87-3228 to 87-3230 - Sales





Petitioners, :


AUDITING DIVISION OF THE : Appeal Nos. 87-3228


Respondent. :



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.


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.


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.



R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner