BEFORE THE UTAH STATE TAX
COMMISSION
__________________________
XXXXX
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 90-1032
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. Alan Hennebold, Presiding
Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was
XXXXX, of the law firm of XXXXX.
Present and representing the Respondent was XXXXX, Assistant Utah
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.
Petitioner is in the business of owning and operating retail XXXXX. It completed construction on several XXXXX
in Utah during the period XXXXX through XXXXX (the "applicable
period").
4.
Petitioner paid the full amount of Utah sales tax upon the purchase during the
applicable period of certain items of machinery and equipment for use in its
XXXXX and now seeks a refund of those sales taxes in the amount of $$$$$, plus
interest.
5.
Petitioner timely filed two refund claims for respective quarters within the
applicable period to recover the sales taxes described above. Following denial of those refund claims,
Petitioner timely filed two Petitions for Redetermination with the Utah State
Tax Commission, which Petitions have been consolidated in this action.
6.
In addition to selling XXXXX, the XXXXX offer "XXXXX" for customers
through specialized departments located within the XXXXX which provide XXXXX
products or services, including XXXXX.
7.
During the applicable period, Petitioner installed the above referenced
machinery and equipment into XXXXX departments ("XXXXX departments")
of all of its newly constructed and some of its previously built XXXXX in Utah,
including XXXXX and similar and related items, each of which is used in the
XXXXX process.
8.
The XXXXX departments each are staffed by personnel trained in those specialty
areas and are segregated from the XXXXX portion of the stores in easily
identifiable locations. XXXXX personnel
are employed by Petitioner and are identified as such.
9.
Each of the XXXXX departments is centrally managed through a specialized
management structure operated at the corporate level of Petitioner. Corporate management personnel perform the
following in connection with each XXXXX Department: financial audits, physical
inspections, hiring and firing employees, preparation, analysis and monitoring
of accounting and financial data, selection of products to be made and sold, purchase
price of final products and marketing and display of final products.
10.
Each XXXXX department has its own cash register for ringing up sales, provides
its own profit and loss statement, establishes its own budget, is expected to
operate on its own as a profit center.
However, purchases from the XXXXX departments can also be made at the
XXXXX regular check-out stands.
11.
The machinery and equipment purchased for each XXXXX department is tangible
personal property, does not at any time become an improvement to real property
and has a useful economic life exceeding XXXXX years.
12.
Many of the activities performed in Petitioner's XXXXX upon XXXXX and other
unfinished products are a continuation of activities or processes begun at
Petitioner's XXXXX, Utah facility in making or enhancing that XXXXX and other
unfinished products.
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. (Utah Code Anno.
§59-12-104(15).)
"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
Anno. §59-12-104(15).)
"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. (Utah State Tax Commission
Administrative RuleR865-19S-85.)
"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
The
Respondent concedes that Petitioner's XXXXX departments meet all but two of the
requirements of §59-12-104(16) for exemption from sales tax. The two elements remaining in dispute are
the XXXXX departments' status as "manufacturing facilities", and
their status as manufacturers".
Petitioner's purchases of machinery and equipment are exempt from sales
tax only if its XXXXX departments meet the definition of both those terms.
The
term "manufacturing facility" is defined by §59-12-104(16) as
"an establishment described in SIC Codes 2000 through 3999 of the Standard
Industrial Classification Manual of 1972." The Commission's RuleR865-19S-85(A)(5) defines establishment as:
...an economic unit of operations 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 location, each activity should be treated
as a separate establishment. (Emphasis
added)
Petitioner
argues that each XXXXX department is a separate economic unit of operation and
the parties have submitted a stipulation to that effect. However, the parties also stipulate that
"Petitioner is in the business of owning and operating XXXXX" where
"in addition to selling XXXXX, the XXXXX offer 'XXXXX' for customers
through specialized departments".
At the hearing in this matter, it was also established that items
selected from the XXXXX departments can be purchased through the XXXXX stands. XXXXX department staff are Petitioner's
employees and are identified as such.
While certain organizational and accounting divisions exist between the
XXXXX departments and the XXXXX, the Commission does not consider such
divisions to be sufficient to render the XXXXX departments separate economic
units. Instead, the Commission
concludes the XXXXX departments are a part of the larger economic unit, the
XXXXX, in which they are located.
Because the SIC classification for supermarkets, 5411, is not included
in SIC Codes 2000 through 3999, XXXXX are not "manufacturing
facilities" and do not qualify for exemption from sales tax under
§59-12-104(15).
Assuming
for purposes of discussion that Petitioner's XXXXX departments area separate
economic units, the Petitioner's claim for exemption would still fail. As noted above, only those establishments
which are a "manufacturing establishment", functioning in activities
described in SIC codes 2000 through 3999," are exempt from sales tax. Petitioner argues that its XXXXX Departments
do, in fact, function in such activities.
For example, its XXXXX departments to some extent manufactures XXXXX
from XXXXX as described in SIC Code 2013.
However, SIC Code 2013 further states that "establishments
primarily engaged in the cutting up and resale of XXXXX are classified in trade
industries." As another example,
Petitioner argues its XXXXX department functions in activities described in SIC
Code 2051 by "manufacturing" XXXXX and other XXXXX products. However, SIC Code 2051 further states that
"Establishments producing bakery products primarily for direct sale on the
premises to household consumers are classified in Retail Trade, Industry
5462." Thus, even if Petitioner's XXXXX departments were separate
establishments, their proper classification under the SIC code system is in
activities related to retail trade, and not in the manufacturing codes of 2000
through 3999 for which the statute allows exemption from sales tax.
The
Tax Commission has concluded the Petitioner's XXXXX departments do not qualify
as manufacturing establishments within the meaning of §59-12-104(16).
Because
of that conclusion, it is not necessary to discuss in detail Petitioner's
contention that those departments are manufacturers, which is the second
element in controversy in this case. The
analysis of this decision regarding the XXXXX departments' qualifications as
"manufacturing facilities" would also result in a determination that
the departments are not manufacturers.
Based
upon the foregoing, the Tax Commission finds that Petitioner's XXXXX
Departments do not meet the requirements for exemption from sales tax liability
set forth in Utah Code Anno.
§59-112-104(16). The Tax
Commission therefore affirms the determination of the Audit Division denying
Petitioner's request for refund. It is
so ordered.
DATED
this 16th day of September, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco S.
Blaine Willes*
Commissioner Commissioner