98-0032

Sales Tax

Signed 6/20/98

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER :

: ORDER

Petitioner, :

: Appeal No. 98-0032

v. : Account No. #####

AUDITING DIVISION OF : Tax Type: Sales Tax

THE UTAH STATE TAX )

COMMISSION, : Presiding: McKeown

Respondent. :

_____________________________________

Presiding:

Richard B. McKeown, Commissioner

Appearances:

For Petitioner: NAME

For Respondent: Gale K. Francis, Assistant Attorney General

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission on June 22, 1998 for an Initial Hearing pursuant to the provisions of Utah Code Ann. §59-1-502.5.

Petitioner appeals from a sales tax deficiency assessment imposed by Respondent via a statutory notice letter dated November 21, 1997. The assessment arises from Respondent's determination that Petitioner claimed a manufacturing exemption on its purchases of fuel used at its business location.

Petitioner argues that it is eligible for the exemption because it performs manufacturing activities at its shop. Respondent counters that Petitioner operates as a real property contractor and, therefore, is not eligible to claim the fuel exemption as a manufacturer.

APPLICABLE LAW

Prior to July 1, 1996, the sales tax exemption on fuels was as follows:

1. Utah Code Ann. §59-12-103 (Supp. 1995) states in part:

(1) There is levied a tax on the purchaser for the amount paid or charged for the following:

. . .

2. Utah Code Ann. §59-12-102 (Supp. 1995) states in part:

(3) "Commercial consumption" means the use connected with trade or commerce and includes:

. . .

(d) real property contracting work.

Effective July 1, 1996, the sales tax exemption on fuels is as follows:

1. Utah Code Ann. §59-12-103 (Supp. 1996) states in part:

(1) There is levied a tax on the purchaser for the amount paid or charged for the following:

. . .

2. Utah Code Ann. §59-12-102 (Supp. 1996) states in part:

(4) "Commercial use" means the use of gas, electricity, heat, coal, fuel oil, or other fuels that does not constitute industrial use under Subsection (10) or residential use under Subsection (16).

. . .

(10) "Industrial use" means the use of natural gas, electricity, heat, coal, fuel oil, or other fuels in:

. . .

(c) manufacturing tangible personal property at 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.

DISCUSSION

Petitioner is in the business of selling and installing air conditioning and heating systems. In the course of installing a system, Petitioner may custom fit pipe and sheet metal duct work as required for each particular job. The work of customizing the pipe and duct work may take place on site or in Petitioner's shop. Petitioner claims that because some of this pipe and metal work takes place in the shop, Petitioner is a manufacturer for purposes of the sales tax exemption on fuel consumed for manufacturing purposes. We disagree. Petitioner's primary business is that of a real property contractor. To the extent that Petitioner fabricates pipe fittings and duct work, it does so for its own use in performing its construction contracts. The fabrication activities are incidental to Petitioner's primary construction work activities.

A good deal of the argument in this case focused on whether Petitioner's in-shop activities fit within a manufacturing code of the Standard Industrial Classification Manual (SIC Manual). Petitioner argues that even if it is a real property contractor whose on-site construction activities fit within the construction classification 1711 of the SIC Manual, it also engages in manufacturing activities. To the extent that the manufacturing activities take place in its shop, they should be separately considered as manufacturing activities within SIC code 3444.

According to the SIC Manual at p. 11, "each establishment is classified according to its primary activity." (Emphasis added.) Furthermore, "[f]or activities such as construction, . . . establishments are represented by those relatively permanent main or branch offices, terminals, states, etc., that are either (1) directly responsible for supervising such activities, or (2) the base from which personnel operate to carry out these activities. Id. at p. 12. The Commission finds that Petitioner is primarily a real property contractor, it has one base of operation, and its entire operation is covered by SIC code 1711. The shop activities do not constitute a separate establishment.

The fuel exemption for manufacturing activities has been expressly tied to the SIC Manual classifications since 1996. Because the audit period at issue here extends back beyond 1996, it is necessary to determine whether Petitioner qualified for the exemption under the earlier version of the law without regard to its SIC classification. Prior to statutory amendment in 1996, section 59-12-103 of the Utah Code imposed sales tax on the sale of fuel used for commercial consumption. Under section 59-12-102, the term "commercial consumption" included real property contract work. (Emphasis added.) As stated above, Petitioner fabricates some of the items that it converts to real property as part of its real property contract work, however, that activity is incidental to its real property contract work. Therefore, it was not eligible for exemption under the earlier version of the law.

DECISION AND ORDER

The Commission finds that Petitioner is not a manufacturer within the meaning of the fuel exemption for manufacturer, and, therefore, sustains the assessment.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further appeal rights in this matter.

DATED this 20 day of July, 1998.

Richard B. McKeown

Commissioner

BY ORDER OF THE UTAH STATE TAX COMMISSION.

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

DATED this 20 day of July, 1998.

W. Val Oveson

Chairman

Joe B. Pacheco Pam Hendrickson

Commissioner Commissioner