BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW
: AND FINAL DECISION
AUDIT DIVISION OF THE :
STATE TAX COMMISSION OF UTAH, ) Appeal No. 88-1551
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for formal hearing on XXXXX. Hearing the matter on behalf of the Commission were R. H. Hansen, Chairman, and Paul F. Iwasaki, Hearing Officer. Present and representing the Petitioner was XXXXX, Attorney at Law. Present and representing the Respondent was XXXXX, Assistant Attorney General.
The Petitioner filed an appeal from a determination by the Auditing Division of the Utah State Tax Commission that disallowed a manufacturing exemption for sales tax on the purchase of an XXXXX by the Petitioner.
Based upon the testimony and evidence presented at the hearing, the Tax Commission makes its:
FINDINGS OF FACT
1. The tax in question is sales and use tax.
2. The amount of tax in question is $$$$$.
3. The audit period is XXXXX through XXXXX.
4. The Petitioner is a Utah Corporation and is primarily a XXXXX firm whose appropriate XXXXX is XXXXX.
5. XXXXX is a division of the Petitioner whose activities are identified as manufacturing activities within XXXXX codes XXXXX to XXXXX of the XXXXX Manual.
6. Although it is a separate division of the Petitioner, XXXXX is not a separate legal entity apart from the Petitioner. XXXXX is a XXXXX of the Petitioner.
7. XXXXX produces XXXXX and XXXXX, XXXXX, and XXXXX.
8. Although a division of the Petitioner, XXXXX maintained separate facilities and operations from the Petitioner including separate offices, separate repair facilities, storage yards, manufacturing facilities, office and accounting personnel, production personnel, billing and collection systems, accounting records, inventories, purchasing, and accounts payable systems.
9. Of the XXXXX manufactured by XXXXX, approximately XXXXX to XXXXX of the XXXXX was purchased from XXXXX by the Petitioner for use in their XXXXX projects. The remaining XXXXX to XXXXX was sold to outside parties.
10. In July of XXXXX, XXXXX purchased an XXXXX for the sum of $$$$$. The purposes of the purchase of the new XXXXX were to expand XXXXX's XXXXX capacity; to be able to more efficiently produce different XXXXX required by bid specification; to improve its competitive position in the XXXXX production business; and to meet projected increased demand for XXXXX products from outside parties other than the Petitioner.
11. The projected increased demand for XXXXX products did not materialize. Instead, demand for XXXXX decreased, thus resulting in an under utilization of the XXXXX.
12. During the audit period the Petitioner also purchased a XXXXX which the Auditing Division found to meet requirements for a manufacturing exemption.
13. The basis for the different treatment by the Auditing Division accorded the XXXXX and the XXXXX purchased by the Petitioner was the Auditing Division's position that the XXXXX produced by XXXXX was purchased primarily by outside users other than the Petitioner, whereas the vast majority of the XXXXX produced by XXXXX was sold to the Petitioner rather than outside parties.
14. The sales made by XXXXX to the Petitioner were done on a competitive bid basis. XXXXX quoted prices to the Petitioner when the Petitioner had a XXXXX project requiring XXXXX, XXXXX, XXXXX or XXXXX and the Petitioner was free to accept bids from others if a better price could be obtained and did so on occasion.
CONCLUSIONS OF LAW
Sales or leases of machinery and equipment purchased by manufacturers for use in new or expanding operations in any manufacturing facility in Utah are exempt from sales taxes (Utah Code Ann. §59-12-104(16) 1953).
As used in §59-12-104 "manufacturer" means a person who: (a) functions within the activities included in SIC code classification 2000 through 3999; (b) produces a new, reconditioned, or remanufactured product, articles, substance, or commodity from raw, semifinished, or used material; (c) in the normal course of business produces products for sale as tangible personal property. Utah State Tax Commission Administrative RuleR865-19S-85(A)(4).
DECISION AND ORDER
In the present case, Respondent first argued that the manufacturing exemption of §59-12-104(16) does not apply because the Petitioner does not meet the definition of "manufacturer" as defined in RuleR865-19S-85 (Rule 85S), which would require the Petitioner to function within the activities included in XXXXX through XXXXX. The Respondent contended that although XXXXX's activities fell within such a classification, XXXXX was not a separate legal entity and was merely a division of the Petitioner. The Respondent argued that the real party in interest seeking the exemption was XXXXX and XXXXX's activities were outside the required XXXXX codes.
The Respondent's interpretation of that provision of Rule 85S is unduly restrictive. Relevant portions of that Rule state:
"manufacturer" means a person who (a) functions within the activities included in SIC code classification 2000 through 3999; . . . (emphasis added).
The Rule does not require an exclusive functioning within the XXXXX code classifications specified. It is enough that a portion of the manufacturer, which purchased or leased the machinery and equipment sought to be exempt, functions within the appropriate code classifications. The Respondents seemed to recognize this when they allowed XXXXX a manufacturing exemption on the purchase of the concrete plant by XXXXX. In that case, the Respondent was satisfied that XXXXX was a manufacturer functioning within the activities included in XXXXX code classification XXXXX through XXXXX.
The Respondent next argued that the purchase of the XXXXX was not exempt because they failed to meet the third requirement of the definition of manufacturer under Rule 85S. That portion of the Rule states:
"manufacturer" means a person who: (c) in a normal course of business produces products for sale as tangible personal property.
Respondent interpreted that portion of Rule 85S to require retail sales to outside parties. The Respondent maintained that the sale of asphalt from XXXXX to XXXXX were not sales within the meaning of the Rule, but were merely 'intercompany transfers."
The Tax Commission in XXXXX v. Auditing Division, appeal no. 87-1056, issued an informal decision based on facts similar to those in the present case. In XXXXX the Petitioner, a business engaged primarily in highway construction, purchased an XXXXX plant. The purpose was to provide its own supply of XXXXX for use in its XXXXX business. More than 95% of the XXXXX produced was consumed by the Petitioner. The remaining small percentage was sold to outside parties.
Based upon the facts in XXXXX, the Tax Commission held that the manufacturing exemption did not apply because the normal course of business of the facility was not the production of XXXXX for resale.
The present case is easily distinguished from XXXXX. Here, the purpose of the purchase of the XXXXX was to meet an anticipated increase in demand of the product from internal and outside sources. Additionally, in the present case the amount of sales to outside parties is significantly more then in XXXXX. Such sales would have been even greater if demand had increased as expected.
Based upon these facts the exempt status of the XXXXX should not be negated by an unforeseen change in economic conditions which substantially diminished the amount of sales of XXXXX that the Petitioner made to outside parties.
The Respondent contended that even if XXXXX sold some of its products to outside customers, the Commission must look at the predominant use to which the XXXXX was being put. In support of this, the Respondent referred to Rule 85S(a)(5) in its brief stating "Each activity should be treated as a separate establishment where distinct and separate economic activities are performed at a single physical location." From that, the Respondent argued that the predominant activity of the XXXXX was to use the XXXXX in its XXXXX business.
The Respondent's interpretation of Rule 85S(a)(5) is not well taken. That provision of the Rule deals with the definition of establishment. The Rule states:
'Establishment' 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 single physical location, each activity should be treated as a separate establishment.
In the present case, the XXXXX in question does not perform more than one economic activity. There is but one economic activity being performed at the XXXXX in question and that economic activity is the production of XXXXX. The Rule does not require further division of that activity into sales to outside parties and sales to XXXXX.
Because the Petitioner has shown that it; (a) functions within the activities included in XXXXX code classification XXXXX through XXXXX; (b) produces a new, reconditioned, or remanufactured product, article, or substance, or commodity from raw, semifinished or used material; and (c) in the normal course of business produces products for sale as tangible personal property, the purchase of the XXXXX is exempt from sales tax under §59-12-104(16).
Based on the foregoing, the Utah State Tax Commission hereby finds that the purchase of the XXXXX by the Petitioner is exempt from sales tax as provided for by §59-12-104(16), and that the determination of the Auditing Division which found a sales tax deficiency related to the purchase of that XXXXX is reversed.
DATED this 27 day of February, 1990.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis