is not exempt as sales of tangible personal property used or consumed
primarily and directly in the farming operation. In addition, the Respondent determined that the electricity
consumed was for distribution or sales of farm products, and was therefore not
exempt.
The
Petitioners argued that the transportation of the potatoes from the harvesting
field to the storage cellar on the farm is still in the production phase. The potatoes have not been sold, they have
not left the farm, and are simply placed in the storage cellars until such time
as they can be sold. The potatoes are
stored in bulk; they are not warehoused, packaged, cleaned, or sorted, which is
typical after sale.
DISCUSSION
The
question before the Commission is whether or not the storage of the harvested
potatoes in environmentally controlled storage cellars is outside of the
agricultural production phase, or is still within the production phase which
would allow an exemption from taxation for the electricity used.
The
Tax Commission Auditing Division has relied heavily upon two Attorney General's
Opinions Letters, 69-107 and 70-104.
These letters basically contradict each other.
The
first letter states that agricultural is not a commercial use, and the second
broadly defines "commercial consumption" as including agricultural
uses. Attorney General's Opinion Letter
70-54 finds that the electricity used in a greenhouse is not exempt from sales
tax. The opinion letter does not go to
the extent of determining that a greenhouse is a farm. Neither opinion letter is directly on
point. The current statute defines
"commercial consumption" as including agricultural uses; therefore,
the distinction in the first opinion letter is mute. Further, the second opinion letter does not discuss farming or
farm operations as it relates to the consumption of electricity. Utah Code Ann. §59-12-103(1)(c) requires
sales tax to be collected upon the commercial consumption of electricity, heat,
coal, fuel, etc. That tax is to be
collected and paid unless specifically exempted by statute. Utah Code Ann. §59-12-104(22) provides for
an exemption from sales tax of "tangible personal property used or
consumed primarily and directly in farming operations." The Respondent has argued that once a
product is harvested from the field, it no longer falls within the farming
operation and is into the chain of events called "processing." Because it is no longer in the farming
operation, any electricity used in its storage is not exempt from
taxation. The Respondent further argues
that because the potatoes have been harvested and placed in storage for sale
they fall within the exception to the exemption in Subparagraph 22(b) which
provides that sales of "tangible personal property used in any activities
other than farming, such as office equipment and supplies, the equipment of
supplies used in sales or distribution of farm products, . . ." and is
therefore not exempt.
The
Commission recently decided an ad valorem property tax exemption case regarding
an exemption for farm equipment and machinery.
In that case, the Commission found that the distinction between
production and processing is the appropriate line whereby the exemption should
be applied, or not applied.
The
Tax Commission finds similar arguments persuasive in this case. The production
of the potatoes includes the planting, raising, and harvesting of the
potatoes. Once the harvest is completed
the exemption ends. Therefore, if the
Petitioners have harvested their potatoes and are simply holding them in
storage until such time as the market conditions are right for sale then an
exemption is not allowed.
Based
upon these conclusions, the Tax Commission finds that the Petitioners are not
entitled to an exemption on the electricity used and consumed in the air
conditioning of the storage facilities on the property of the Petitioners.
DECISION AND ORDER
Based
upon the foregoing, it is the decision and order of the Utah State Tax Commission
that the request of the Petitioner be denied.
It is so ordered.
DATED
this 4 day of October, 1988.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
ABSENT
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner
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