BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. : AND FINAL DECISION
AUDITING DIVISION OF THE : Appeal No. 92-1270
UTAH STATE TAX COMMISSION, :
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. XXXXX, of XXXXX, represented the Petitioner, XXXXX ("XXXXX" hereafter). XXXXX, Assistant Utah Attorney General, represented Respondent, the Auditing Division of the Utah State Tax Commission ("Auditing Division" hereafter).
Based upon the evidence presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is sales tax.
2. The audit period in question is XXXXX through XXXXX.
3. On XXXXX, the Auditing Division assessed XXXXX with additional sales tax for the period in question in the amount of $$$$$, plus interest. No penalty was assessed.
4. On XXXXX, XXXXX filed its petition for redetermination with the Commission.
5. XXXXX produces sterile "procedure packets" containing surgical products and supplies for sale to wholesalers. Such procedure packets must be sterile to be marketable.
6. XXXXX uses a gas known as ETO ("ethylene oxide") to sterilize its procedure packets. The gas is forced into the procedure packets where it kills any microorganisms present. The gas is then evacuated from the procedure packets, which are sealed and remain sterile until opened. Less than 1% of the ETO remains in the packets. The remaining 99% of the ETO, which is not reusable by XXXXX, is converted to nontoxic ethylene glycol and sold to a local chemical company.
7. XXXXX has not been charged or paid sales tax on its purchases of ETO, nor has it accrued and paid use tax on such ETO.
CONCLUSIONS OF LAW
Utah Code Ann. §59-12-103(1) provides in material part as follows:
There is levied a tax
on the purchaser for the amount paid or charged for the following:
(a) retail sales of
tangible personal property made within the state;
. . . .
(l) tangible personal
property stored, used or consumed in this state.
Utah Code Ann.
§59-12-104 provides in material part:
The following sales
and uses are exempt from the taxes imposed by this chapter:
. . . .
purchased for resale in this state, in the regular course of business, either
in its original form or as an ingredient or component part of a manufactured or
Administrative Rule R865-19S-29.B.
property or services which are purchased by a manufacturer or compounder which
do not become and remain an integral part of the article being manufactured or
compounded are subject to sales or use tax.
"Ingredient" is defined as: something that enters into a compound or is a component part of any combination or mixture. (Webster's New Collegiate Dictionary).
"Component" is defined as: "a constituent part: ingredient. (Webster's New Collegiate Dictionary).
Parties seeking exemptions from taxation bear the burden of proving that they qualify and are legally entitled to the exemption. (Parsons Asphalt Products, v. Utah State Tax Commission, 617 P.2d 397 (1980).)
DECISION AND ORDER
Petitioner seeks exemption from sales and use tax on its purchases of ETO by virtue of the exemption provided by Utah Code Ann. §59-12-104(27). That provision exempts from tax purchases of tangible personal property which are to be used as ingredients or components of a manufactured or compounded product.
Because Petitioner is seeking to qualify for an exemption from tax, it bears the burden of showing that the exemption covers its situation, and the terms of the exemption must be strictly construed. (Parsons Asphalt Products v. Utah State Tax Commission, ibid.)
The substance which is the subject of this appeal, ETO, is a gas used to sterilize Petitioner's product. After the product has been fabricated and placed in its package, the ETO is introduced into the package. The ETO kills any microorganisms present in the package. The ETO is then "pumped" out of the package to the extent possible, leaving the products inside the package in a sterile condition. It is not possible to remove all the ETO from the package. Consequently, approximately 1% of the ETO so used remains in the package.
The language of the exemption upon which Petitioner relies is clear. Purchases of tangible personal property are not subject to sales or use tax if the purchase is for resale. Resale can take the form of a subsequent sale of the tangible personal property in its original form, or as an ingredient or component of a manufactured or compounded product.
While Petitioner contends that the ETO is an ingredient or component of Petitioner's products, the facts indicate otherwise. The ETO is used solely to change the condition of the product from unsterile to sterile. Beyond that, the ETO has no purpose. It is only because of the limitations of the "pumping" process that any ETO remains in Petitioner's product packets. Even at that, the small amount of remaining ETO does not become an ingredient or component of Petitioner's product.
Because the ETO in question is not used as an ingredient or component of Petitioner's product, the Tax Commission finds that Petitioner's purchases of ETO are not exempted from sales or use tax by the provisions of Utah Code Ann. §59-12-104(27), and are therefore subject tax under §59-12-103(1) of such tax and related interest is therefore affirmed. It is so ordered.
DATED this 20th day of April, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes