96-2170
Sales and Use Tax
Signed 7/18/97
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. 96-2170
UTAH STATE TAX COMMISSION, :
STATE OF UTAH, : 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 June 17, 1997. G. Blaine Davis, Administrative Law Judge, heard the matter for
and on behalf of the Commission.
Present and representing Petitioner were PETITIONERS REP., from the law
firm of XXXXX, together with Mr. XXXXX, the Chief Financial Officer of Petitioner. Present and representing Respondent were Mr.
Clark Snelson, Assistant Attorney General, together with Mr. Brad Simpson, Mr.
Bert Ashcroft, and Ms. Holly Ward, 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 October 1, 1992
through June 30, 1995.
3. Petitioner is engaged primarily in the
business of producing, duplicating, reproducing, and distributing audio
cassettes, video cassettes, and CD’s.
Some of those audio and video cassettes are assembled together with
printed material into educational and informational cassettes and packets.
4. Respondent performed an audit of Petitioner
for the period at issue. At the time
the Petition for Redetermination was filed, all except two issues had been
resolved. Those issues were whether
some of the machinery and equipment used for reproducing the videos were exempt
from sales and use tax pursuant to the provisions of §59-12-104(15) Utah Code
Annotated, as amended, as a sale or lease of machinery and equipment purchased
or leased by a manufacturer, or the similar provisions of prior versions of the
Utah Code, and also the sales tax related to the XXXXX. At the time of the hearing, Petitioner
conceded the issue relating to the XXXXX, so the only issue presented at the
hearing was whether the equipment used for reproduction of videos qualified for
the manufacturers exemption.
5. The position of Petitioner is that the
equipment used for reproducing videos qualifies for the manufacturers exemption
and that it falls within SIC Code 2741, miscellaneous publishing. That SIC Code is described as:
“Establishments
primarily engaged in miscellaneous
publishing activities,
not elsewhere classified,
whether or not
engaged in printing. Establishments
primarily engaged in
offering financial, credit
or other business
services, and which may publish
directories as part of
this service are classified
in Division I,
Services.” (emphasis added)
One
of the examples listed under miscellaneous publishing is “multimedia
educational kits; publishing and printing, or publishing only.”
6. The position of Respondent is that Petitioner
is not included within the manufacturing SIC Codes, but is instead included
within SIC Codes 7812, 7819, and possibly even some inclusion in 7822.
7. Respondent has allowed Petitioner to exempt
its audio reproduction equipment as falling within SIC Code 3652, phonograph
records and pre-recorded audio tapes and discs, which provides:
“Establishments
primarily engaged in manufacturing
phonograph records and
pre-recorded audio tapes and
discs. Establishments primarily engaged in the
design, development,
and production of pre-packaged
computer software are
classified in services,
industry group 737; and
those reproducing pre-
recorded video tape
cassettes and discs are
classified in
services, major group 78.”
(emphasis added)
8. Accordingly, in the opinion of Respondent,
the manufacturing of pre-recorded audio tapes qualifies for the manufacturers
exemption because it falls within SIC Code 3652, but it argues that the SIC
Code provisions specifically provide that reproducing pre-recorded video tape
cassettes falls within services, which are numbered 7800 and higher, and
specifically within Sections 7812 and 7819.
9. SIC Code 7812 is for motion picture and
video tape production, and provides:
“Establishments
primarily engaged in the production
of theatrical and
non-theatrical motion pictures
and video tapes for
exhibition or sale, including
educational,
industrial, and religious films.
Included in the
industry are establishments engaged
in both production and
distribution. Producers of
live radio and
television programs are classified
in Industry 7922. Establishments primarily
engaged in motion
picture and video tape re-
production are
classified in industry 7819 and those
engaged in
distribution are classified in industry
7822.” (emphasis added)
10. SIC Code 7819, for services allied to motion
picture production, 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; television
tape services;
motion picture and video tape re-
production and
stock footage film libraries.”
(emphasis added)
11. SIC Code 7822, Motion Picture and Video Tape
Distribution, provides:
“Establishments
primarily engaged in the distribution
(rental or sale) of
theatrical and non-theatrical
motion picture films
or in the distribution of video
tapes and discs,
except to the general public.
Establishments in
both distribution and production
are classified in
Industry 7812. Establishments
primarily engaged in
renting video tapes and discs
to the general public
are classified in Industry 7841,
and those engaged in
the sale of video tapes and discs
to individuals for
personal or household use are
classified in retail
trade, Industry 5735.”
(emphasis added)
12. Petitioner is engaged in elements of several
of the items listed, including the production and distribution of educational,
industrial, and religious videos. There
was no testimony or evidence presented by either of the parties as to whether
the business of Petitioner is a new or expanding operation related to the
manufacturing process, or as to whether the equipment may have been a normal
operating replacement. However, because
Respondent allowed Petitioner the exemption for its audio reproduction
equipment, and because neither party raised the issue and both parties agreed
that the only issue was whether Petitioner met the SIC Code requirements of the
statute, it is presumed, for purposes of this decision, that the equipment was
for use in a new or expanding operation and that it was not a normal operating
replacement.
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 1987 Standard Industrial Classification manual, of the Federal Executive
Office of the President, Office of Management and Budget. (Utah Code Ann. §59-12-104(15).)
Petitioner
has the burden of proof to establish that it meets the requirements of the
statute.
"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.) 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 R865-19-85S defines manufacturer as a person who
"functions within the activities included in SIC Code Classification
2000-3999.”
ANALYSIS
The
primary issue in this case is whether Petitioner has sustained its burden of
proof that its activities fall within the miscellaneous publishing activity set
forth in SIC Code 2741. Petitioner
argues that miscellaneous publishing is broader than merely printed material,
because it specifically says “whether or not engaged in printing.” Further, one of the examples set forth is
multimedia educational kits; publishing and printing, or publishing only. However, the manner of wording when it
refers to multimedia educational kits as publishing and printing or publishing
only still infers, in the opinion of the Commission, printed materials.
Contrary
to the arguments of Petitioner, the SIC Codes seems to clearly designate video
tape re-production among SIC Codes 7812, 7819, and 7822. While it does seem somewhat questionable
that audio tape reproduction is classified as manufacturing under SIC Code
3652, and that video tape reproduction does not have a similar manufacturing
classification, it is not up to the Commission to question or challenge the
classifications determined in the SIC Manual.
That determination has been made by the legislature and by the Federal
Office of Management and Budget.
Accordingly,
the Commission determines that Petitioner has not sustained its burden of proof
to establish that reproduction of video tapes qualifies as miscellaneous
publications under SIC Code 2741.
DECISION AND ORDER
Based
upon the foregoing, the Tax Commission finds that the activities of Petitioner
related to its reproduction of video tapes is not within the SIC Code 2741
Miscellaneous Publishing. Instead, it
more clearly falls within the SIC Code 7812, 7819, and 7822. Accordingly, the activities of Petitioner
are not manufacturing activities within the appropriate SIC Code numbers. The Petition for Redetermination of
Petitioner is hereby denied, and the audit assessment made by Respondent is affirmed. It is so ordered.
DATED
this 18 day of JULY, 1997.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Richard
B. McKeown
Chairman Commissioner
Joe B.
Pacheco Pam
Hendrickson
Commissioner Commissioner
^^