97-1206
SALES
Signed 5/1/98
BEFORE
THE UTAH STATE TAX COMMISSION
____________________________________
PETITIONER, )
:
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. ) AND
FINAL DECISION
:
AUDITING DIVISION OF THE ) Appeal
No. 97-1206
UTAH STATE TAX COMMISSION, :
) Account
No. #####
:
Respondent. ) Tax Type: Sales and Use Tax
_____________________________________
STATEMENT
OF CASE
This matter came before the Utah State Tax
Commission for a Formal Hearing on
October 15, 1997. Richard B. McKeown,
Commissioner, heard the matter for and on behalf of the Commission. Present and representing Petitioner was
NAME. Present and representing
Respondent were Mr. Gale Francis, Assistant Attorney General, and Ms. Anna
Andersen, Tax Audit Manager of 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 January 1, 1994, through December 31, 1996.
3.
By Statutory Notice dated May 13, 1997, the Respondent imposed an audit
deficiency upon Petitioner in a total amount of $$$$$$ for the tax, plus
interest thereon. The notice detailed
four separate areas of deficiency.
4.
The Petitioner is engaged in the business of providing printed tangible
personal property for its customers. In
doing so, it prepares materials known as "pre-press" materials which
result in transfers from those materials to the delivered printed product. Though the customer is charged for both the
pre-press materials and the printed product, the pre-press materials are
generally kept at the printing business.
5. On
September 21, 1994, the Petitioner purchased a press. Reflected in the purchase price of this new press was a trade-in
of a 1964 press.
6.
The Petitioner submitted a petition for redetermination to the Tax
Commission in June, 1997, appealing two of Respondent=s four areas of deficiency. Specifically, Petitioner challenged the
Respondent=s claims that it had not properly reported
taxable purchases of pre-press materials and that it had erroneously applied a
sales tax exemption to its purchase of the press.
7. On
July 18, 1997, Respondent submitted its answer to the petition for
redetermination, maintaining its prior claims. As to the purchase of pre-press
materials, Respondent asserted that the Petitioner did not place a statement on
its invoices informing its clients that title to the pre-press materials was
passing to them. Also, the Respondent
asserts that the Petitioner did not separately bill its resale and out-of-state
customers for the pre-press materials and did not collect from them the
applicable sale tax. As to the purchase
of the press, Respondent asserted that Petitioner's purchase was a normal
operating replacement to replace an old press and that the manufacturing
exemption does not extend to normal operating replacements.
8.
The appeal was originally scheduled for an informal hearing. Given the October 7, 1997, ruling in XXXXX
the informal hearing was changed to an initial hearing, which was then waived
by the parties and a formal hearing held instead.
ISSUES
1.
Has the Petitioner properly excluded sales tax on its purchases of
pre-press materials and its sales of printed materials to "exempt"
customers?
2.
Does Petitioner=s
September 21, 1994, purchase of manufacturing equipment (the press) qualify for
the manufacturing equipment exemption?
APPLICABLE
LAW
1.
Utah Code Ann. '59-12-103(1)
levies a tax on the sale of tangible personal property as follows:
There is levied a tax on the purchaser for
the amount paid or charged for the following:
(a) retail sales of tangible personal
property made within the state;
2.
Utah Ann. Code '59-12-104(1994)[1]
exempts from sales tax the purchase of certain manufacturing equipment, stating
in pertinent part:
(15)
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;
...
(b)
for purposes of this subsection, the commission shall by rule define
"new or expanding operations"...
3.
Utah Admin. Code R865-19S-80 provides administration guidelines for
applying sales tax to pre-press sales, stating in pertinent part:
E.
Printers may purchase tax free reusable pre‑press materials, ...
used in the preparation of printed matter for resale provided title to said
tangible personal property passes to the customer.
1.
The tax applies to the printer's charge to the customer for such
material in addition to charges for printed matter in connection with which
they are sold.
2.
The printer's invoice must contain a statement on its face, that states
that reusable pre‑press materials associated with that transaction are
included with the purchase. A
description and the quantity of the actual items used in the order is not
necessary. The statement must not
restrict the customer from taking physical possession of those items if so
desired.
3. If
the printer's customer is purchasing printed material for resale, sales tax is
still applicable to the selling price of these materials which are not to be
resold, and in this case, the charges must be separately priced so that tax
will be properly charged.
4. If
printing work is shipped outside of the state of Utah and interstate sale
exemption applies, the charges for plates, dies, negatives, and similar items
are exempt only if these items are physically shipped out‑of‑state
with the printed material. If these
items are retained in Utah by the printer for any reason, the interstate
commerce exemption does not apply. Charges for these items must be separately
priced, and tax collected on these charges.
4.
Utah Admin. Code R865-19S-85 provides definitions concerning the
manufacturing equipment exemption and states in pertinent part:
A.
Definitions:
...
3.
a) "New or expanding
operations" means manufacturing, processing, or assembling activities
that:
(1)
are substantially different in nature, character, or purpose from prior
activities;
(2)
are begun in a new physical plant location in Utah; or
(3)
increase production or capacity.
b)
The definition of new or expanding operations is subject to limitations
dealing with normal operating replacements.
...
6.
"Normal operating replacements" means machinery or equipment
that replaces existing machinery or equipment of a similar nature, even if the
use results in increased plant production or capacity.
a) If
new machinery or equipment that is purchased or leased has the same or similar
purpose as machinery or equipment retired from service within 12 months before
or after the purchase date, that new machinery or equipment is considered as
replacement and is not exempt.
b) If
existing machinery or equipment is kept for back‑up or infrequent use,
any new, similar machinery or equipment that is purchased is considered as
replacement and is not exempt.
ANALYSIS
I:
PRE-PRESS AND PRINTED MATERIALS
Petitioner asserts several theories why it
should not have to pay the sales tax on its purchase of pre-press materials and
sales of printed materials to "exempt" customers. Each theory deserves separate comment.
A.
Pre-press materials. Petitioner provides evidence that pre-press materials
originally purchased by the Petitioner are taxed when they are sold to its
customers. Petitioner claims that
double taxation results if it is required to pay sales tax on these materials
when it purchases them and sales tax is also charged when it sells them.
Utah Admin. Code R865-19S-80(E) does allow a
printer to purchase the pre-press materials without sales tax liability if
title to the pre-press materials eventually passes to the printer's
customer. To evidence this transfer of
title, the rule provides that the invoice supplied by the printer to its
customer must contain a statement on its face stating that the pre-press
materials are included in the purchase price.
Respondent claims that the Petitioner's
invoices do not contain such a statement.
While Petitioner does not provide invoices containing this statement, it
does supply tangential evidence showing that title did pass to its
customers. Petitioner's evidence is in
the form of letters from its customers asserting that they knew that title to
the pre-press materials passed to them.
Also submitted is a memo from the Petitioner reassuring a customer that
it does indeed receive title to pre-press materials when it makes a purchase
from the Petitioner.
We are convinced that the Petitioner's intent
was to pass title of the pre-press materials to its customers. However, the rule was promulgated to
administer the uniform and efficient collection of sales tax. To accomplish this, the rule requires a
specific method by which to show an exchange of title, i.e., a statement on the
face of the invoice. Should Petitioner
be able to produce invoices that were sent during the audit period that contain
such a statement, the Petitioner will owe no sales tax on the sales so
evidenced. Otherwise, the rule clearly
establishes that sales tax is due on the Petitioner's purchase of these items,
and the deficiency as determined by the Respondent is affirmed.
B.
Sale to "exempt" customers.
Petitioner next claims that it should not collect sales tax on printed
materials sold to "exempt" customers, i.e., other printers,
advertising agencies, and graphic designers.
That is true if that customer is reselling the materials bought from the
Petitioner. Rule 865-19S-80(E)(3)
requires collection of sales tax on printed materials sold to customers who do
not resell these materials. The rule
further provides that sales containing both taxable items (those that will not
be resold) and exempt items (those that will be resold) must segregate these
two categories so that sales tax can be properly applied on the taxable sales.
Respondent asserts that Petitioner did not
properly collect the sales tax on certain sales to "exempt"
customers. While the Petitioner did
provide a list of exempt customers, it did not provide evidence that the
deficiencies assessed by the Respondent were incorrect. "Exempt" customers should be
assessed sales tax on items they do not intend to resell. Without specific evidence showing that the
sales which the Respondent determined as taxable were in fact exempt from
taxation, the Respondent's deficiency is affirmed.
C.
Tax bulletin. Lastly, the
Petitioner asserts that it did not receive Tax Bulletin 8-89, which was issued
by the Tax Commission to educate the printing industry on how to apply sales
tax to pre-press material purchases and printed material sales. Tax bulletins are issued by the Tax
Commission as educational tools, a service intended to foster better compliance
with the statutory guidelines. However,
receipt of a tax bulletin is not required before a person is subject to the
laws and rules of the state. The Tax
Commission does regret that the Petitioner did not receive this tax bulletin;
nevertheless, the fact that the Petitioner did not receive a tax bulletin does
not excuse it from compliance with the laws and rules addressed in a particular
tax bulletin.
II. PRESS
Utah Code Ann. '59-12-104(15)(1994) exempts from taxation sales of machinery and
equipment purchased by a manufacturer for use in new or expanding
operations. The statute excludes from
this exemption the purchase of equipment classified as normal operating
replacements. Definitions for both "new
and expanding equipment" and "normal operating replacements" are
found in Utah Admin. Code R865-19S-85.
The Respondent claims that the press, which
was purchased on September 21, 1994, is a normal operating replacement and,
accordingly, does not qualify for the exemption. The Petitioner counters that this new press does qualify for the
manufacturing equipment exemption because it was purchased to expand the
Petitioner's manufacturing capabilities.
In support of the Petitioner, Utah Admin. Code R865-19S-85(A)(3)(a) does
provide that a new or expanding operation is evidenced by the purchase of
equipment that increases production or capacity.
However, the above statute and rule both
provide that there is no exemption if the equipment is a normal operating
replacement, which is defined in Utah Admin. Code R865-19S-85(A)(6). In XXXXX, 906 P.2d 882 (Utah 1995), the
court interpreted rule 865-19S-85(A)(6) to mean that new equipment is
considered a taxable normal operating replacement when two conditions are met:
(1) it is of a similar nature to the replaced
machinery or equipment; and
(2) the replaced machinery or equipment is:
(a)
retired from service within 12 months before or after the
purchase; or
(b)
kept for back-up or infrequent use.
To determine if the new press qualifies as a
normal operating replacement, each of the court's two conditions must be
examined.
First, is the new press of a "similar
nature" to the old press?
Petitioner supplies evidence that, while both presses can produce
printed materials, the new press is capable of producing a six page brochure,
whereas the old press could not. Also,
the new press more than doubles the production speed of the old press.
In XXXXX, the new equipment consisted of one
machine to replace six old machines.
The new machine was used in a similar capacity as the old machines, but
reduced production time by fifty percent and allowed the company to make parts
that the old machines were incapable of making. The court held that although the new machine allowed the company
to produce a superior product line, it could not properly be termed a new or
expanding operation. Instead, it was a
normal operating replacement, one which enabled the company to remain
competitive in its field.
The Petitioner's new press allows it to also
produce a superior product line, as well as reduce production time. As these facts so closely resembles the ones
in XXXXX, we find that the new press is of a "similar nature" to the
old press. Thus, the first condition
needed to establish normal operating replacement is met.
As to the second condition, was the old press
retired from service within 12 months before or after the purchase of the new
press or kept for back-up or infrequent use?
The old press was traded in, so it was not kept for back-up or
infrequent use. The issue that remains
is whether or not the old press was retired within the 12 months prior to the
September 21, 1994, purchase date of the new press. If it was, then the second condition is met.
In the Petitioner's September 5, 1997, brief
is a statement that asserts that the old press was not used for at least two
years prior to its trade-in on the new press.
At the hearing, the Petitioner further testifies that the press was last
used in 1990. Without evidence to the
contrary, it appears that the old press was retired from service at least two
years prior to the purchase of the new press.
As a result, neither portion of the second condition is met. Because both conditions outlined by the
XXXXX court are not present here, the new press is not considered a normal
operating replacement. It is considered
equipment for new or expanding operations.
For these reasons, the new press qualifies
for the manufacturing equipment exemption, and the Respondent's sales tax
deficiency on the purchase of the new press is not affirmed.
DECISION
AND ORDER
Based upon the foregoing, the Tax Commission
finds that the Petitioner is liable for all sales tax deficiencies as
determined by the Respondent on its purchases of pre-press materials and sales
of printed materials unless the Petitioner can show that its purchases and
sales complied with the law as set forth herein. Concerning any sales tax deficiency on the press, the Tax
Commission finds that the Petitioner's purchase of this equipment qualifies for
the manufacturing equipment exemption.
It is so ordered.
DATED this 1 day of May, 1998.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
Richard B. McKeown
Commissioner
The agency has reviewed this case and the
undersigned
concur in this decision.
DATED this 1 day of May, 1998.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson Pam
Hendrickson
Chairman Commissioner
Joe B. Pacheco
Commissioner
^^
[1] The
Legislature has modified this manufacturing equipment exemption every year
since 1994. The purchase of only one
piece of equipment is at issue here. As
it was purchased by the Petitioner on September 21, 1994, our decision will be
based on the law as it existed in 1994.