90-1032 - Sales





Petitioner, : FINDINGS OF FACT,






: Account No. XXXXX


Respondent. :



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:


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.


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.)


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.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco S. Blaine Willes*

Commissioner Commissioner