BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. ) AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 93-1636
UTAH STATE TAX COMMISSION, :
) Account No. XXXXX
Respondent. ) Tax Type: Sales & Use
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX. Joe B. Pacheco, Commissioner, and G. Blaine Davis Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was Mr. XXXXX, Attorney at Law, together with Mr. XXXXX, Manager of Petitioner. Present and representing Respondent was Mr. XXXXX, Assistant Attorney General, together with Mr. XXXXX, from the Auditing Division.
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 period in question is XXXXX through XXXXX.
3. The Petitioner was originally incorporated as a business on XXXXX, with the purposes of manufacturing beer for retail sales, as well as selling food, souvenirs, and other beverages. In XXXXX, Petitioner converted from a corporation to a limited liability company, but Petitioner operated as a single corporation during the entire period that is at issue in this proceeding.
4. During the years in question, XXXXX was a retailer of food, souvenirs, beer, ale, and other fermented malt beverages.
5. The beer, ale, and other fermented malt beverages which are sold by Petitioner are produced on the premises.
6. The business operation of Petitioner including the production of the beer, ale and other fermented malt beverages, occurs at XXXXX, XXXXX, Utah.
7. At the premises of Petitioner, it has a lease on the entire building, but it operates primarily from the main floor and the basement. On the main floor of the building, is an area where the beverages are brewed, and that area is walled off but has glass windows so that the customers of Petitioner can look into the brewery and see the activities and see the large brewing kettles that sit in those facilities. There is a XXXXX with appropriate seating which is directly in front of the windows to view the XXXXX area. There is also a kitchen for the preparation of food, an additional bar in front of the kitchen, and other areas for tables and customers, including a dining room, large XXXXX, waiters station, and restrooms. The basement of the building contains additional brewing areas, offices, mechanical rooms, restrooms, storage areas and preparation areas.
8. Pursuant to the Bureau of Alcohol, Tobacco, and Firearms Regulations on the operation of breweries, specifically 27 C.F.R. 25.25, the XXXXX physically segregates the brewery premises from its retail premises.
9. During the audit period, the XXXXX operated as one corporate entity with two cost centers for purposes of accounting. One cost center was the brewing functions, and the other cost center was the food and retail function.
10. During the audit period, XXXXX had licenses for the following purposes:
(a) Utah Department of Alcohol and Beverage Control, to operate an on-premise beer license for the storage, sale and consumption of beer.
(b) Utah Department of Alcohol and Beverage Control, to operate as a brewery allowing the manufacture, storage and distribution of beer.
11. In the audit years in question, the percentage of total revenues which XXXXX earned from the retail sale of beer ranged between 38.95% and 41.49%. No beer was sold at wholesale. The balance of XXXXX=s revenues for the audit years was approximately 1.7% to 7.24% for souvenirs, and approximately 52% to 58% for the retail sales of food.
12. During the audit years in question, XXXXX filed beer tax returns with the Utah State Tax Commission in which XXXXX listed itself as a manufacturer.
13. When Petitioner commenced its operations, it had the capacity to brew approximately XXXXX of brew per year, and it has increased its capacity to approximately XXXXX per year. The brewery employs approximately XXXXX full-time equivalent employees, and the restaurant employs approximately 90 additional individuals, many of whom are employed on a part-time basis. The restaurant employees do not perform any functions or services within the brewery.
14. Most of the beer which is brewed on the premises of the XXXXX is consumed on those premises. Less than 10% of the beer is sold in kegs or other forms to permit it to be taken from the premises.
15. Natural gas is received through two separate meters, one meter for the brewery, and one meter for the restaurant and bar facility.
16. Water is received through two separate water meters, one for the brewery and one for the restaurant and bar facility.
17. Electricity is received for all services at the location of Petitioner, including the brewery, restaurant and bar facility through one single meter.
18. There is only one telephone number for the facility, and there are not separate telephones or telephone numbers for the brewery, restaurant, or bar facility.
19. While Petitioner maintains that the brewery is a separate cost center from the restaurant and bar facility, there is only one financial statement prepared on the total business. Separate profit and loss statements are not prepared for the different "cost centers."
20. Petitioner maintained only one Federal employers identification number until the creation of the limited liability company, which occurred after the audit period in question.
21. The Petitioner maintains only one local business license, and the fee for that license is based upon a base fee, plus a fee for the number of employees, plus an additional amount based upon the number of seats, the vending machines, and the soft drink machine fees for the business.
22. Almost all of the beer which is sold is drawn at the bar in the restaurant, and the beer sales and restaurant sales are merged together on all government filings.
23. When the Petitioner started the brewery business, it purchased machinery and equipment for the purposes of brewing the beer. Petitioner maintains that the purchase of such machinery and equipment was exempt from sales and use tax as machinery and equipment purchased or leased by a manufacturer for use in new or expanding operations pursuant to the provisions of '59-12-104(15), Utah Code Ann., as amended. It is the position of Respondent that the purchase of such machinery and equipment did not qualify as an exempt sale or lease pursuant to that statute, primarily because the facility of Petitioner is not a manufacturing facility and is not an establishment described in SIC codes 2,000 to 3,999 of the 1987 Standard Industrial Classification Manual of the Federal Executive Office of the President, Office of Management and Budget.
24. The parties have stipulated that:
"If XXXXX=s activities took place at a physical location different from retail activities, this machinery and equipment would be exempt from sales tax."
25. The Petitioner maintains that the brewery is a manufacturing function and part of the manufacturing division of the SIC codes, and that it should be classified in SIC code no. 2082 and 2083. SIC code 2082 is for malt beverages, and states that it is for "establishments primarily engaged in manufacturing malt beverages." SIC code classification 2083 is for malt, and states that it is for "establishments primarily engaged in manufacturing malt or malt by-products from barley or other grains."
26. Respondent maintains that the total function of Petitioner is one of Retail Trade, Division G as defined in the SIC codes 5812 for eating places and 5813 for drinking places for acholic beverages. That definition specifically states:
"Also included in retail trade are establishments primarily engaged in selling, to the general public, products produced on the same premises from which they are sold, such as bakeries, candy stores, ice cream parlors, and customer tailors." (Emphasis added).
The general definition of retail trade, in division G of the SIC Code Classification Manual, includes the following definitions:
"This division includes establishments engaged in selling merchandise for personal or household consumption and rendering services incidental to the sale of the goods."
The statement continues:
"The establishment is usually a place of business and is engaged in activities to attract the general public to buy; .... the establishment may process its products, but such processing is incidental or subordinate to selling;".
The statement also continues:
"For the most part, establishments engaged in retail trade sell merchandise to the general public for personal ... consumption."
The definitions continue:
"Processing incidental or subordinate to selling often is conducted at retail stores. For example, restaurants prepare meals, and meat markets cut meat. Separate establishments selling merchandise for personal or household consumption which has been manufactured by other establishments of the same company are classified in retail trade."
27. The Respondent therefore maintains that as part of the retail group, Petitioner's business is an eating and drinking place and should be classified under SIC code 5812 as an eating place, or 5813 as a drinking place (alcoholic beverages). In the definitions for those areas the general definition includes the following statement:
"This major group includes retail establishments selling prepared foods and drinks for consumption on the premises; and also lunch counters and refreshments stands selling prepared foods and drinks for immediate consumption. Restaurants, lunch counters, and drinking places operated as a subordinate service facility by other establishments are not included in this industry, unless they are operated as leased departments by outside operators.
The definition for eating places states:
"Establishments primarily engaged in the retail sale of prepared food and drinks for on-premise or immediate consumption." (Emphasis added).
28. The statement for drinking places (alcoholic beverages) states:
"Establishments primarily engaged in the retail sale of alcoholic drinks, such as beer, ale, wine, and liquor, for consumption on the premises. The sale of food frequently accounts for a substantial portion of the receipts of these establishments." (Emphasis added).
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
"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 Rule R865-19s-85.)
Utah Code Ann. '59-12-104(16) provides that the sales or leases of machinery and equipment purchased or leased by a manufacturer for use in any manufacturing facility in Utah, which are used in a new operation or to expand operations, are exempt from sales tax. To qualify for such an exemption, the sale or lease must meet several requirements:
1. It must be a sale or lease of machinery or equipment;
2. The machinery or equipment must be used in a new or expanding operation; and
3. The purchaser or lessee must be a manufacturer. Utah State Tax Commission Administrative Rule R865-19S-85 defines manufacturer as a person who "(a) functions within the activities included in SIC Code Classification 2000-3999;
4. A manufacturing facility must be one that is devoted to manufacturing activities which are included in SIC Code Classification 2000-3999.
In the case at hand, the key question is whether the facility at which the brewing activities ocurr is a manufacturing facility or a retail facility. The parties have stipulated that if the activities occurred at a different facility, which was separate and apart from the retail activities of Petitioner, that the purchase of the equipment would have qualified for the exemption. Therefore, does the fact that the predominant activities of the facility are the sale of food and beverages make the tax exemption unavailable to Petitioner.
In reviewing the definition of manufacturing facility and wholesale and retail trade, as well as the general divisional definitions of retail trade, the Commission finds that the primary activity of Petitioner is one of retail trade. The primary purpose of the business is to attract customers to sell, at retail, the products which have been produced by Petitioner as well as other food and beverage products which have been purchased and modified at the location of Petitioner. The preparation of the beer is little different than the preparation of food which occurs at any restaurant or fast food facility. The product is brought to the location, modified and changed, and then sold on the premises, at retail, to the customers of the business.
The Commission has previously faced a similar issue in appeal no. 90-1032, where much the same issue was considered. In that case, the Petitioner was a major retail grocery supermarket, and it operated a bakery within the supermarket. The Petitioner in that case purchased machinery and equipment for its bakery, meat and deli (BMD) departments, and used that equipment to modify meats and to bake breads, donuts, and other bakery items. The grocery store was attempting to justify a tax exemption on the equipment as qualifying for the manufacturers exemptions. However, the Commission stated as follows:
"While certain organizational and accounting divisions exist between the BMD (Bakery, Meat and Deli) departments and supermarkets, the Commission does not consider such divisions to be sufficient to render the BMD departments separate economic units. Instead, the Commission concludes that the BMD departments are a part of the larger economic unit, the supermarket, in which they are located. Because the SIC classification for supermarkets, 5411, is not included in SIC codes 2000-3999, supermarkets are not "manufacturing facilities" and do not qualify for exemption from sales tax under '59-12-104(15)."
Petitioner in this case also has organizational divisions and very minimal accounting between the departments, but the Commission does not find those divisions to be sufficient to render the brewery as a separate economic unit. There is no separate profit and loss statement, balance sheet, or other financial statement maintained. The only significant separation is in the employees, and that is largely a matter of training, rather than trying to separate economic units. Therefore, the Commission concludes that the brewery and the restaurant and bar facility are all parts of a larger economic unit, the XXXXX. That business is primarily involved in the retail sale of food and drinks. The Commission therefore finds that the Petitioners business is classified within SIC code 5812 as an eating place, and also within SIC code 5813 as a drinking place for alcoholic beverages.
The Commission finds that it must look to the predominant function of the facility, and the predominant function of the facilities of Petitioner are to attract retail customers and to sell them the food and beverages which are produced on the premises.
DECISION AND ORDER
Based upon the foregoing, the Tax Commission finds that the Petitioner does not qualify for the manufacturer's exemption provided by '59-12-104(15), Utah Code Ann., as amended. It is so ordered.
DATED this 21st day of June, 1995.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson Roger O. Tew
Joe B. Pacheco Alice Shearer
NOTICE: You have twenty (20) days after the date of a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for Reconsideration with the Commission, you have thirty (30) days after the date of a final order to file a.) a Petition for Judicial Review in the Supreme Court, or b.) a Petition for Judicial Review by trial de novo in district court. (Utah Administrative Rule R861-1-5A(P) and Utah Code Ann. ''59-1-601(1), 63-46b-13(1), 63-46-14(3)(a).)