SALES TAX

96-2055

SIGNED 2/11/99

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioner, ) AND FINAL DECISION

)

v. ) Appeal No. 96-2055

) Parcel No. #####

AUDITING DIVISION OF )

THE UTAH STATE TAX COMMISSION, ) Tax Type: Sales Tax

STATE OF UTAH, )

) Presiding: Davis

Respondent. )

_____________________________________

Presiding:

G. Blaine Davis, Administrative Law Judge

Appearances:

For Petitioner:

For Respondent: Mr. Clark Snelson, Assistant Attorney General

Mr. Bert Ashcroft and Ms Holly Ward from the Auditing Division

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on December 21, 1998. The parties have stipulated to the facts and there are no material issues of fact. Respondent filed a Motion for Summary Judgment, and Petitioner filed a Cross-Motion for Summary Judgment. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. Petitioner is a corporation organized under the laws of the state of Utah. At all times during the period beginning July 1, 1992 and ending June 30, 1995 (the "audit period"), it had its principal place of business in Salt Lake City, Utah.

2. Throughout the audit period, Petitioner was in the business of duplicating audio and video cassettes and computer software floppy discs. In 1994, Petitioner began duplicating compact discs.

3. During the audit period Petitioner timely filed all required sales and use tax returns with the Utah State Tax Commission and paid all sales and use taxes reported thereon.

4. The Auditing Division performed a sales and use tax audit of Petitioner for the audit period. As a result of the audit, the Auditing Division determined, among other things, that machinery and equipment used for video duplication are not exempt from sales and use tax under the manufacturers' exemption. The Auditing Division issued a Statutory Notice - Sales and Use Tax on June 18, 1996, covering the audit period, pursuant to which the Auditing Division assessed additional sales and use taxes relating to, among other things, the purchase by Petitioner of the equipment which it alleges was exempt from sales and use tax because it was used in a new or expanding manufacturing business.

5. Following additional discussions between representatives of Petitioner and the Auditing Division and the delivery of additional material, the Auditing Division provided an Amended Utah Sales and Use Tax Audit Summary on February 28, 1997, and April 8, 1998, both of which reduced the amount of assessed tax against Petitioner, but did not adjust the amount of taxes assessed for the video duplication equipment.

6. As set forth in the Amended Summary dated April 8, 1998, the Auditing Division claims that Petitioner is liable for additional taxes relating to the purchase and lease of video duplication machinery and equipment, the purchase and lease of CD machinery and equipment, the purchase and lease of other consumable items, the failure to provide exemption certificates, and adjustments to Petitioner's sale tax accrual account.

7. The only issues that are the subject of this action are the additional taxes assessed relating to the purchase and lease of the video duplication machinery and equipment and the assessment of penalties thereon. The video duplication equipment is contained in Schedules 2 and 3 of the Amended Audit Summary.

8. Utah Code Annotated '59-12-104(15), as in effect during the audit period, creates a sales tax exemption for machinery and equipment purchased or leased by a manufacturer for use in new or expanding operations in any manufacturing facility in the state of Utah.

9. The video duplication equipment purchased or leased by Petitioner during the audit period were for use in new or expanding operations, within the meaning of Utah Code Annotated '59-12-104(15).

10. A manufacturing facility is defined in Utah Code Annotated '59-12-104(15) (as in effect during the audit period) as an establishment described in SIC Codes 2000 to 3999 of the 1987 Standard Industrial Classification Manual (the "1987 SIC Manual"). Prior to amendment effective April 27, 1992, Utah Code Annotated '59-12-104(15) defined a manufacturing facility as an establishment described in SIC Codes 2000 to 3999 of the Standard Industrial Classification Manual 1972 (the "1972 SIC Manual").

11. Video reproduction functions in a very similar manner to audio reproduction.

12. Video reproduction is defined under SIC Code 7819. Audio reproduction is defined under SIC Code 3652.

13. Petitioner argues that the classification of establishments engaged in the reproduction of prerecorded audio magnetic tape in the manufacturing division under SIC Code 3652 was a proper classification whereas the classification of establishments engaged in the reproduction of video tape in the services division under SIC Code 7819 was an improper classification. However, there is no evidence, other than the assertion by Petitioner, that either of the classifications is erroneous. Further, if the Commission assumed that because the two functions are so similar that it was erroneous to classify them differently, there is no evidence, other than speculation, as to which type of establishment was improperly classified.

14. Petitioner further argues that the alleged classification error was corrected by the replacement to the 1987 SIC Manual when the North American Industry Classification Systems - United States 1997 (NAICS) was released by the Executive Office of the President, Office of Management and Budget in July of 1998. Nevertheless, Utah Code Ann. '59-12-104(15) defines a "manufacturing facility" by reference to "SIC Codes 2000-3999 of 1987 Standard Industrial Classification Manual." That manual is very specific by including video reproduction under SIC Code 7819.

15. The classification of audio reproduction business as a different classification than video reproduction business is a reasonable classification.

. APPLICABLE LAW

Utah Code Ann. '59-12-104(15)(1992) exempted from sales taxes:

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 includes replacement machinery and equipment even though they may increase plant production or capacity, as determined by the Commission), in any manufacturing facility in Utah. Manufacturing facility means an establishment described in SIC Codes 2000 to 3999 of the 1987 Standard Industrial Classification Manual, of the Federal Executive Office of the President, Office of Management and Budget. For purposes of this subsection, the commission shall by rule define "new or expanding operations" and "establishment". . . .

The Tax Commission has defined "establishment" in Utah Administrative Code, Rule R865-19S-85, which provides:

"Establishment" means an economic unit of operations 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.

'7819 of the Standard Industrial Classification Manual for 1987 provides:

Establishments primarily engaged in performing services independent of motion picture production, but allied thereto, such as motion picture film processing, editing, and titling; casting bureaus; wardrobe and studio property rental; tape services; motion picture and video tape production; and stock footage film libraries.

The Utah State Tax Commission may not rule that statutes are unconstitutional. Shea v. State Tax Commission, 120 P.2d 274 (Utah 1941).

CONCLUSIONS OF LAW

The business of Petitioner falls within SIC Code Section 7819, and is therefore not eligible for the exemption provided by Utah Code Ann. '59-12-104(15).

The manufacturers exemption is available only to those establishments for manufacturers which operate in SIC Code Classifications 2000 to 3999 of the 1987 Standard Industrial Classification Manual of the Federal Executive Office of the President, Office of Management and Budget.

The video reproduction business of Petitioner is treated similarly and uniformly with all other video reproduction businesses. The audio reproduction business of Petitioner is treated similarly and uniformly with all other audio production businesses. It is not a violation of equal protection requirements to classify video reproduction businesses in a different classification than audio reproduction businesses.

ANALYSIS

The Parties have agreed that video reproduction equipment is defined under SIC Code Section 7819, which is not within the SIC Codes defined by the Utah Legislature as manufacturing establishments, which are SIC Codes 2000 to 3999.

Petitioner challenges the constitutionality of the statute on the basis that it is denied equal protection of the laws. Petitioner maintains that its process for video reproductions, which is not classified as manufacturing, is almost identical to its process used for audio reproductions which is classified as manufacturing. However, the Commission determines that it does not have the power, jurisdiction or authority to change, modify, amend, or strike down the statute, but such a matter is an issue for the legislature or the courts.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that it does not have the authority, jurisdiction or power to grant the Petition for Redetermination as filed by Petitioner. The statute limits the businesses which qualify for the manufacturers' exemption to those in SIC Codes 2000 to 3999. Petitioner does not meet that statutory requirement. The classification of a video reproduction business in a different classification than an audio reproduction business is not an unconstitutionally unreasonable classification. Therefore, the Motion for Summary Judgment of Respondent is hereby granted, and the Petition for Redetermination is hereby denied. It is so ordered.

DATED this 11th day of February, 1999.

_____________________

G. Blaine Davis

Administrative Law Judge

BY ORDER OF THE UTAH STATE TAX COMMISSION:

The Commission has reviewed this case and the undersigned concur in this decision.

DATED this 11th day of February, 1999

Richard B. McKeown Joe B. Pacheco

Chairman Commissioner

Pam Hendrickson R. Bruce Johnson

Commissioner Commissioner