Response
December 14, 1990
December
14, 1990
XXXXX
Re:
Advisory Opinion - XXXXX
Dear
XXXXX:
This
letter is in response to your recent
request for a Tax Commission ruling on whether sales or use tax would be due on
the purchase or lease of equipment used in a new manufacturing facility where
printed circuit boards are produced.
You have stated that all of the equipment will be used in the
manufacturing process and than none will be used for research and development,
refrigeration or storage of raw materials or finished goods, or used in
shipping finished goods. All of the
equipment will have a useful life of three or more years.
The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your request was referred to the
Tax Commission's Auditing division for their analysis and recommendations. The division's recommendation is as follows:
1. Code section 59-12-104 (16) and Sales Tax
Rules R865-19-85S provide tax exemption for the purchase or lease of qualifying
machinery and equipment for use in a new or expanded manufacturing
facility. Based upon your description
of the equipment and its use the exemption cited above is available for both
the purchases and leases referred to in the request.
2. It should be noted that equipment, such as
computers, not used in the actual production process will not qualify for
exemption.
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
November
19, 1990
HAND-DELIVERED
Utah
State Tax Commission
Auditing
Division
Sales
and Use Tax Section
160
East 300 South
Salt
Lake City, Utah 84134
Attention:
XXXXX
RE: XXXXX -- Equipment Lease Transaction
Gentlemen:
The
purpose of this letter is to request an advisory opinion as to sales and use
tax consequences of equipment purchase and leasing transactions.
We
represent XXXXX, a Utah corporation ("XXXXX"). XXXXX was formed in
1989 to construct a new manufacturing plant at the XXXXX in Salt Lake County,
Utah, for the manufacture of printed circuit boards for computers. XXXXX is a
wholly-owned subsidiary of XXXXX, a XXXXX corporation.
XXXXX
contracted with XXXXX of Salt Lake City to build the manufacturing plant. XXXXX
expects the building to be completed before January 1, 1991. XXXXX has ordered
numerous items of highly-technical, sophisticated equipment from various vendors
and manufacturers around the world, and such equipment is beginning to arrive
at the plant site for installation and testing. Equipment for the plant will be
coming from Japan, Hong Kong, Taiwan, Germany, Israel, and various locations
within the United States.
When
the plant is completed and ready to begin operations (which is estimated to be
in March/April, 1991) it is estimated that the cost of the plant and premises
will be about U.S. $$$$$, and the cost of equipment and facilities in the plant
will be between U.S. $$$$$ and U.S. $$$$$. It is anticipated that, at start-up,
the plant will employ approximately 200 full-time employees, with potential for
growth to approximately 400 full-time employees in two to three years.
To
finance the equipment needed for the plant, XXXXX has chosen to use a
combination of financing as follows:
1.
Self-financing (purchase) Approx.
U.S. $$$$$
2.
Equipment lease financing Approx.
U.S. $$$$$
obtained
under authority of the
Utah
Industrial Facilities and
Development
Act through Salt Lake
City
Corporation and XXXXX ("XXXXX:)
3. Equipment lease financing Approx. U.S.$$$$$
through
XXXXX ("XXXXX")
Most
of the equipment will require expert installation and testing before it can be useful
in the plant operations. It is expected that some of the equipment will be
installed by the end of 1990, and the remainder will be installed in January or
February, 1991.
Some
items of equipment will be purchased and owned by XXXXX and not be subject to
any lease financing arrangement.
The
equipment to be subject to the XXXXX transaction will be purchased directly by
XXXXX, and then leased to XXXXX. Actually, since the XXXXX transaction is under
the authority of the Utah Industrial Facilities Development Act through Salt
Lake City Corporation, the equipment will be leased from XXXXX to Salt Lake
City Corporation pursuant to a Lease/Purchase Agreement and, simultaneously,
subleased from Salt Lake City Corporation to XXXXX pursuant to a Sublease/Purchase
Agreement.
The
equipment to be subject to the XXXXX equipment lease financing will consist of
two packages--one package being equipment to which XXXXX has already taken
title, which will be sold to XXXXX and then leased back by XXXXX, and the
second package being equipment which will be purchased directly by XXXXX from
manufacturers and then leased to XXXXX.
Under
the XXXXX equipment lease agreement, XXXXX will have the option to purchase the
equipment at the end of the five-year lease term for an amount equal to 32.5%
of the original equipment cost. If such option is not timely exercised at that
time, then the lease will be extended for one additional year, at the end of
which XXXXX would have an option to purchase the equipment at its then fair market
value, determined by independent appraisal.
Under
the portion of the XXXXX financing arrangement which involves the
sale/leaseback portion of the transaction, the following steps will be
involved:
1. XXXXX would purchase and take title to the
equipment from the manufacturers.
2. Within a short period of time after XXXXXX's
purchase, and before the equipment is placed in service by XXXXX, XXXXX would
sell the equipment to XXXXX and immediately lease the same equipment back from
XXXXX, pursuant to an equipment lease agreement.
Documents
Furnished
We
are furnishing to you with this letter a copy of the following documents
related to the advisory opinions requested herein:
A. XXXXX Lease documents:
1. Equipment Lease Agreement
2. First Amendment to the Equipment Lease
Agreement
3. Lease Rider No. 1
4. Individual Equipment Record (IER) Form
5. Bill of Sale (XXXXX to XXXXX)
6. Bill of Sale (Vendor to XXXXX)
7. Listing of equipment to be subject to XXXXX
lease arrangement (sale/leaseback portion only)
B. XXXXX documents:
1. Lease-Purchase Agreement and First
Supplement to Lease-Purchase Agreement
2. Sublease-Purchase Agreement and First
Supplement to Sublease-Purchase Agreement
Representations
Regarding Equipment
On
behalf of XXXXX, we make the following representations concerning all of the
Equipment subject to this advisory opinion, whether such Equipment will be
purchased and owned by XXXXX or made subject to the XXXXX lease arrangement or
be made subject to the XXXXX lease arrangement:
1. All of the Equipment will be tangible
personal property;
2. None of the Equipment will become an
improvement to real property;
3. All of the Equipment will be used by XXXXX
predominantly as part of its manufacturing processes in the State of Utah;
4. None of the Equipment will be used primarily
for
-
research and development;
-
refrigeration or storage of raw materials, component parts or finished
products; or
-
shipping finished products; and
5. All of the Equipment will have a useful
economic and/or accounting life of three or more years.
Based
on the above, we hereby respectfully request an Advisory Opinion from you to
the effect that neither XXXXX (nor XXXXX nor XXXXX, as lessors of equipment to
XXXXX) will be liable for any Utah sales tax or Utah use tax with respect to:
1. The direct purchase and continued ownership
and use by XXXXX of the Equipment;
2. The direct purchase by XXXXX of the
Equipment followed by the sale of such Equipment to XXXXX and simultaneous
leaseback of such Equipment from XXXXX to XXXXX pursuant to the XXXXX equipment
lease agreement;
3. The purchase by XXXXX of the Equipment
followed by the lease of such equipment to XXXXX pursuant to the XXXXX
equipment lease agreement;
4. The purchase by XXXXX of Equipment followed
by the lease of such Equipment to Salt Lake City Corporation pursuant to the
Lease-Purchase Agreement, with simultaneous sublease of such Equipment to XXXXX
pursuant to the XXXXX Sublease-Purchase Agreement.
If
you have any questions with regard to these matters, please let us know. We
would be glad to furnish to you any additional information or documents which
may be relevant to this matter.
Very
truly yours,
XXXXX