97-1163

SALES AND USE TAX

Signed 2/26/99

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioner, ) AND FINAL DECISION

)

v. ) Appeal No. 97-1163

) Parcel No. #####

AUDITING DIVISION OF THE )

UTAH STATE TAX COMMISSION, ) Tax Type: Sales and Use

STATE OF UTAH, )

) Judge: Davis

Respondent. )

_____________________________________

Presiding:

G. Blaine Davis, Administrative Law Judge for and in behalf of Judge Gail Reich

Appearances:

For Petitioner:

For Respondent: Mr. Gale Francis, Assistant Attorney General

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on February 20, 1998. At that time, the parties agreed to submit the matter by way of stipulation of facts and briefs which were to be filed by the parties. Those matters were heard before Judge Gail Reich who is no longer with the Commission. Therefore, this decision is based upon the stipulation of facts and the briefs submitted by the parties, and based thereon, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is Utah Sales and Use Tax.

2. The periods in question are December 1, 1993 thru November 30, 1996.

3. At least two prior audits have been conducted by the Auditing Division for this taxpayer. The last audit was for the period October 1, 1983 thru September 30, 1986 and was based upon a preliminary notice dated December 19, 1986. In that audit, the taxpayer was assessed for goods consumed, having failed to report sales taxes on those goods consumed, and the assessment for tax, interest and penalty was upheld.

4. The audit performed by Respondent imposed sales and use tax on numerous items. Petitioner has only contested the three issues, which are as follows:

(a) The denial of the manufacturing exemption to three pieces of equipment on which Petitioner did not pay sales tax and for which it believes it qualified for the manufacturer's exemption.

(b) The assessment of a ten percent negligence penalty.

5. Petitioner has paid all tax, penalty and interest amounts pursuant to the audit, and any ruling in favor of Petitioner will result in a refund to Petitioner.

6. The three items on which the manufacture's exemption is at issue are as follows:

(a) A compressor was purchased June 30, 1996, the day before a change in the exemption requirements of the revised state statute. The compressor was purchased because Petitioner had expanded its plant by 27,000 square feet and alleged that it needed to replace the prior compressor. The letter submitted by XXXXX, President of Petitioner, and dated June 2, 1997 indicated that it was in fact a replacement compressor, because XXXXX stated, "we would not have replaced the compressor, except we expanded our operations (added 27,000 sq. ft.) and needed a new one for our additional equipment." The Commission finds that the compressor was a replacement under the terms of the statute.

(b) On August 8, 1996, Petitioner purchased a press brake, which Petitioner has also represented as replacing the old press brake. The Commission finds that based upon the statements of the President of Petitioner, the press brake was also a replacement piece of machinery and equipment. Nevertheless, because the equipment was purchased after July 1, 1996, the Auditing Division has allowed thirty percent of the purchase price to be exempt in accordance with the statute which was revised effective July 1, 1996.

(c) Petitioner purchased a large forklift. The position of Respondent is that the forklift is not exempt in any portion regardless of when it was purchased, because it is used only to move products, and primarily to unload them, and therefore the forklift is not used as manufacturing equipment. The day of purchase is not specified in the documents, but unless it is manufacturing equipment, the date of purchase is not important. In this matter, Petitioner has not presented sufficient evidence to meet its burden of proof of establishing that the forklift was in fact manufacturing equipment rather than just equipment to load and unload supplies, material and merchandise. Therefore, there is not sufficient evidence from which the Commission can find that it was manufacturing equipment.

APPLICABLE LAW

The applicable statutes in this matter have been modified over the years in question. The pertinent parts of the statutes as printed in Utah Code Ann. '59-12-105(1) until July 1, 1996 states 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.

As printed, Utah Code Ann. '59-12-104 (15) and (21) (1993) and (1994) in pertinent part state as follows:

(15) sales or leases of machinery and equipment purchased or leased by a manufacture for use in new or expanding operations. . .in any manufacturing facility in Utah . . . .

* * * *

(21) sales of tangible personal property used or consumed primarily and directly in farming operations . . .

The statues were then amended in 1995 to reduce the consequences for failing to report from a 100% disallowance to a 10% penalty. As printed, Utah Code Ann. '59-12-105 (1995) provides as follows:

The amount of sales or uses exempt under Subsections 59-12-104 (15) and (21) shall be reported to the Commission . . . Upon failure . . . to report the full amount of the exemptions granted under Subsection 59-12-104 (15) and (21) on the original filed return, the Commission shall impose a penalty equal to 10% . . .

However, in that year the particular subsections as printed, Utah Code Ann. '59-12-104 (15) and (21) (1995) were as follows:

(15) isolated or occasional sales by persons not regularly engaged in business . . . .

* * * *

(21) sprays and insecticides used to control insects, diseases, and weeds for commercial production of fruits, vegetables . . . .

In 1996 the Utah Legislature again amended these statutes. Utah Code Ann. '59-12-105- (1996) as printed states as follows:

The amount of sales or uses exempt under Subsections 59-12-104 (16), (22), (42), and (43) shall be reported to the Commission . . . Upon failure . . . to report the full amount of the exemptions granted under Subsections 59-12-104 (16), (22), (42), and (43) on the original filed return, the Commission shall impose a penalty equal to 10% of the sales or use tax . . . .

The particular subsections set out in Utah Code Ann. '59-12-104 (16) and (22) (1996) as printed state the following:

(16) sales of tooling, special tooling support equipment and special test equipment used or consumed exclusively in the performance of any . . . contract with the United States government . . . .

* * * *

(22) exclusive sale of locally grown season crops, seeding plants . . .

The reason that '59-12-105 imposing a penalty upon '59-12-104 (15) does not coordinate with the manufacturer's exemption in '59-12-104 which was subparagraph 16, is because of the passage of House Bill 274 by the 1995 legislature, which is chapter 318 of the Laws of Utah 1995, which took the former paragraph two and divided it into what became subparagraphs two and three, and the legislature renumbered 15 into 16, but did not coordinate that renumbering with Utah Code Ann. '59-12-105. The problem was therefore created by the legislature and not by the printer. The lack of coordination between the two statutes is not caused by the published laws not conforming with the laws as enacted, but is a problem created by the legislature.

Utah Code Ann. '59-1-401 (5) provides for a negligence penalty of 10% of any under-payment which is due to negligence.

ANALYSIS

With respect to the compressor, the Commission finds that the compressor constituted replacement equipment which was not eligible for the manufactures exemption at the time it was purchased. With respect to the press brake, the Commission also finds that it was replacement equipment, but the statute had been modified by the time of its purchase to provide that thirty percent of the purchase price was treated as exempt, and it has been so treated by the audit of Respondent. With respect to the forklift, the Commission finds that the evidence is not sufficient to support a finding that the forklift was used in the manufacturing process. Therefore, the Commission finds and orders that the audit assessment made by Respondent against Petitioner is correct and accurate, and the audit assessment is therefore sustained.

With respect to the negligence penalty of ten percent, the Commission also sustains that penalty because it is undisputed that the problems that occurred on this audit were very similar to problems which had been corrected in other audits, and Petitioner had not taken sufficient steps to correct those problems.

With respect to the ten percent penalty for failure to report the items purchased exempt under the manufacturer's exemption, the Commission does not sustain that penalty. The statute which imposes the penalty, Utah Code Ann. '59-12-105, did not list the paragraph of the manufacturer's exemption as one of those for which the penalty was imposed for a failure to report. It does appear that the Legislature intended to impose a penalty for failure to report those exempt purchases, but through a legislative error, a different subparagraph was listed. The mistake was a lack of coordination by the legislature, and it was not a printing error. Therefore, the failure to report a penalty is not sustained.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission sustains the assessment of taxes and further sustains the ten percent negligence penalty imposed by Respondent, but the ten percent failure to report penalty is not sustained. It is so ordered.

DATED this 26TH 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 26th day of February, 1999

Richard B. McKeown Joe B. Pacheco

Chairman Commissioner

Pam Hendrickson R. Bruce Johnson

Commissioner Commissioner