97-1238

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. 97-1238

CUSTOMER SERVICE DIVISION OF ) Tax Type: Sales and Use Tax

THE UTAH STATE TAX COMMISSION, )

STATE OF UTAH, )

) Presiding: McKeown

Respondent. )

_____________________________________

Presiding:

Richard B. McKeown, Chairman

Appearances:

For Petitioner:

For Respondent: Brian L. Tarbet, Assistant Attorney General

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission ("Tax Commission") for a Formal Hearing on July 7, 1998. Chairman Richard B. McKeown heard the matter for and on behalf of the Tax Commission. ATTORNEYS Petitioner PETITIONER ("PETITIONER"). Brian L. Tarbet, Assistant Attorney General, represented Respondent Customer Service Division of the Utah State Tax Commission ("Customer Service Division"). Having considered the evidence presented at the formal hearing, the memoranda, pleadings on file, and the arguments of respective counsel, the Tax Commission now enters its Findings of Fact, Conclusions of Law and Final Decision.

FINDINGS OF FACT

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

2. On June 26, 1997, PETITIONER filed a Request for Agency Action by Way of Declaratory Judgment and Request for Refund of sales taxes paid to vendors for certain purchases of services and tangible personal property related to the 1996 "expansion" of its cement plant near Leamington, Utah ("the Leamington facility").

3. PETITIONER is a STATE Corporation whose principal place of business is in CITY STATE. PETITIONER operates five cement manufacturing facilities in the western United States, one of which is near CITY, Utah, located on ADDRESS.

4. Increasing demand in markets served by PETITIONER CITY facility prompted PETITIONER to develop and construct a substantially larger cement manufacturing plant. The expanded facility has increased capacity by approximately 25%.

5. The machinery and equipment currently in use at the CITY facility did not need replacement. In fact, the CITY facility was only sixteen years old and still in the early stages of economic life. The equipment was properly maintained and was expected to operate successfully well into the future.

6. On January 19, 1996, COMPANY and PETITIONER entered into a contract by which COMPANY would design and build PETITIONER expanded CITY facility.

7. Expansion of PETITIONER CITY facility began on or about March 1, 1996 and was substantially completed by July 1, 1996, except for further modification and warranty responsibilities.

8. The manufacture of cement primarily involves the extracting, crushing, grinding and blending of RESOURCE and other raw materials into a chemically proportioned mixture which is then processed in a MACHINE to produce an intermediate product called PRODUCT." The PRODUCT is cooled and ground with a relatively small amount of RESOURCE to

produce finished cement.

9. Both before and after the expansion, the CITY facility incorporated the more fuel efficient "dry process" technology. In MACHINE, the most modern application of this technology, the raw materials are processed through a MACHINE that utilizes RESOURCE from the MACHINE to effect partial PROCESS of the raw materials before they enter the MACHINE.

10. The following is a description of additions or changes to the CITY facility made during its expansion in 1996:

a. Increased capacity of the MACHINE by converting the first compartment to a more efficient SYSTEM.

b. Installed a new SYSTEM in the LOCATION to improve fuel efficiency and to increase the amount of product PROCESSED.

c. CONVERTED ONE MACHINE TO ANOTHER, and enlarged PART, to allow additional RESOURCES to flow through the MACHINE without increasing the RESULT TROUGH THE MACHINE.

d. Installed PARTS to cool RESOURCES as they leave the MACHINE.

e. Installed an PART directly after the PART, to induce OF ADDITIONAL PRODUCT.

f. Installed more efficient MACHINE and MACHINE.

g. Installed a PART in the existing MACHINE to increase the capacity of the PLACE to keep pace with the increased fuel demand of the PROCESS.

h. Converted the SYSTEM to an indirect system by addition of a new PART in series with the PLACE. This allowed PRODUCE from the PLACE to be separated from the PRODUCT, AND PROCESSED IN A DIFFERENT WAY.

i. Modified the SYSTEM to handle the increased volume of PRODUCT. Install higher capacity units for the two MACHINES.

j. Modified the SYSTEM to handle the additional MACHINE feed.

k. Installed a SYSTEM on the existing raw mill to reduce PROCESS. Again, this allowed PROCESS TO EXPAND.

l. Modifications included piling foundations for the PLACE, PLACE, and several towers for the SYSTEM, a new tower for the SYSTEM, new supports for the tertiary PART, three new towers for the SYSTEM, and major modifications to the existing PLACE, to support the NEW PROCESS.

m. Installed a SYSTEM for the existing control system. This involved installing the PART throughout the plant, installing new operator stations in the control room, and installing specially designed software to automate much of the plant operations. A key component of this system is PART, which when properly tuned, is able to operate major areas of the plant for extended periods of time with minimal operator input.

11. The CITY facility produces portland cement. Classification 3241 of the Standard Industrial Classification Manual describes cement manufacturing facilities as "[e]stablishments primarily engaged in manufacturing hydraulic cement, including portland, natural, masonry and pozzolana cements."

APPLICABLE LAW

1. In November 1996, the Legislature amended and renumbered Utah Code Ann. '59-12-104(16), which exempts certain manufacturing equipment from the sales and use tax. In addition, the Legislature gave this amended statute an effective date of July 1, 1995. Accordingly, it is this amended statute that applies to PETITIONER February, 1996, through July, 1996, purchases of tangible personal property to "expand" its cement operations. The amended Section 59-12-104(16) provided the following exemptions:

(a) the following purchases or leases by a manufacturer on or after July 1, 1995:

(i) machinery and equipment:

(A) used in the manufacturing process;

(B) having an economic life of three or more years; and

(I) to manufacture an item sold as tangible personal property; and

(II) in new or expanding operations in a manufacturing facility in the state; and

(ii) subject to the provisions of Subsection (15)(b), normal operating replacements that:

(A) have an economic life of three or more years;

(B) are used in the manufacturing process in a manufacturing facility in the state;

(D) do not include repairs and maintenance;

(b) the rates for the exemption under Subsection (15)(a)(ii) are as follows:

(i) beginning July 1, 1996, through June 30, 1997, 30% of the sale or lease described in Subsection (15)(a)(ii) is exempt;

(ii) beginning July 1, 1997, through June 30, 1998, 60% of the sale or lease described in Subsection (15)(a)(ii) is exempt; and

(iii) beginning July 1, 1998, 100% of the sale or lease described in Subsection (15)(a)(ii) is exempt;

(c) for purposes of this subsection, the commission shall by rule define the terms "new or expanding operations" and "establishment"; ...

2. To administer the manufacturing equipment exemption of Section 59-12-104, the Commission has defined the terms "machinery," "equipment," "new or expanding operations" and "normal operating replacements" in Utah Admin. Code R865-19S-85. Subsequent to the Legislature's 1996 amendment to this exemption, Rule R865-19S-85 was also amended. However, the amended rule did not have an effective date until August 21, 1997. Accordingly, the amended rule is not applicable to PETITIONER 1996 purchases. The rule in effect during the February, 1996 to July, 1996, period in which PETITIONER "expanded" its cement operations provided the following:

A. Definitions:

1. "Machinery" means electronic or mechanical machines incorporated into a manufacturing or assembling process from the initial stage where actual processing begins, through the completion of the finished end product, and including final processing, finishing, or packaging of articles sold as tangible personal property. This definition includes automated material handling and storage machinery when that machinery is part of the integrated continuous production cycle.

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.

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 location in Utah; or

(3) increase production or capacity.

(b) The definition of new or expanding operation 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 twelve 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.

7. "Improvement" is defined in Section 59-2-102(11).

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.

C. Machinery or equipment used for an activity that is not part of the manufacturing process is not exempt. Examples of nonexempt activities include:

1. research and development;

2. refrigerated or other storage of raw materials, component parts, or finished product; or

3. shipment of the finished product.

...

3. An exemption from sales and use tax on certain purchases associated with pollution control facilities is found in Utah Code Ann. '59-12-104(12)(1996), which provides an exemption for "sales or use of property, materials, or services used in the construction of or incorporated in pollution control facilities allowed by Sections 19-2-123 through 19-2-127."

4. Utah Code Ann. '59-12-103(1) (1996) lists those transactions on which sales and use tax is imposed. Among these taxable transactions are those of Subsection 59-12-103(1)(g), which include "services for repairs or renovations of tangible personal property or services to install tangible personal property in connection with other tangible personal property."

5. Utah Admin. Code R865-19S-58(B) provides that "[t]he sale of real property is not subject to sales tax, nor is the labor performed on real property. For example, the sale of a completed home or building is not subject to the tax, but sales of materials and supplies to contractors for use in building the home or building are taxable transactions as sales to final consumers."

ANALYSIS AND CONCLUSIONS OF LAW

Prior to the expansion of the CITY facility, PETITIONER had advised the Auditing Division that it would pay sales and use tax on all purchases in connection with the expansion as if the project were fully taxable, then request a refund for all taxes paid on nontaxable and exempt transactions. In its subsequent refund request, PETITIONER seeks a refund of sales and use taxes paid on three types of purchases in connection with the expansion of the CITY facility.

The first type of purchases are for professional services, which PETITIONER claims are not taxable under Utah Code Ann. '59-12-103(1). Included as professional services are engineering and project management services. The second type of purchases are for labor used in connection with the installation and conversion of tangible personal property to real property, also pursuant to Section 59-12-103(1).

The third type of purchases on which refunds are requested are for machinery and equipment purchases that qualify either under the manufacturing exemption of Utah Code Ann. '59-12-104(16) and/or the pollution control exemption of Utah Code Ann. '59-12-104(12). Several subissues have arisen and must also be addressed concerning the purchases of this machinery and equipment. Specifically, PETITIONER has requested the refund of sales and use tax paid on materials incorporated into certain large structures, which Respondent claims should be characterized not as machinery and equipment, but as real property. Another issue is whether certain items are used in activities that are not part of the manufacturing process and thus ineligible for the manufacturing equipment exemption.

Exhibit P-Livesay-4 provides a list of all transactions associated with the expansion project. These transactions are separated into the three types of purchases for which PETITIONER is requesting a refund of taxes. Under its contract with Fuller, PETITIONER was separately invoiced for each type of purchase it made from Fuller. We shall separately address each of these types of purchases and the additional issues raised.

I. Professional Services

Sales and use taxes are levied upon the purchaser for "sales of tangible personal property," including "repairs and renovations of tangible personal property or services to install tangible personal property in connection with other tangible property." Utah Code Ann. '59-12-103(1) (1996). At question is whether various professional charges incurred by PETITIONER during its expansion are taxable under this statutory language.

The majority of the charges for professional services that are listed in Column 1 of Exhibit P-Livesay-4 are the professional services fees charged by NAME. NAME provided three types of professional services that are represented in this charge, specifically: (1) project engineering that is related to an individual piece of machinery or equipment, (2) project engineering that is related to the entire scope of work of the project; and (3) project management that is also related to the entire scope of the project. Fuller invoiced PETITIONER for these services in a lump sum representing a combined charge for all three types of services, without indicating the amount applicable to each type.

Prior to the closing arguments, counsel for both parties indicated a desire to stipulate as to which portions of the charges for professional services were taxable and which were not. At that time, the parties agreed that charges for professional services that related to the entire project were nontaxable and charges for professional services that related to an individual piece of equipment were taxable or exempt, depending upon the taxability of the underlying piece of equipment. The parties agreed to provide stipulation language to this effect to be included in the order, but have not done so. So, instead we accept the stipulation terms proposed by the parties at the hearing, as follows. The charges for professional services for project engineering that are specific to an individual piece of machinery or equipment, to the extent that these charges are properly booked and capitalized as a cost of the machinery or equipment, are exempt if the underlying machinery or equipment is exempt from taxation. On the other hand, professional services charges for project engineering that are specific to an individual piece of machinery or equipment are taxable if the underlying machinery or equipment is not exempt from taxation or if the charges are not booked and capitalized as a cost of machinery or equipment that is exempt. As to charges for project engineering services that relate to the entire scope of work of the project and project management services that relate to the entire scope of work of the project, these charges would not be taxable.

Where the charges for professional services are reported in a lump sum, but represent a combination of taxable services and nontaxable or exempt services, the parties shall agree to provide a breakdown of the lump sum into its separate parts. If the parties cannot agree, the parties may submit their respective views to the Commission for resolution.

II. Labor on Personal Property Converted to Real Property

PETITIONER contract with Fuller anticipated that NAME would act as a "builder" and convert certain tangible personal property into real property. Charges for labor, with respect to converting the tangible personal property to real property, have been separately identified in NAME'S invoices to PETITIONER. In Exhibit P-Livesay-4, these charges are found in Column 2-Labor. PETITIONER has paid sales and use tax on these specific labor charges and asks that these taxes be refunded.

Utah Admin. Code R865-19S-58(B) provides that "the sale of a completed home [, real property,] is not subject to the [sales and use] tax, but sales of materials and supplies [, tangible personal property,] to contractors and subcontractors are taxable transactions to final consumers." Necessarily excluded from taxation, therefore, is real property contract labor. Accordingly, charges for labor to convert tangible personal property to real property are not subject to sales and use tax, and to the extent that Ash Grove has paid taxes on such charges, these taxes should be refunded.

However, PETITIONER offers an alternative argument at the hearing, claiming that Exhibit P-Livesay-4 should be amended to remove all charges currently in Column 2 (for those items that were converted from tangible personal property to real property) and transfer them to Column 3 (for items that remained tangible personal property). PETITIONER wishes to identify these items as having remained tangible personal property instead of having become real property. Such a move might benefit PETITIONER because charges for items that remain tangible personal property and the labor to install these items may both be exempt from taxes under the manufacturing equipment exemption of Section 59-12-104(16). Should the tangible personal property instead be identified as having been converted to real property, only the labor is nontaxable (because Utah Admin. Code R865-19S-85(B) states that the manufacturing equipment exemption does not apply to real property or to tangible personal property that is purchased and becomes an improvement to real property).

PETITIONER argues that the items it originally designated in Column 2 as having been converted to real property are not really buildings, but are instead structures in support of the tangible personal property. These items include concrete foundations, structural steel and pilings that are put into place to support the machinery and equipment. Testimony is offered that when machinery and equipment are capitalized, the structures that support them are also capitalized because the structures are usually destroyed should the equipment be removed.

The majority of the charges in Column 2 relate to a silo that is used to store the finished cement prior to shipment. There is no chemical transformation of the cement after it arrives at the silo, and it is unlikely that the silo could be moved as it has a diameter of 80 feet and is over 150 feet tall. PETITIONER argues that the new silo is needed because of the increased output of the expanded facility and is a necessary component of the production process because a portion of the finished cement would be "lost" were a storage facility unavailable. PETITIONER also points out it depreciates the silo in the same manner as it does other manufacturing equipment.

In Morton Int'l, Inc. v. Utah State Tax Comm'n, 163 Utah Adv. Rep. 34, 814 P.2d 581, (Utah 1991), the Utah Supreme Court was confronted with a similar issue as to whether tangible personal property was converted to real property or remained tangible personal property for purposes of the manufacturing equipment exemption. In that case, Morton argued that the shells of its production facilities functioned as equipment by preventing, localizing, and directing accidental explosions, preventing toxic exposure to workers and the environment, providing structural support for specialized pieces of machinery, and providing access to machinery. The Commission rejected this argument, determining that the facilities constituted real property not subject to the manufacturing equipment exemption. The Supreme Court declined to disturb the Commission's ruling.

The facility shells in Morton Int'l served a similar support function for equipment as does the steel, concrete, and pilings that PETITIONER has installed to support its equipment. In both cases, these items were attached to the land and have become real property. As to the silo, its size and method of attachment to the ground leads us to believe it is real property, also. For these reasons, we confirm PETITIONER original characterization of these items as tangible personal property converted to real property. We do not believe these structures to be equipment, and, thus, they are ineligible for the manufacturing equipment exemption of Section 59-12-104(16). Accordingly, as we have determined that these structures, including the silo, are real property, any invoiced charges for labor to convert the tangible personal property to real property are nontaxable charges and should be refunded to the extent PETITIONER has paid sales and use tax on them.

One additional point should be addressed concerning the silo. Had we concluded that the silo was equipment, it still would not have qualified for the manufacturing equipment exemption because it is used for an activity outside the manufacturing process. Rule R865-19S-85(C) states that machinery or equipment used for an activity that is not part of the manufacturing process does not qualify for the exemption. The rule lists, as an example of equipment outside the production process, equipment used in the storage of finished product. It is clear that PETITIONER delivers its finished product, cement, to the new silo and that the silo is not used to process the cement. Not only is the silo real property instead of equipment, but its use is outside the cement's manufacturing process. For both these reasons, the silo does not qualify for the manufacturing equipment exemption.

III. Tangible Personal Property

PETITIONER asks for a refund of sales and use taxes paid on purchases of tangible personal property that remained tangible personal property after its installation. PETITIONER indicates that two exemptions apply to the purchase of these items, the manufacturing exemption of Section 59-12-104(16) and/or the pollution control exemption of Section 59-12-104(12). The transactions that relate to this portion of the refund request are listed in Column 3 of Exhibit P-Livesay-4.

A. Manufacturing Equipment Exemption

In November, 1996, the Legislature amended the manufacturing equipment exemption of Section 59-12-104(16), retroactive to July 1, 1995. The amended statute allowed an exemption for machinery and equipment with an economic life of three or more years if purchased or leased by a manufacturer in new or expanding operations and used in the manufacturing process to manufacture an item sold as tangible personal property. The version of this statute in effect prior to July 1, 1995 and the amended statute both required the Tax Commission to define the term "new or expanding operations" in rule for purposes of the manufacturing exemption.

Prior to July 1, 1995, the Tax Commission, in fulfillment of its statutory duty, had defined the term "new or expanding operations" in Rule R865-19S-85 ("Rule 85"), which remained unchanged during the period PETITIONER expanded its CITY facility,^[1] as follows:

A.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 location in Utah; or

(3) increase production or capacity.

(b) The definition of new or expanding operation is subject to limitations dealing with normal operating replacements.

Subpart (A)(3)(b) of the above definition bars any machinery or equipment that qualifies as normal operating replacements from also qualifying as machinery or equipment used in new or expanding operations. Rule 85 defines the term "normal operating replacements" as follows:

A.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.

If any machinery or equipment constitutes Anormal operating replacements,@ analysis of whether that machinery or equipment meets the definition of new or expanding operations in Subpart (A)(3)(a) is unnecessary.

The rule, on its face, would appear to preclude any "replacement" from qualifying for the exemption, regardless of the purpose of the replacement. For example, a taxpayer that replaces a state-of-the-art widget maker because it can produce only 100 widgets an hour would be denied an exemption for an otherwise similar machine purchased only because it can produce 10,000 widgets an hour. This application has the virtue of simplicity and may be consistent with guidance this Commission has given to the Auditing Division in the past.^[2] We now believe, however, that this application is unduly narrow. In interpreting the statute, we have the duty to give effect to all of its terms. The statute does not exclude all "replacements." It excludes "normal operating replacements" which is clearly a narrower term. See Eaton Kenway v. Auditing Division, 906 P.2d 882, 887 (1995).

The new machinery and equipment replaces other machinery and equipment of a similar nature. We determine that the new equipment that PETITIONER purchased for its 1996 expansion "replace[d] existing machinery and equipment of a similar nature" even though those replacements resulted in increased plant production or capacity. PETITIONER counsel concedes that the nature and character of the cement facility after the expansion is similar to the prior facility and that the purpose of the facility is the same prior to and after the expansion. We do not disagree with the counsel's conclusion. The plant produced cement both before and after the expansion. The new machinery and equipment replaced machinery and equipment of a similar nature, character, and purpose. For example, an existing coal system was converted to an indirect system by addition of a new dust collector so the moist gases could be vented, and existing kiln units received an upgrade with higher capacity units. Even though this new equipment increased PETITIONER productivity, it did not change the basics of cement production. For these reasons, we agree that the new machinery and equipment replaced existing machinery or equipment of a similar nature.^[3]

These replacements are not "normal operating replacements." We have found that the new machinery and equipment is similar in nature to the old equipment that was retired and thus qualifies as "replacement" equipment. To determine if these replacements qualify for the exemption, however, we must determine whether they are "normal operating replacements" within the meaning of the statute.

The Utah Supreme Court, in Eaton Kenway, has determined that replacement equipment purchased pursuant to a significant modernization and plant upgrade may constitute "normal operating replacements." In that case, the Court held (ibid):

After examining the exemption we do not agree with Eaton and

Amici that it should apply broadly to manufacturers upgrading and

modernizing existing machinery and equipment . . . Modernizing and

upgrading machinery and equipment are normally done in the

regular course of business even though the replaced items may be

in good working order . . . . notably, the statute does not simply deny

the exemption to normal operating replacements - but >normal

operating replacements . . . even though they may increase plant

production or capacity.= Utah Code Ann. '59-12-104(15) (emphasis

added). This language indicates that the legislature intended to deny

the exemption to purchases of replacements normally made in the

regular course of business even though through advanced technology

the replacement machinery and equipment are more efficient and

productive.

See also Newspaper Agency Corp. v. Auditing Division, 938 P.2d 266 (1997).

Eaton Kenway provides that replacements purchased to modernize existing facilities or maintain a competitive advantage are made in the "regular course of business" and are normal operating replacement, even if they increase production. Upgrades are often necessary in business to meet stricter federal or state guidelines, to replace obsolete equipment, or just to remain competitive. Such upgrades or modernizations are in the "regular course of business" because they maintain a business's current production potential and competitive position or allow the business to adapt to new market variables, such as stricter pollution level guidelines. This type of upgrade is made in the "regular course of business" even if increased production is a secondary result.

On the other hand, upgrades that have little purpose other than to increase production are an expansion of a business, not the regular course of business. In such an instance, the business is not maintaining its current production potential and competitive position or adapting to variable market conditions, but is upgrading primarily to increase production. It is these types of upgrades that we feel are expansionary replacements, not normal operating replacements.

What stands out in the long list of equipment replaced at PETITIONER is the fact that the new machinery and equipment almost always had a larger capacity than the old machinery and equipment. While the Respondent argues that the changes were aimed at simply upgrading equipment to a more technologically advanced and convenient process, we do not believe this was a major goal or result of the upgrade. While some of the new equipment may be more technologically advanced than the previous equipment, that was not the purpose for the expansion. There is little or no evidence that efficiency was improved by the new equipment or that pollution levels dropped because of the new equipment. In fact, the CITY facility was already the most efficient plant that PETITIONER owned, even prior to the expansion. Nor is evidence offered that efficiency or pollution level concerns even precipitated or influenced the expansion decision.

Instead, the testamentary evidence overwhelmingly shows that PETITIONER reconfigured its cement manufacturing plant primarily, if not solely, in order to increase its production capacity. PETITIONER was not seeking to modernize or update its machinery and equipment in its old plant. In fact, the machinery and equipment in the plant were working normally and properly at full potential capacity and would have continued to do so for many years in the future. PETITIONER reconfigured its plant for one reason - to increase production capacity. Documentary evidence supports the fact that PETITIONER production capacity has increased approximately 25 percent because of the expansion. PETITIONER did not just "upgrade" or "modernize" its plant. It added or replaced machinery and equipment at its CITY plant to increase its production capacity.

Accordingly, PETITIONER 1996 expansion is not a substitution normally made in the regular course of business. The goal and result were not to increase the plant's efficiency, or modernize or upgrade the equipment. The goal and result both were to enable PETITIONER to produce more cement. PETITIONER upgrades were primarily, if not solely, for expansionary purposes. Therefore, we find PETITIONER purchases of machinery and equipment for its 1996 expansion were not made in the "regular course of business," and thus are not normal operating replacements.

Because the machinery and equipment are not "normal operating replacements," we need to analyze whether the equipment qualifies for use in "new or expanding operations" as outlined in subpart (A)(3)(a) of the rule. This subpart lists three activities that qualify purchases as "new or expanding operations." As the three activities are listed disjunctively, the existence of any one of the three activities is sufficient to result in a "new or expanding operations" designation. It is clear from the facts that PETITIONER 1996 expansion at the CITY facility did increase its production of cement and its capacity to produce cement. Accordingly, the PETITIONER purchases of machinery and equipment for the 1996 expansion are in "new or expanding operations" in a manufacturing facility in the state, a requirement of Section 59-12-104(16)(a).

PETITIONER is also a manufacturer of cement, the purchases are for machinery and equipment that have an economic life of three years or more and are used in the manufacturing process to manufacture tangible personal property (cement) for sale. No evidence is given to suggest otherwise. Thus, PETITIONER's 1996 expansion of its CITY facility meets all the requirements necessary to qualify its purchases of machinery and equipment for the manufacturing equipment exemption for "new or expanding operations."

B. Pollution Control Exemption

PETITIONER also requests that some of the purchases pertaining to the 1996 expansion of the CITY facility may be exempted from taxation under Section 59-12-104(12), which allows a sales and use tax exemption on the purchase "of property, materials, or services used in the construction of or incorporated in pollution control facilities allowed by Sections 19-2-123 through 19-2-127." Utah Code Ann. '19-2-123(2) provides that a facility may receive the pollution control exemption only upon obtaining a certification of pollution control from the Department of Environmental Quality. As the CITY facility has not been certified as a pollution control facility by the Department of Environmental Quality, the pollution control exemption is not available.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that PETITIONER purchases of professional services are taxable or exempt in part (depending upon the taxability of the underlying equipment) and nontaxable in part. PETITIONER should receive a refund of taxes paid on the exempt and nontaxable purchases of professional services. Also, PETITIONER should receive a refund of taxes paid on labor to convert tangible personal property to real property. Lastly, the machinery and equipment purchased to expand the CITY facility qualify as new or expanding operations and are thus eligible for the full manufacturing equipment exemption. Thus, PETITIONER should receive a refund of taxes paid on this "new or expanding" machinery and equipment. However, PETITIONER does not qualify for any refund of taxes pursuant to the pollution control exemption. It is so ordered.

DATED this 26TH day of February, 1999.

Richard B. McKeown Pam Hendrickson

Chairman Commissioner

R. Bruce Johnson Joe B. Pacheco

Commissioner Commissioner

^[1] Because of the November, 1996, amendment to the statute, Rule R865-19S-85 was also amended. But, the amended rule did not have an effective date until September 21, 1997. Accordingly, the amended rule with an effective date of September 21, 1997, is not applicable to the 1996 purchases for the Leamington facility expansion.

^[2] Ease of administration is not irrelevant and furthers the important goals of treating taxpayers equally and allowing them to predict the tax consequences of their proposed actions. Administrative convenience, however, cannot justify a disregard of the words of a statute.

^[3] We do not require any exact matching of individual pieces of equipment. It is sufficient that Ash Grove=s new machinery and equipment, taken as a whole, replaced previous machinery and equipment of a similar nature. See Eaton Kenway, where a state-of- the- art computer numerically controlled machine replaced six manually assisted cutting and drilling machines.