95-0070

Sales Tax

11/16/95

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX, )

:

Petitioner, ) FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. ) AND FINAL DECISION

:

AUDITING DIVISION OF THE ) Appeal No. 95-0070

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. Chairman W. Val Oveson, heard the matter for the Commission. Present and representing Petitioner were XXXXX, Attorney, and XXXXX, Paralegal. Present and representing Respondent were XXXXX, Assistant Attorney General, XXXXX, Deputy Director of the Audit Division, XXXXX, Audit Manager, and XXXXX, Senior Auditor.

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 to XXXXX.

3. On XXXXX Petitioner purchased a "front end pagination system" for $$$$$ and did not pay sales or use tax on the purchase on the basis that the purchase qualified for an exemption as "new and expanding" machinery and equipment under the law.

4. The pagination system did not replace existing equipment or machinery.

5. The invoice billing of Petitioner for the "front end pagination system" included, as a separate line item, $$$$$ of training.

6. Respondent completed an audit of Petitioner and in a Second Statutory Notice dated XXXXX, assessed an additional $$$$$ in tax and $$$$$ in interest to that date at the statutory rate. Petitioner paid the assessment and the interest on XXXXX and appealed to the Tax Commission for a refund of the tax and interest.

7. Respondent argues that Petitioner did not meet any of the criteria for new or expanding operations and therefore, does not qualify for the exemption.

8. Respondent argues that the $$$$$ for training that was separately stated on the invoice for the purchase of the pagination system is considered to be part of the purchase of the system and is subject to use tax as provided by statute.

APPLICABLE 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.

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 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.

"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 R865-19-85S.)

ANALYSIS

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 operation, 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 R865-19-85S defines manufacturer as 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 in the normal course of business produces products for sale as tangible personal property."

4. Petitioner demonstrated at the hearing that the "front end pagination system" expanded their operations and increased their capacity to produce classified advertising.

5. Petitioner meets the other tests prescribed in the statutes.

6. Because the entire "front end pagination system" qualifies for the manufacturing exemption, the taxability of the training costs is moot. However, had the equipment not been exempt, the training costs would not have been taxable because the charge is stated separately and is for the sale of personal services which are not taxable under the statute.

7. In a prior decision of this Commission involving Petitioner and the manufacturing equipment exemption, their request for redetermination was denied. (Tax Commission Appeal No. 92-0328). The Court of Appeals overturned the Commission=s decision ( Court of Appeals No. 940694-CA) and the matter is now on appeal to the Utah Supreme Court. Upon initial examination it may appear that the Commission=s position in this case and the case on appeal are in conflict. The Commission does not believe this is the case. The initial decision determined that the equipment in question performed essentially the same tasks as the old equipment and ultimately produced the same product. In the present case, the task involved, Afront end pagination,@ was not previously mechanized. Therefore, there is no similar machinery being replaced. The product of the new Afront end pagination@ machinery, namely automated layout and design, is a new one. The fact that the end product of the entire process is unchanged does not disqualify discrete parts of that process from qualifying if those portions were never previously mechanized.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds in favor of Petitioner. It is so ordered.

Dated this 16th day of November, 1995.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

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 R861-1A-5(P) and Utah Code Ann. ''59-1-601(1), 63-46b-13 et. seq.)

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