BEFORE THE UTAH STATE TAX COMMISSION
Petitioner ) FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. ) AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 89-0031
UTAH STATE TAX COMMISSION :
) Account No. XXXXX
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Paul F. Iwasaki, Presiding Officer, Joe B. Pacheco and S. Blaine Willes, Commissioners, heard the matter for and on behalf of the Commission.
Present and representing the Petitioner was XXXXX, Attorney at Law. Present and representing the Respondent was XXXXX, Assistant Attorney General.
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 tax.
2. The period in question is XXXXX through XXXXX.
3. Prior to XXXXX, the Petitioner was engaged in the business of the erection of structural steel for buildings. In XXXXX, the Petitioner expanded its operations to include the fabrication of structural steel items as well as erecting the fabricated products.
4. The fabrication of the structural steel took place in a facility located near XXXXX in Salt Lake City. Approximately one year later it was determined that a new facility was required to meet the demand for increased production. In XXXXX, the Petitioner moved to a location located near XXXXX in Salt Lake City.
5. As a result of the move, the Petitioner purchased and leased machinery and equipment for use at its fabrication facility. The machinery and equipment in question consisted of computer operated processing devices, cutting machines, cambering machines, rail trains and other related equipment. Sales tax was not paid on those purchases or leases.
6. The steel purchased by the Petitioner for use in its fabrication and erection needs was purchased through a steel broker located within the state of Utah. No sales tax was paid on that transaction by the Petitioner.
7. The vast majority of contracts entered into by the Petitioner relating to the fabrication and erection of steel products consisted of "furnish and install contracts". That is, the Petitioner would contract with the owner to fabricate the necessary structural steel items and to erect or install those items. In computing the totaL bid price, approximately 75% of the bid price would be allocated to fabrication costs and the remaining 25% would be allocated to erection costs. Very rarely did the Petitioner fabricate structural steel items that it did not also install.
8. During the audit period, the Petitioner performed only two jobs in Utah. Those jobs, while included in the audit deficiency, are not at issue for the purpose of this hearing. The remaining jobs performed by the Petitioner during the audit period were performed on structures located in XXXXX and in XXXXX.
9. The Petitioner has accrued but not yet paid taxes on jobs performed in XXXXX. The State of XXXXX has also assessed sales tax against the Petitioner for those jobs performed in XXXXX and the Petitioner has made payments on such assessments.
10. As a result of the audit conducted upon the Petitioner for the period in question, a sales tax deficiency was assessed by the Auditing Division for the failure of the Petitioner to pay sales tax on machinery purchased or leased for use in its fabrication facility and also for failure of the Petitioner to pay sales tax on its purchases of steel from Utah vendors.
CONCLUSIONS OF LAW
Sales or leases of machinery and equipment purchased or leased by a manufacturer for use in new or expanding operations (excluding normal operating replacements) in any manufacturing facility in Utah are exempt from sales tax.
Manufacturing facility means an establishment described in SIC Code Classification 2000-3999 of the Standard Industrial Classification Manual 1972, of the Federal Executive Office of the President, Office of Management and Budget. (Utah Code Ann. §59-12-104(16).) "Manufacturer" means a person who:
a. Functions within the activities included in SIC Code Classification 2000-3999;
b. Produces a new, reconditioned, or remanufactured product, article, substance, or commodity from raw, semi-finished, or used material; and
c. In the normal course of business, produces products for sale as tangible personal property.
"Establishment" means an economic unit of operation 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 a single physical location, each activity should be treated as a separate establishment. (Utah State Tax Commission Administrative Rule R865-19S-85.)
Sale of tangible personal property to real property contractors and repairmen of real property is generally subject to tax.
The person who converts the personal property into real property is the consumer of the personal property since he is the last one to own it as personal property. (Utah State Commission Administrative Rule R865-19S-58)
DECISION AND ORDER
Utah Code Ann. §59-12-104(16) provides that the sales or leases of machinery and equipment purchased or leased by a manufacturer for use in any manufacturing facility in Utah, which are used in a new operation or to expand operations, are exempt from sales tax. To qualify for such an exemption, the sale or lease must meet several requirements:
1. It must be a sale or lease of machinery or equipment;
2. The machinery or equipment must be used in a new or expanding operation; and
3. The purchaser or lessee must be a manufacturer.
Utah State Tax Commission Administrative Rule R865-19S-85 defines manufacturer as a person who "(a) functions within the activities included in SIC Code Classification 2000-3999; (b) produces a new, reconditioned, or remanufactured product, article, substance, or commodity from raw, semi-finished or used material; and (c) in the normal course of business produces products for sale as tangible personal property."
In the present case, the Petitioner maintains that it is entitled to the manufacturing exemption provided by Utah Code Ann. §59-12-104(16) and Utah State Tax Commission Administrative Rule R86519-85S ("Rule 85S").
Under the facts of this case, the Tax Commission finds that the Petitioner is not a "manufacturer" within the meaning of Rule 85S. In order to meet the requirements of Rule 85S a taxpayer must show that each of the three requirements are met. In the present case, the Tax Commission finds that the Petitioner fails to met subparagraph a and subparagraph c of the rule. Specifically the Petitioner does not function within the actives included sic code classification 2000 - 3999, nor does it in the normal course of business produce products for sale as tangible personal property.
The appropriate SIC classification in which a business should be placed is determined by its primary activity which is conducted by that entity. In the present case, the Petitioner argues that it conducts two activities: 1) fabrication of structural steel items and; 2) the erection of said items. Under general principals where separate economic activities are being conducted, the activity which constitutes the primary activity is determined by measuring the income produced by each activity. That general rule however, is not applicable to the Petitioner's situation.
While the Petitioner's counsel argues that the primary activity being conducted is one of fabrication as measured by the amount of income generated from that function, separating the functions of the Petitioner in that manner is misleading.
As testified to by the President of the company, the vast majority of jobs performed by the Petitioner are bid as furnish and install contracts. Therefore, while the costs may be allocated in the manner as testified to, the income received under those contracts is not independent of one another, nor does the Petitioner produce structural steel items which it sells at the retail level without also being contractually obligated to install those items. Therefore, under the facts of this case, the Commission finds that the Petitioner is not primarily engaged in manufacturing fabricated iron and steel as defined within the SIC manual industry number 3441, but rather they fall with the SIC industry number 1791 "structural steel erection". That industry number consists of special trade contractors primarily engaged in the erection of structural steel.
Even if the Commission were to find that the Petitioner fell within the appropriate SIC code classification, the Petitioner still would not be a manufacturer within the meaning of Rule 85S because it does not, in the normal course of business, produce a product for sale as a tangible personal property.
Because the Petitioner not only manufactures the structural steel items but also installs those items which are incorporated into real property the Petitioner acts as a real property contractor. Therefore, the items which it manufactures are not manufactured for sale as tangible personal property, but rather, are manufactured for use by the Petitioner to be installed and incorporated into real property. Further evidence of this finding is the fact that the Petitioner does not maintain an inventory of steel but rather orders its steel as it obtains contracts. Those items of steel once received by the Petitioner are specifically identified for each project it has and maintained by the Petitioner until fabrication work on them can begin. They are not used for other jobs or other purposes. Clearly then such purposes are made in furtherance of its contracts to improve real property.
The Petitioner also argued that its purchases of steel from its broker were exempt from sales tax as being sales made in interstate commerce. As such, the Petitioner goes on to argue that taxing those transactions is an impermissible burden on interstate commerce and is thus unconstitutional under Article I Section III of the United States Constitution.
While it is true that the steel purchased by the Petitioner in question ultimately made its way to California or Nevada, such a fact in and of itself does not make the sale made in interstate commerce as contemplated under Utah State Tax Commission Administrative Rule R865-19S-44.
As is correctly pointed out by the Respondent in its brief when it cites Rule R865-19S-2, "The tax is not upon the article sold or furnished but upon the transaction". Here, the transaction involved the purchases of steel by a real property contractor from vendors located within the State of Utah. Clearly the taxable transaction occurred within Utah and the Petitioner, as a real property contractor, is the ultimate consumer of the property and thus liable for the sales tax due.
The Petitioner next urges the Commission to retroactively apply the 1989 amendment to Utah Code Ann. §59-12-104(34) which would allow for a sales tax exemption under the facts of the present case. The 1989 amendment exempts:
sales of tangible personal property to persons within this state that is subsequently shipped outside the state and incorporated pursuant to contract into and becomes a part of real property located outside of this state, except to the extent that such other state or political entity impose, a sales, use, gross receipts, or other similar transaction excise tax thereon against which such other state of political entity allows a credit for taxes imposed by this chapter.
A similar argument was raised by the Appellant in Tummurru Trades v. Utah State Tax Commission, 802 P 2d 715 (Utah 1990). There, the Utah Supreme Court, after noting the 1989 amendment, specifically chose not to consider it as ruling statute because the subsection of the Code was amended after the date of issue in that case. Therefore, the Tax Commission similarly rejects the Petitioner's request to apply the 1989 amendment retroactively to the instant case.
Based upon the foregoing, the Tax Commission finds that the Petitioner is not a "manufacturer" within the meaning of Utah State Tax Commission Administrative Rule R865-19S-85 and is therefore not entitled to the exemption provided for by Utah Code Ann. §59-12-104(16). The Commission further finds that the Petitioner, with respect to the purchases in question, operated as a real property contractor and thus is liable for the sales tax due on purchases it made of structural steel items from Utah vendors. The determination of the Auditing Division for the audit period in question is therefore affirmed. It is so ordered.
DATED this 21st day of November, 199l.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes