BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX. )
:
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
Respondent :
_____________________________________
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.
ABSENT
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco S.
Blaine Willes
Commissioner Commissioner