BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. ) AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 90-0056
UTAH STATE TAX COMMISSION, :
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Paul F. Iwasaki, Presiding Officer, 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 and use tax.
2. The audit period in question is XXXXX through XXXXX.
3. The Petitioner operates five stores in the Salt Lake City area which provide printing and duplicating services. Four of those stores are within a one block radius of each other. The fifth is located approximately ten blocks away from the other four.
4. Of the five stores, one is considered to be the central plant. That store houses three offset printers which service the printing needs for all of the stores. In addition to the printing presses, the central store also has a high speed duplicating machine which is commonly referred to, albeit inaccurately, as a "photo copying machine." Each of the other stores also has a high speed duplicating machine.
5. The Petitioner employs the use of two motor vehicles which make pick ups and deliveries between each store and the central plant throughout the day.
6. The four "satellite" stores are located at their various sites primarily for the convenience of the public. In the event that a job is placed with them which is outside of their capability to produce, the above described vehicles pick up that order and take it to a location which is capable of completing the job.
7. During the audit period, the Petitioner leased, tax exempt, several high speed, high volume duplicating machines for use in its business. The machines were leased to expand the Petitioner's business by increasing production capacity and not as replacements for worn or outdated machinery.
8. During the audit period, the Petitioner also purchased several laser printers and XXXXX computers used to drive the laser printers. Those items were purchased tax exempt. The laser printers are primarily used to create a high quality original from which multiple copies are made either by offset printing or through high speed duplicating machines. Approximately 10% of the work generated through the computers and laser printers is the creation of making high quality multiple copies not to exceed 25 copies.
9. In addition to copying and printing services, the Petitioner also provides binding services at each of the five locations. The type of binding available, however, may vary from store to store. For example, the central store where the offset printing presses are located, has a huge collator, a huge paper cutter, and a three-spindle drill that none of the other stores have. When that type of service is needed, the work is sent to the central store.
10. When calculated on a number of impressions basis, approximately 75% of the number of impressions generated by the Petitioner's overall business is performed by the offset printers. The remaining 25% is generated by the high speed duplicators. When calculated on a revenue basis, however, the amount of revenue generated by the offset printers and the high speed duplicators is approximately equal. This is due to the fact that the Petitioner charges his customers more for high speed duplicator work than for offset printing work.
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 RuleR865-19S-85.)
DECISION AND ORDER
In the present case, there is no question that the high speed duplicating machines are equipment or machinery, and there is no question that the high speed duplicators were purchased with the intent to expand the Petitioner's operation.
The issue before the Commission is whether or not the Petitioner is a "manufacturer" within the meaning of Utah Code Ann. §59-12-104(16) and Utah State Tax Commission Administrative RuleR865-19S-85.
Utah State Tax Commission Administrative RuleR865-19S-85 defines a 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."
The Respondent contends that the Petitioner's activities do not fall within the requisite SIC Code Classification. The Respondent contends that the activities of the Petitioner fall within SIC Code Classification number 7332 or 7339 as either "establishments primarily engaged in reproducing drawings, plans, maps, or other copy by blueprinting or photocopying" (SIC Code Classification 7332), or as "an establishment primarily engaged in furnishing stenographic services; and reproduction services other than printing, blueprinting and photocopying, and reproduction in connection with direct mail advertising." (SIC Code Classification 7339.)
The Petitioner argued that its activities fell within SIC Code Classification number 2752, "Commercial Printing, Lithographic." That industry number classification includes establishments which are primarily engaged in printing by the lithographic method.
In properly assigning the Petitioner's business an industry code, the Commission turns to the SIC manual for guidance in making that determination. The Standard Industrial Classification Manual, 1972, states:
Each establishment is assigned an industry code on the basis of its primary activity, which is determined by its principal product or group of products produced or distributed, or services rendered. Ideally, the principal product or service should be determined by its relative share of value added at the establishment. In practice, however, it is rarely possible to obtain this measure for individual products or services; typically, it is necessary to adopt some other criterion which may be expected to give approximately the same results in determining the primary activity of an establishment." Id. at page 12.
The SIC manual goes on to state that for manufacturing, the data measure which should be used in determining its principal product is the value of production, and for services, the data measure used should be the value of receipts or revenues. Applying the above data measures to the case at hand, it is apparent that the Petitioner's business, when taken as a whole, functions within SIC group number 2752 "Commercial Printing, Lithographic." That classification applies to establishments primarily engaged in printing by the lithographic process and includes offset printing, photo-offset printing, and photolithographing. It should be noted that because of the variety of the types of printing jobs the Petitioner performs, it could conceivably fall within a number of SIC classification numbers, however, all of them would be within the SIC major group 27 category.
Although the Petitioner's overall business functions within the requisite SIC Classification, each of the Petitioner's stores must be classified according to the activities performed there. This is required by Utah State Tax Commission Administrative RuleR865-19S-85, which states:
"Establishments" 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."
In the present case, the Petitioner maintains five separate stores which are physically located apart from each other. Therefore, one must examine the activities that are being performed at each of those locations to determine whether or not qualifying activities are taking place. After so doing, it is clear that at the four locations where there are no printing presses located, the predominant activities do not fall within SIC Code Classification 2000-3999 because no printing activities are conducted there. The Tax Commission finds that the appropriate SIC Code Classification for those establishments is 7332 "Blueprinting and Photocopying."
The Petitioner claimed that the term "photocopying" as used in the industry, refers to a specific process by which reproductions or duplications are made. Petitioner goes on to argue that the high speed duplicators used by it at its several locations utilizes a duplication method referred to as "Xerography" and not photocopying. Therefore, the Petitioner argues, it does not fall within SIC industry number 7332 which encompasses establishments primarily engaged in reproducing drawings, plans, maps or other copy by blueprinting or photocopying.
The Tax Commission is not persuaded by the Petitioner's argument. The Tax Commission finds that the term "photocopying" as used in the SIC manual is a generic term which includes the reproduction or duplication of copy by both photocopying and xerography methods. This is based upon the fact that nowhere in the SIC manual is there a specific group or industry classification for xerography services, nor is the term xerography used.
Even if one were to accept the Petitioner's position that because it does not make reproductions by photocopy, its services would nevertheless fall within SIC industry number 7339 "Stenographic Services; and Reproduction Services, not elsewhere classified." That category covers establishments which are primarily engaged in furnishing stenographic services; and reproduction services other than printing, blueprinting and photocopying, and reproduction in connection with direct mail advertising.
Based upon the foregoing, the Tax Commission finds that the lease of the high speed duplicating machines and the purchase of its personal computers and laser printers which are used by the Petitioner at its central store are exempt from sales and use tax, and further, that the leases of the high speed duplicating machines and the purchase of the personal computers and laser printers used at its satellite stores are not exempt from sales and use tax. The Auditing Division is ordered to amend its audit in accordance with this decision. It is so ordered.
DATED this 27 day of February, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis