90-014
January
24, 1991
XXXXX
Utah
State Tax Commission
Auditing
Division
160
East Third South
Salt
Lake City, Utah 84134-2100
Re:
XXXXX Petition for Redetermination
Dear
XXXXX:
Enclosed
please find our Petition for Redetermination regarding the manufacturers'
exemption from sales tax on purchase of equipment used in new or expanding
manufacturing operations.
The
Petition is in response to an Advisory Opinion dated December 3, 1990 signed by
Joe B. Pacheco which was received in our office on December 27, 1990 (see
attached copy of envelope showing December 26, 1990 postmark).
Please
call me at XXXXX if you have any questions. We thank you for your help and
consideration.
Sincerely,
XXXXX
Treasurer
BEFORE THE UTAH STATE TAX COMMISSION
In
the Matter of:
XXXXX
Petitioner,
XXXXX
PETITION
FOR REDETERMINATION
The
Petitioner herewith requests an agency action before the Utah State Tax
Commission, as provided in Utah Code Ann. §63-46b-3(3). (Attach additional
pages if necessary.)
1. If this petition results from a letter or
notice from the Commission, include the date of the letter or notice and the
originating division or officer.
This
opinion results from an Advisor Opinion dated December 3, 1990, signed by
Commissioner Joe B. Pacheco.
2. Indicate the agency's file number or other
reference number.
None
3. Indicate the particular tax involved, the
period of alleged liability, if appropriate, and the amount of tax or the issue
in dispute.
The
tax involves sales tax. The amount and periods have not been determined. but will
comply with the rates in effect at the time of purchase within the statute of
limitations.
4. Include a statement of the facts and reasons
forming the basis for relief or action sought from the agency.
See
Attached
5. Include a summary of arguments and
authorities relied upon.
See
Attached
6. Indicate legal authority, jurisdiction,
and/or rule under which agency action is requested.
UCA-59-12-104(16);
Rule R865-19-85S
7. Include a statement of the relief or action
sought from the agency.
See
Attached.
8. Do you request an oral hearing Yes / x/
No / /
If
not, the Commission will make a determination based on the information
presented herewith.
9. Indicate the names and addresses of all
persons to whom a copy of the Petition for Redetermination is being sent.
The
Petition was delivered to Utah State Tax Commission -- Attn: XXXXX
Petitioner's
Signature
Telephone
No. XXXXX
MAILING
CERTIFICATE
I
certify that I hand delivered this Petition for Redetermination to the Utah State
Tax Commission, Auditing Division, 160 East Third South, Salt Lake City, Utah,
84134-2100, this 24th day of January 1991.
Petitioner
Petition
for Redetermination
January
24. 1991
Statement
of Facts/Summary of Arguments
XXXXX
(XXXXX) is a Utah corporation engaged primarily in radio and television
broadcasting. Two of XXXXX's divisions, XXXXX (XXXXX) and XXXXX (XXXXX),
qualify for the sales tax exemption provided in UCA 59-12-104(16). The XXXXX
and XXXXX manufacturing processes deal with video and audio tapes. XXXXX and
XXXXX annually produce over 3,000,000 audio cassettes and 1,500,000 video tapes
respectively.
In
both divisions, the manufacturing process deals basically with three phases:
1-
Assembly: Blank tape is loaded into VHS or audio shells.
2-
Duplication: Program material is then reproduced onto the audio or video tape.
3-
Distribution: The video and audio tapes are then labelled and packaged for
distribution to resellers.
Various
pieces of machinery and equipment are used in this manufacturing process.
During recent years, equipment was purchased to expand the video and audio tape
manufacturing operations. Sales tax was paid on the purchase of this equipment.
Some
examples will illustrate the type of work and clientele that XXXXX and XXXXX
deal with:
A
popular video in Utah has been "XXXXX", a musical dealing with
problems faced by LDS families and youth. XXXXX, the distributor, contracted
with XXXXX to reproduce approximately 60,000 copies of this video tape. XXXXX then
distributes the video to bookstores and video outlets throughout the country.
XXXXX,
a large national publisher, contracts with XXXXX for the duplication of
"books on tape." XXXXX will reproduce say 5,000 audio cassettes of a
particular book and then sell the cassettes to XXXXX who then distributes the
tapes to its national network of retail outlets. In summary, the XXXXX/XXXXX
manufacturing operations deal mainly with the duplication of video and audio
tapes which are sold to wholesalers/distributors who then in turn distribute
the tapes to various retail outlets throughout the country.
Section
59-12-104(16) provides for a sales tax exemption for purchases or leases of
machinery and equipment by a manufacturer for use in new or expanding
operations (excluding normal operating replacements) in any manufacturing
facility in Utah. A manufacturing facility is defined as an establishment
described in the Standard Industry Classification (SIC) Codes 2000 to 3999 of
the 1972 SIC Manual.
Rule
R865-19-85S(A)(5) states that an "Establishment 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." Pursuant to this rule, XXXXX may have various SIC
codes for various establishments. The operations of XXXXX and XXXXX must be treated
as separate establishments for purposes of the sales tax exemption.
The
XXXXX/XXXXX tape manufacturing operations are directly related to the SIC
manufacturing code series. Quoting from page 57 of the 1972 SIC manual's
definition of manufacturing:
"Establishments
engaged in assembling component parts of manufactured products are also
considered manufacturing if the new product is neither a structure nor other
fixed improvement."
XXXXX
and XXXXX assemble the tape and cassette shell component parts as part of its
tape manufacturing process.
SIC
Code number 3652 applies specifically to our operation. That category includes
establishments primarily engaged in manufacturing phonograph records and
pre-recorded magnetic tapes. At the establishments in question, the majority of
our work deals with prerecorded audio and video tapes and fits precisely within
this category. Moreover, the tapes XXXXX and XXXXX manufacture are sold to
wholesalers/distributors rather than to final retail consumers. This factor
(sold to wholesalers/distributors) is not mentioned in this classification, but
it appears frequently in other manufacturing classifications and appears to be
a significant factor in determining whether the "manufacturing"
classification is appropriate.
Our
business is also similar to the printing industries identified as major group
27. In particular, we are analogous with and closely related to the provisions
set forth regarding codes 2731 and 2732. In essence, XXXXX is producing books
and music on audio tapes while printers produce books and music on paper. XXXXX
is producing stories and ideas on video tape, while printers produce stories
and ideas on paper. The operations at the XXXXX/XXXXX establishments involve
manufacturing and therefore qualify for exemption under the provisions of Rule
R865-19-85S.
The
Tax Commission's letter of December 3, 1990, indicates that "the activity
performed by XXXXX and XXXXX is a "production" service, and they do
not meet the requirement that their activity would be classified as
manufacturing with a SIC code from 2000 to 3999." This letter also
incorrectly assigns the SIC code 7814 to XXXXX and XXXXX.
The
7814 SIC Code description states: "Establishments primarily engaged in the
production of theatrical and nontheatrical motion pictures and tape, including
commercials, for television exhibition." Establishments engaged in both
production and distribution are included here. This classification does not
apply to the XXXXX and XXXXX activities described above. In addition, one of
the activities included under the 7814 classification is "Video tape
production (but not reproducing)." Is it precisely the
"reproducing" (which is specifically excluded from this SIC code
section) that XXXXX and XXXXX are involved with. The majority of our audio and
video tapes are mass produced copywritten materials which are sold to
wholesalers/distributors who then distribute the tapes to retail outlets for
resale to consumers. We strongly
believe that the expansion of our business operations is exactly what the
legislature had in mind in adopting this business development related
exemption.
Statement
of Relief Sought
XXXXX
respectfully requests a ruling that it is entitled to seek a refund of sales
tax paid together with applicable interest relating to purchases of equipment
qualified for sales tax exemption. Sales tax was paid to vendors of the
equipment. If this relief is not granted based on the information included in
this request, a formal oral hearing is requested. Subsequent to the filing of
this petition, we will prepare a detailed list of equipment qualifying for the
sales tax exemption.
XXXXX
Re:
Advisory Opinion - Manufacturer's Exemption from Sales Tax
Dear
XXXXX:
This
letter is in response to your recent request for a Tax Commission ruling on whether
your wholly owned subsidiaries, XXXXX and XXXXX, qualify for exempt purchases
under §59-12-104(16). It is your opinion that producing video tapes is a
manufacturing activity.
The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request ant make recommendations concerning it. As such, your
request was referred to the Tax Commission's Auditing Division for their
analysis and recommendation. The Division's recommendation is as follows:
1.
The activity performed by XXXXX and XXXXX is a "production" service,
but they do not meet the requirement that their activity would be classified as
manufacturing with a SIC code from 2000 to 3999. In the Standard Industrial
Code Manual of 1972, they would be classified with SIC Code 7814, which is not
a manufacturers code number. A copy of the manual page is attached.
2.
XXXXX and XXXXX are not entitled to apply for a refund of sales or use tax even
though they may have expanded their "production" facilities.
Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously,
if there are deviations from these facts, this opinion may be negated.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights is attached.
For
the Commission,
Joe
B. Pacheco
Commissioner
Utah
State Tax Commission
Heber
Wells Building
160
East 300 South
Salt
Lake City, Utah 84134
Attn:
XXXXX
Re:
Sales Tax Exemption for Purchases/Leases of Machinery and Equipment by a Manufacturer
for Use in New or Expanding Operations (Rule R865-19-85S)
Dear
XXXXX:
The
purpose of this letter is to request clarification regarding the application of
Rule 865-19-85S to the operations of XXXXX and XXXXX, both divisions of XXXXX
(#XXXXX).
XXXXX
(XXXXX) is a Utah corporation engaged primarily in radio and television
broadcasting. Two of XXXXX's divisions, XXXXX and XXXXX, perform manufacturing
services as part of their operations which appear to qualify for the sales tax
exemption for equipment purchases and leases provided for under the sales tax
rule cited above.
The
XXXXX and XXXXX manufacturing processes deal with video and audio tape
duplication respectively. In both companies, the manufacturing process deals
basically with three phases:
1)
Loading of blank tape into VHS video or audio shells
2)
Duplication of program material onto tape
3)
Labelling and packaging of materials for distribution
Various
pieces of machinery and equipment are used in the manufacturing processes
described above.
Rule
R865-19-85S provides for a sales tax exemption for purchases or leases of
machinery and equipment by a manufacturer for use in new or expanding
operations (excluding normal operating replacements) in any manufacturing
facility in Utah. Normal operating replacements would include replacement
machinery and equipment which increases plant production or capacity. A
manufacturing facility is defined as an establishment described in the SIC
Codes 2000 to 3999 of the Standard Industrial Classification Manual.
XXXXX's
SIC code is 4830, for radio and television broadcasting. Rule R865-19-85S
indicates in paragraph 5 that an "Establishment 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." This would seem to indicate that even though XXXXX's SIC
code does not fall within the 2000-3999 range, that the operations of XXXXX and
XXXXX should be treated as a separate establishment for purposes of the sales
tax exemption.
Based
on the materials discussed above, we would appreciate your responding to the following
questions:
1)
Are XXXXX and XXXXX eligible for the sales tax exemption provided for by Rule
R865-19-85S?
2)
What is the effective date(s) for the this exemption?
3)
If the answer to 1) above is yes, would XXXXX and XXXXX be entitled to file for
a refund of sales taxes paid on equipment purchased for use in expanding
operations?
We
would appreciate your response to these questions plus any additional
information which would help us to comply with the sales and use tax
regulations in this area. Please call me at XXXXX if you have any questions or
should you need additional information.
We
thank you for your help and consideration.
Sincerely,
XXXXX
Treasurer