98-1300

SALES TAX

Signed 10/11/00

 

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

 

PETITIONER, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioner, ) AND FINAL DECISION

)

v. ) Appeal No. 98-1300

) Acct. No. #####

AUDITING DIVISION OF )

THE UTAH STATE TAX ) Tax Type: Sales Tax/Exemption

COMMISSION, )

) Judge: Phan

Respondent. )

_____________________________________

 

Presiding:

Pam Hendrickson, Commissioner

Jane Phan, Administrative Law Judge

 

Appearances:

For Petitioner: Attorney at Law

For Respondent: Brian Tarbet, Attorney General's Office, and Anna Anderson, Auditing Division

 

 

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on July 12, 2000. 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 tax.

2. The audit period in question January 1, 1996 through December 31, 1997.

3. Petitioner operates a micro brewery and restaurant. Both operations are housed in one building. The restaurant is a retail establishment that falls within SIC Code 5812. The manufacture of malt beverages falls within SIC Code 2082.

4. Petitioner's micro brewery and restaurant operate as a single legal entity. Petitioner has one set of accounting books for both the brewery and the restaurant and one payroll. It operates under one business license. The restaurant and brewery clearly are one economic unit.

5. While 25 to 65 of the Petitioner's employees work in the restaurant, only 1 full-time and 1 to 2 part-time employees work in the brewery.

6. The building in which Petitioner operates the brewery and restaurant is 8,500 square feet. Of that, 1,500 square feet are used by the brewery operation, the rest of the building is used by the restaurant operation. The brewery and restaurant are separated by a glass wall.

7. Testimony and evidence supplied by Petitioner indicates that its retail restaurant business is the primary support for the microbrewery while the owners attempt to grow their wholesale business. The brewery was designed to produce much more beer than could ever be sold at the restaurant and it was designed so that there is room for additional expansion. Currently the restaurant uses approximately 1/3 of the brewery's capacity.

8. Although it was Petitioner's intent to sell its beer wholesale, its actual beer sales outside of the restaurant have been very minimal. In 1996, of Petitioner's $$$$$ in total sales, only $$$$$ came from the wholesale of beer. In 1997, of Petitioner's $$$$$ in total sales, only $$$$$ came from the wholesale of beer. Petitioner did not have the numbers available for 1998 or 1999. Petitioner's projections for 2000 were total sales of $$$$$ with $$$$$ coming from the wholesale of beer.

APPLICABLE LAW

1. Utah Code Ann. '59-12-104 (15) (Supp. 1996)[1] states in pertinent part:

The following sales and uses are exempt from the taxes imposed by this chapter:

. . .

(15) sales or leases of machinery and equipment purchased or leased by a manufacturer on or after July 1, 1995 for:

(i) use in new or expanding operations related to the manufacturing process in any manufacturing facility in Utah:

(A) manufacturing facility means 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;

(B) for purposes of this subsection, the commission shall by rule define the [term] . . . "establishment";

 

2. Utah Administrative Rule R865-19S-85 (Supp 1994), effective March 14, 1994 through July 2, 1997, states in pertinent part:

 

A. 5. AEstablishment@ means an economic unit of operations 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.

. . . .

 

3. Utah Administrative Rule R865-19S-85 (A) (Supp. 1997), effective July 3, 1997, states in pertinent part:

 

A. Definitions:

. . .


2. AEstablishment@ means an economic unit of operations, that is generally at a single physical location in Utah, where qualifying manufacturing processes are performed. If a business operates in more than one location (e.g., branch or satellite offices), each physical location is considered separately from any other locations operated by the same business.

. . .

D. Where manufacturing activities and nonmanufacturing activities are performed at a single physical location, machinery and equipment . . . purchased for use int he manufacturing operation are eligible for the sales and use tax exemption . . . if the manufacturing operation constitutes a separate and distinct manufacturing establishment.

1. Each activity is treated as a separate and distinct establishment if:

a) no single SIC code includes those activities combined; or

b) each activity comprises a separate legal entity.

 

CONCLUSIONS OF LAW

1. Petitioner=s microbrewery operation did not qualify for the manufacturing exemption as a separate and distinct establishment under Utah Administrative Rule R865-19S-85 as that rule was written prior to amendment in 1997.

2. Due to a substantive amendment to Utah Administrative Rule R865-19S-85, effective July 3, 1997, Petitioner=s purchases of qualifying equipment and machinery on or after that date are eligible for the manufacturing exemption.

DISCUSSION

The issue presented in this case is whether Petitioner=s microbrewery operations constitute a manufacturing facility within the meaning the manufacturing exemption set out in section 59-12-104 of the Utah Code. Under Section 59-12-104, purchases and leases of machinery and equipment used in qualifying manufacturing operations are exempt from sales and use tax. To qualify as a manufacturing facility, the operations must fall within codes 2000 to 3999 of the Standard Industrial Classifications (ASIC@) described in the SIC manual published in 1987.

Petitioner operates both a micro brewery and a restaurant on the same premises. The micro brewery not only shares premises with Petitioner=s restaurant, its business operations are intertwined with the operations of the restaurant so that it does not constitute a separate economic unit. The restaurant is properly classified as SIC code 5812, a classification that does not qualify as a manufacturing facility under the provisions of the exemption.

A brewery of ale beverages is classified as SIC code 2082, a classification that is eligible for the manufacturing exemption. If the micro brewery was Petitioner's primary operation at this location or if it was a separate legal entity, it would clearly qualify as a manufacturing facility. However, in this case, the micro brewery and the restaurant are a single legal entity, and the restaurant operation is the primary business activity of that entity. To qualify for the manufacturing exemption, the micro brewery must qualify as an "establishment" under Utah Administrative Rule R865-19S-85 ("Rule 85").

Until Rule 85 was amended in July of 1997, "establishment" was defined as "an economic unit of operation," generally operating at a single location. "Where distinct and separate economic activities are performed at a single physical location, each activity should be treated as a separate establishment." Under these terms of Rule 85, the Commission has taken the position that a brewery functioning as part of a restaurant operation is not a separate establishment, but part of a business that functions primarily as a retail establishment. As such it does not qualify for the manufacturing exemption. This position was upheld by the Utah Supreme Court in Company v. Auditing Division of the Utah State Tax Comm'n., 945 P.2d 691 (Utah 1997).


Like the brewery in Company, Petitioner's micro brewery functions in conjunction with its restaurant operation. Under this definition of "establishment," the micro brewery does not qualify as a separate manufacturing operation. Therefore, the purchases for the micro brewery operation during the time that this definition of "establishment" was in place do not qualify for exemption.

In 1995, the manufacturing exemption came under close scrutiny and debate by the legislature. Once the legislature had settled on its final statutory amendments (and while Company was pending before the Supreme Court), the Commission promulgated changes to Rule 85. Pertinent to this case is the language in subsection D concerning businesses that perform both manufacturing and nonmanufacturing activities at a single location. The manufacturing arm of the business is considered a separate and distinct manufacturing establishment if (a) no single SIC code includes those activities combined; or (b) each activity comprises a separate legal entity. Because there is no SIC code that combines the activities of a brewery and a restaurant, we find that Petitioner's micro brewery operation qualifies as a separate establishment under (a). This change in the Rule 85 became effective on July 3, 1997, and Petitioner's purchases of qualifying machinery and equipment on or after July 3, 1997 are eligible for exemption.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that Petitioner's purchases of machinery and equipment for the micro brewery before July 3, 1997 are not eligible for the manufacturing exemption. Purchases of qualifying machinery and equipment on or after July 3, 1997 are eligible for exemption. It is so ordered.

DATED this __11____ day of ________September_______________, 2000.

 

__________________________________

Jane Phan

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 __11___ day of _________September________________, 2000.

 

 

Pam Hendrickson R. Bruce Johnson

Commission Chair Commissioner

 

 

Palmer DePaulis Marc B. Johnson

Commissioner Commissioner

 

Notice of Appeal Rights: You have twenty (20) days after the date of this order to file a Request for Reconsideration with the Tax Commission Appeals Unit pursuant to Utah Code Ann. '63-46b-13. A Request for Reconsideration must allege newly discovered evidence or a mistake of law or fact. If you do not file a Request for Reconsideration with the Commission, this order constitutes final agency action. You have thirty (30) days after the date of this order to pursue judicial review of this order in accordance with Utah Code Ann. ''59-1-601 and 63-46b-13 et. seq.

 

 

 

 

 


[1] Reference here is to the 1996 supplement. Although the manufacturing provisions have been subject to frequent amendment, the provisions cited here are relevant to the audit period in question in this case.