BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX
XXXXX
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 92-1270
UTAH STATE TAX COMMISSION, :
:
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. 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:
. . . .
(27) property
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
compounded product.
The Commission's
Administrative Rule R865-19S-29.B.
provides:
Tangible personal
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.
ABSENT
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco S.
Blaine Willes
Commissioner Commissioner