95-1167
SALES & USE TAX
Signed 11/17/97
BEFORE
THE UTAH STATE TAX COMMISSION
____________________________________
COMPANY C )
:
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. ) AND FINAL DECISION
:
AUDITING DIVISION OF THE ) Appeal
No. 95-1167
UTAH STATE TAX COMMISSION, :
) Account
No. #####
:
Respondent. ) Tax Type:
Sales & Use Tax
_____________________________________
STATEMENT
OF CASE
This matter came before the Utah State Tax
Commission for a Formal Hearing on July
30, 1997. Jane Phan, Administrative Law
Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner were
PETITIONERS REP., Esq., along with PETITIONERS REP. and PETITIONERS REP.. Present and representing Respondent was
Clark Snelson, Assistant Attorney General, along with Julie Halvorson, Jim
Elliot and Gil Naisbitt.
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 the audit period of January 1, 1991
through June 30, 1994.
3. On February 11, 1997,
Petitioner issued a Statutory Notice for the audit period in question assessing
$$$$$ in additional tax along with the interest thereon. Petitioner appeals only a portion of the
additional tax assessment along with the related portion of interest.
4. Petitioner is a manufacturing
company. In 1991 Petitioner purchased a
building and warehouse in North Salt Lake for the purpose of relocating its
facility from California. The building
purchased had functioning plumbing and electrical systems. 5. However, due to the nature of the machinery
used in Petitioner's manufacturing process, it was necessary for Petitioner to
add additional plumbing and electrical systems to the building. This was accomplished in part by the
installation of "bus bars" which were attached to the ceiling of the
real property and provided additional outlets to which the machinery could be
plugged into electrical current.
Additional equipment was necessary to connect the machinery to the bus
bars.
6. Much of the machinery, which
was purchased for installation in the North Salt Lake location, was exempt from
sales or use tax based on the manufacturer's exemption for new and expanding
machinery or equipment pursuant to Utah Code Ann. '59-12-104 (15) and was not subject to the tax
assessment at issue. In addition
Petitioner was not claiming the bus bars themselves as exempt equipment.
7. The items at issue were
described at the hearing as: (1) miscellaneous electrical and plumbing
supplies; (2) fork lifts and scissor lifts; and (3)overhead cranes. These items were not reported on
Petitioner's original sales and use tax returns for the periods in which they
were purchased as is required by Utah Code Ann. '59-12-105. Petitioner later
reported the exemptions on amended returns.
8. From the testimony presented
by the parties the Commission makes a finding that the items of equipment at
issue, described as miscellaneous electrical and plumbing supplies, were not
the items of equipment used to connect the machinery to the bus bars because
these items were furnished and installed by real property contractors. None of the tax assessment at issue was
based on items furnished and installed by real property contractors. Petitioner has failed to sufficiently
identify the items of equipment in this category for which Petitioner claims
the exemption.
9. The overhead cranes at issue
were used in the manufacturing process.
They ran on rails attached to the structure of the real property. The forklift and scissor lifts were used by
Petitioners to install the machinery and equipment at the manufacturing
facility.
10. The payment arrangement
between COMPANY A, and Petitioner is based on a contingency fee. COMPANY A is to receive 50% of the amount of
the overpaid taxes for which Petitioner receives a refund.
APPLICABLE
LAW
The Utah Legislature provided an exemption from sales and use tax for
manufacturers in Utah Code Ann. '59-12-104(15)(1994) as follows:
Sales or leases of machinery and equipment
purchased or leased by a manufacturer for use in new or expanding operations
(excluding normal operating replacements, which include replacement machinery
and equipment even though they may increase plant production or capacity, as
determined by the commission) in any manufacturing facility in Utah; . . .
The legislature imposed a reporting requirement for purposes of
claiming this particular exemption.
This requirement is set out in Utah Code Ann. '59-12-105(1994)[1]
as follows:
The amount of sales or uses exempt under
Subsections 59-12-104 (15) and (21) shall be reported to the commission by the
owner, vendor, or purchaser, as the case may be. The commission shall disallow the exemption granted under
Subsections 59-12-104 (15) and(21)upon failure by the vendor or purchaser to
report the full amount of such exempt sales.
The Tax Commission adopted a rule to define certain terms set out in
Utah Code Ann '59-12-104(15). Utah Administrative Rule R865-19S-85 (1994) in pertinent part
provides as follows:
(A)(2) "Equipment" means any
independent device separate from any machinery but essential to an integrated
or continuous manufacturing or assembly process or any subunit comprising a
component of any machinery or auxiliary thereof, including such items as dies,
jigs, patterns molds, and similar items used in manufacturing, processing, or
assembling. Qualifying equipment also
includes devices necessary to the control or operation of machinery and
equipment qualifying under this rule even though not located in the specific
manufacturing area. . .
(B)
The machinery and equipment exemption applies only to tangible personal
property. It does not apply to real
property or to tangible personal property that is purchased and becomes an
improvement to real property. The
exemption does not apply to charges for labor to repair, renovate or clean
machinery or equipment.
ANALYSIS
The first issue presented to the Tax
Commission in this appeal is whether the miscellaneous plumbing and electrical
items qualify as equipment exempt from
sales and use tax pursuant to Utah Code Ann. '59-12-104 (15). However, the
Tax Commission cannot find that these items meet the statutory requirements for
the exemption if it does not know specifically what the items are and
Petitioner failed to provide information so that the Commission can
sufficiently identify these items.
It was Petitioner's position that the
miscellaneous plumbing and electrical items where items of equipment purchased
by Petitioner and installed by Petitioner's employees to connect the exempt
machinery to the bus bars and to other pieces of machinery. XXXXX, Of COMPANY A, testified that he had
audited the invoices and records of Petitioner and had personally inspected the
facility on a number of occasions and spoke with Petitioner's employees. From this audit he concluded that the miscellaneous
electrical and plumbing items were those items of equipment used to attach the
machinery to the bus bars or the machinery to other pieces of machinery.
However, this testimony was not supported by the other witnesses called
by Petitioner. Two other witnesses for
Petitioner, familiar with the plant and some of the installation of the
equipment, testified that COMPANY B provided and installed the equipment used
to attach the machinery to the bus bars.
One of these witnesses was XXXXX, an employee of COMPANY B who had worked
on the installation of the bus bars and had connected machinery to the bus
bars. He had again toured the facility
just prior to the hearing. It was his
testimony that as far as he was aware, COMPANY B had connected all the
machinery to the bus bars.
A second witness for Petitioner, XXXXX, had worked as an employee in
COMPANY C accounting department for over five years. It was also his testimony that COMPANY B had made all of the
connections from the machinery to the bus bars. He testified that Petitioner did have a facilities crew but they
did more maintenance work and would have done very little work in connecting
the machinery to the bus bars.
Jim Elliot, the auditor for the Tax Commission who prepared the audited
assessment at issue, testified that no portion of the additional tax assessment
arose from the furnish and installation contracts that Petitioner had with
COMPANY B. Mr. Elliot had considered
COMPANY B to be a real property contractor and for this reason assessed the
sales and use tax arising from these transactions to COMPANY B, not Petitioner.
In weighing the testimony and making its findings of fact that the
miscellaneous plumbing and electrical items at issue were not the items of
equipment used to connect the machinery to the bus bars, the Commission found
the testimony of Mr. XXXXX and Mr. XXXXX, who were both familiar with the plant
and the actual installations, to be more persuasive than the testimony of Mr. XXXXX.
Further, the Commission notes that Mr. XXXXX's payment arrangement is
based on a percentage of taxes recovered.
Petitioner has not shown what these miscellaneous electrical and
plumbing items were and therefore the Commission cannot find the items to be
exempt.
A second issue presented to the Commission is whether the fork and scissor lifts and the overhead
cranes qualify as exempt equipment or machinery pursuant to Utah Code Ann. '59-12-104 (15). Petitioner asserted that the fork lifts and scissor lifts had
been acquired and used to install exempt machinery and equipment and had not
been used to remodel the real property.
Insufficient testimony was presented on how these items were used at the
time of the installation of the machinery or subsequent to the
installation. As for the overhead
cranes the testimony presented was that they were used in the manufacturing
process. However, insufficient
information was presented by Petitioner on how these cranes were attached to
the structure of the real property for the Commission to determine if they had
become an improvement to the real property or if they were tangible personal
property. Petitioner's witness on this
issue did not know how the cranes or rails were attached to the real property.
The third issue discussed by the parties was the reporting requirement
set out in Utah Code Ann. '59-12-105 and whether the amended returns satisfied this
requirement. However, the Commission
does not reach this issue as the first two issues clearly dispose of this
case.
DECISION
AND ORDER
Based upon the foregoing, the Tax Commission sustains the sales and use
tax audit assessment in its entirety as set out in the Statutory Notice, dated
February 11, 1997, against Petitioner, for the audit period of January 1, 1991
through June 30, 1994. It is so
ordered.
DATED this 17 day of NOVEMBER, 1997.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson Richard
B. McKeown
Chairman Commissioner
Joe B. Pacheco Pam Hendrickson
Commissioner Commissioner
^^