BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
XXXXX
Petitioner, : FINDINGS OF FACT,
v. : CONCLUSIONS OF LAW
: AND FINAL
DECISION
AUDITING
DIVISION OF THE :
UTAH STATE TAX COMMISSION, : Appeal
No. 88-2850
Respondent. :
_____________________________________
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.
XXXXX
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.
XXXXX
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
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
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner