BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW
: AND FINAL
DECISION
AUDIT DIVISION
OF THE :
STATE TAX
COMMISSION OF UTAH, ) Appeal No. 88-1551
Respondent. :
_____________________________________
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.
ABSENT
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner