BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX, )
:
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. ) AND FINAL DECISION
:
AUDITING
DIVISION OF THE ) Appeal No. 90-0056
UTAH STATE TAX
COMMISSION, :
Respondent. )
_____________________________________
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for worn or outdated machinery.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
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner