BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW
: AND FINAL DECISION
AUDITING DIVISION OF THE :
UTAH STATE TAX COMMISSION, : Appeal No. 88-2850
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Hearing the matter on behalf of the Tax Commission were Joe B. Pacheco, Commissioner, Roger O. Tew, Commissioner, Paul F. Iwasaki, Hearing Officer, and G. Blaine Davis, Commissioner and Presiding Officer. Present and representing the Petitioner were XXXXX and XXXXX, attorneys for the Petitioner. Present and representing the Respondent was XXXXX, Assistant Attorney General.
The matter before the Commission involved a deficiency assessment for sales and use tax for the period XXXXX through XXXXX as determined by the Auditing Division of the Utah State Tax Commission. That audit was consolidated with the Petitioner's claim for refund for sales and use tax dated XXXXX.
After a prehearing conference held before the Commission on XXXXX, the remaining issues to be determined by the Commission at the formal hearing involved the Petitioner's allegation that its purchase of certain items of personal property were exempt from sales and use tax pursuant to Utah Code Ann. §59-12-104(28).
Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is sales and use tax.
2. The audit period in question is XXXXX through XXXXX.
3. Petitioner is engaged in the business of manufacturing XXXXX and XXXXX related products in a XXXXX process located near XXXXX, Utah.
4. The XXXXX manufacturing process consists of the melting and refining of XXXXX. The XXXXX is placed in XXXXX which, when loaded, weigh approximately XXXXX. The buckets are dumped into XXXXX furnaces. XXXXX, which are suspended above the furnace roof, are then lowered into the furnace and charged with electricity. This charging process creates intense heat which in turn melts the XXXXX.
5. The XXXXX utilized by the Petitioner consists of three sections connected by XXXXX which form a column. Each section of the XXXXX is approximately XXXXX pounds, cylindrical in shape, XXXXX inches in diameter, XXXXX inches in length and composed of XXXXX.
6. As the XXXXX melts, the XXXXX themselves become consumed by the XXXXX. Approximately 55% of the XXXXX become a part of the final product.
7. The introduction of the XXXXX into the XXXXX provides the XXXXX with XXXXX which is essential in the manufacturing of XXXXX.
8. Approximately 41% of the XXXXX content of the final XXXXX product comes from the XXXXX introduced from the XXXXX consumed. The remaining percentage comes from XXXXX raisers or the XXXXX found in the items of XXXXX used in the melting process.
9. The consumption of the XXXXX in the melting process is unavoidable and necessary in that the Petitioner relies upon the XXXXX content of the XXXXX as a source of XXXXX for the final XXXXX product.
10. XXXXX pipes utilized by the Petitioner are XXXXX pipes approximately one inch in diameter which vary in length. The XXXXX pipes are used by the Petitioner to inject oxygen into the furnace as well as to open a tap hole in the furnace.
11. Because of the intense heat to which the XXXXX pipes are exposed, the XXXXX pipes melt and become a part of the XXXXX. Approximately 75 to 100 pounds of XXXXX pipe are consumed during each charge.
12. The stirring XXXXX used by the Petitioner is a steel pipe, 1.9 inches in diameter, composed of iron and surrounded by a 3.55 inch layer of ceramic material. The stirring XXXXX is used to inject XXXXX and XXXXX into the XXXXX metal thus removing unwanted ingredients. Because of the extreme temperature of the XXXXX, the stirring XXXXX melt and become a part of the XXXXX.
13. The XXXXX utilized by XXXXX in its manufacturing process are cylindrical in shape, varying from 11.8 to 70.8 inches in length, varying from 14.9 inches to 27.1 inches in diameter and composed of iron. The cost of the XXXXX range from $.49 to $5.23 per pound. Each XXXXX is used to produce between XXXXX and XXXXX tons of XXXXX. XXXXX are used by XXXXX (a) to reduce the size and shape of billets to form the desired finished products; and, (b) when their usefulness is depleted, as an XXXXX source for its products.
CONCLUSIONS OF LAW
Property purchased for resale in this state, in the regular course of business, and resold either in its original form or as an ingredient or component part of a manufactured or compounded product is exempt from sales or use tax. (Utah Code Ann. §59-12-104(28)
DECISION AND ORDER
In the present case, there are four categories of items of personal property that the Petitioner maintains should be exempt from sales and use taxes under the provisions of §59-12-104(28). They are as follows: (1) XXXXX; (2) XXXXX; (3) XXXXX; and (4) XXXXX. Because of the unique nature and use to which each type of property is put, they will be discussed separately.
Section 59-12-104 ( 28 ) has three elements which must be met before that exemption can be applied. The property must be: (1) purchased for resale; (2) in the regular course of business; and (3) either in its original form or as an ingredient or component part of a manufactured product. The Tax Commission in prior cases has held this to require inquiry as to the primary purpose for which the item was purchased.
It is against those three elements and the prior cases that each category of property in the present case is analyzed.
With respect to elements two and three of §59-12-104(28), there is no dispute that the different items of personal property in question were purchased in the regular course of business and that they became an ingredient of the steel that was manufactured. That is in issue, however, is whether those items were purchased for resale and whether the primary purpose for which they were purchased was to become an ingredient of the final product.
Respondent argued that because less costly sources of XXXXX were available to the Petitioner for use in the manufacturing of XXXXX, the motivation of the Petitioner in purchasing the XXXXX was not economically sound. Therefore, the Respondent argued the motivation for the Petitioner's use of the XXXXX must be other than that of purchasing the XXXXX as a source of XXXXX.
Although it may be true that less expensive sources for XXXXX may have been available to the Petitioner, it does not necessarily follow that the use of the XXXXX as a XXXXX source could not be one of the primary factors in the purchase of those items.
The use of XXXXX in an XXXXX furnace is essential just as XXXXX is an essential element of XXXXX. Here, Petitioner has found and purchased an item that serves both purposes.
The XXXXX created the heat necessary to melt the XXXXX and in the process, were consumed by the very XXXXX it was creating. The XXXXX then provided approximately 41% of the XXXXX content of the finished steel, thus reducing the amount of XXXXX required from other sources. From this set of facts and circumstances, it is clear that the XXXXX serve two essential purposes in the manufacturing of XXXXX. Therefore, one of the primary purposes for which the XXXXX were purchased was as an ingredient of the manufactured product.
Although the use to which the XXXXX and XXXXX ("pipes" and "lances") were put were different, the basis for their claimed exemption by the Petitioner are the same. Therefore, they will be discussed together.
The Petitioner contended that the pipes and lances were intended to be used to inject XXXXX into the furnace and XXXXX into the XXXXX and were also intended to be an XXXXX source for its products.
There is no question that the pipes served the purpose of injecting XXXXX and XXXXX during the refining phase. There are, however, real doubts that such items were intended to be a source of XXXXX in the XXXXX making process at the time they were purchased by the Petitioner. Although both parties stipulated that such were the intentions of the Petitioner, those assertions must be measured against the actual use to which the items were put and a determination must be made to see what the primary purposes were.
Under the facts and circumstances surrounding the use of the pipes and lances, it is not accepted that a primary purpose for their purchase was as a source of XXXXX in the XXXXX manufacturing process. While it is true that as the pipes and lances melted, and became a part of the finished product, there was insufficient showing this was anything more than an unavoidable consumption of the pipes that occurred when they were used in performing their essential functions. Furthermore, there was no showing that the slight amount of XXXXX the pipes contributed to the XXXXX was anything more than a fortuitous, incidental consequence, rather than an essential element upon which the success of the final product was dependent.
Therefore, under the analysis used in the prior cases, the Tax Commission finds that the primary purpose for the use of lance pipes and stirring lances was to XXXXX during the XXXXX process and that the parts of the rods which ultimately became a part of the finished product was merely an incidental use of those items.
XXXXX are cylindrical, XXXXX rollers through which the billets of hot XXXXX pass to be reduced and shaped into the final product.
The Petitioner argued that because particles of the XXXXX fuse with the billets as they pass through or flake off as scale, and because the XXXXX are eventually scrapped and used as an XXXXX source for the making of XXXXX, their purchase should be exempt from sales tax.
Here again, the Tax Commission finds that the primary and only purpose for the purchase of the XXXXX was their use as XXXXX and not as a component part of the finished product. The gradual erosion of the XXXXX into the XXXXX billets was so minute and insignificant that it cannot be reasonably said that the Petitioner intended and relied upon that phenomena to occur in the making of its final product.
The argument that the XXXXX are used as scrap and, therefore, should be exempt is equally unpersuasive. It is only after the XXXXX have eroded to the point that their usefulness as XXXXX is gone that they are then utilized as an XXXXX source. At that point, it only makes economic sense that they are "recycled" and used as scrap rather than disposed of without recovering any residual value they might have.
If one were to accept the Petitioner's argument, then anything purchased by the Petitioner which contained XXXXX could be purchased tax exempt simply because the item could be scrapped once it had outlived its usefulness, was obsolete, or was beyond repair. This would include (as the Respondent's brief quite correctly points out) anything from a typewriter to train cars.
Based upon the foregoing, the Tax Commission finds that the purchase of the XXXXX by the Petitioner is exempt from sales or use tax as provided for by Utah Code Ann. §59-12-104(28). The purchase of the XXXXX pipes, XXXXX lances, and XXXXX, however, is not exempt from sales or use tax.
The Auditing Division is hereby ordered to amend its audit in accordance with this decision. It is so ordered.
DATED this 7 day of June, 1990.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis