94-026
Response November 23,
1994
Request
Commissioners
Utah State Tax
Commission
210 North 1950 West
Salt Lake City, UT
84134
Dear Commissioners:
Regarding: Sales or use tax exemption: equipment for
new or expanding operations
We have previously
requested a verification of your position on this question, and I was advised
by XXXXX that you are postponing your ruling because one of the companies to
which it relates is presently undergoing an audit. He explained that it would be necessary for us to wait for the
outcome of the audit and completion of the appeal process if that becomes
necessary.
The problem for us is
the XXXXX is not the only company we represent for whom this issue has
significance. It is important that we
have some clarification so that we know how to advise those companies.
In particular, XXXXX
is presently undergoing substantial expansion to its plant and needs immediate
clarification as to whether the plumbing and electrical connections supplied by
contractors are exempt, as we believe they are. We have a written opinion from XXXXX and verbal indications that
support our interpretation; but, of
course, it is important that we have an official statement from you.
To quote from XXXXX
opinion in a letter dated XXXXX, “...auditors from the personal property
division of the State Tax Commission ruled that materials needed to connect a
large piece of machinery to a source of electricity remained as tangible
personal property...even though attached to real property. I consider their decision to be a sound
one. If the machinery qualifies as exempt
manufacturing machinery, the necessary electrical materials to connect it to a
power source and that remain...[tangible personal property] qualify also.”
I understand XXXXX
concern that there can be different interpretations of this opinion. What we really need is a clear statement of
your position as a commission regarding when plumbing and electrical materials
that are used to make a piece of machinery or equipment operational are
regarded as part of the tangible personal property and when they are regarded
as part of the real property.
We acknowledge and
understand your concerns about expressing an opinion prematurely. Nevertheless, we are submitting our request
because this issue has continuing impact upon the consulting services we
provide.
Sincerely,
XXXXX
Commissioners
Utah State Tax
Commission
210 North 1950 West
Salt Lake City,
Utah 84134
Attention: Alice Shearer
Dear Commissioners:
Regarding: Sales or use tax exemption: Equipment for new
or expanding operations.
I appreciated the
opportunity to talk with you last Thursday, Ms. Shearer. As a result of our conversation, I have
compiled the following information. I
hope it is responsive to your requests and that it gives you the information
you need in order to provide us with some guidance from the commission.
As indicated below,
XXXXX qualifies for the exemption from sales and use taxes described in UCA
59-12-104 and R865-19S-85 on sales of machinery or equipment for new or
expanding operations.
1.
The corporate headquarters of XXXXX, and the XXXXX facility is a new
physical plant location in Utah.
2.
The SIC code for the manufacturing operation is 3354.
3.
The manufacture of aluminum extrusions is accomplished by a large extrusion
press which forms the finished products form aluminum billets.
The extrusion press
mentioned above forces a heated billet through the press, producing a finished
aluminum product formed according to a die placed in the front of the
press. Part of the press is a
closed-loop, reversed-osmosis cooling tower, without which the press could not
function.
Both the electrical
and the plumbing connections are necessary to the operation of this machine,
and neither were available in the building prior to the installation of this
machine. The connections, of course, do
attach to panels in the walls, ceiling, or floor of the building; but,
typically, they are not buried in concrete or otherwise made a permanent part
of the building. The connections, along
with the press, could be removed from the building without damaging the real
estate in any significant way. The
building itself has both a separate electrical system and a separate water
system.
We believe sales of
the piping and other parts and materials necessary to make this machine
operational qualify for the exemption because those connections are part of
tangible personal property used in new or expanding operations.
As I interpreted our conversation
on Thursday, you are in agreement with XXXXX opinion in his letter dated XXXXX,
“...auditors from the personal property division of the State Tax Commission
ruled that materials needed to connect a large piece of machinery to a source
of electricity remained as tangible personal property ...even though attached
to real property. I consider their
decision to be a sound one. If the
machinery qualifies as exempt manufacturing machinery, the necessary electrical
materials to connect it to a power source and that remain...[tangible personal
property] qualify also.”
We are confident that
this opinion verifies our interpretation.
In order for us to proceed in advising our client, however, we need a
confirmation from the Commissioners.
We realize that XXXXX
opinion would have come from you had we addressed our request to you in the
first place. Since that was not done,
we are asking for a verification at this time.
Please let us know if
we can provide further information.
Sincerely,
XXXXX
Re: Advisory Opinion - Qualifications of
Materials for Plumbing and Electrical Connections to Manufacturing Equipment
under Sales Tax Exemption for New or Expanding Manufacturing Facilities.
Dear XXXXX:
Your request for and
advisory opinion as to whether purchases of materials for plumbing and
electrical connections to manufacturing equipment qualify for sale tax
exemptions for new or expanding manufacturing facilities was referred to the
Auditing Division for their analysis.
1.
Utah Code Annotated Section 59-12-104 and Administrative Rule
R865-19S-85 describe criteria for the “manufacturing exemption” for new or
expanding manufacturing operations.
Included in the referenced rule’s definition of qualifying equipment
items are “...devices necessary to the control or operation of machinery and
equipment qualifying under this rule....”
2.
The rule further indicates, “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.”
3.
While treatment of materials under personal property tax statutes is not
determinative of treatment of materials under the sales tax statute and its
corresponding administrative rules, R865-19S-85 does, in fact, refer to the
property tax law with regard to the “improvement” is included the term,
“fixtures.”
4.
Electrical and plumbing connections which are not attached to the real estate
in such a manner as to become an integral part of the building, which are not
installed or attached to the realty, and which have not become fixtures or
improvements to the realty by virtue of intent of the parties or any other
relevant factor will qualify for exemption if necessary for the operation or
control of qualifying equipment. Based
upon your description of the subject connections, the exemption is appropriate.
5.
If the connections were effected through a real property contract
performed by a real property contractor who has considered himself a consumer
of materials used in performing the job under the guidelines of Rule
R865-19S-58, such performance would be indicative of intent to convert personal
property to realty; and the exemption would not be allowed.
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 and a copy of the Utah Taxpayer Bill of Rights are attached.
For the Commission,
Alice Shearer
Commissioner
BEFORE THE UTAH STATE TAX COMMISSION
__________________________________________
XXXXX.,
Petitioner, ) FINDINGS OF FACT,
v. ) CONCLUSIONS OF LAW,
AUDITING DIVISION OF ) AND FINAL DECISION
THE UTAH STATE TAX )
COMMISSION, )
Respondent. ) Appeal No. 92-0341
)
) Account
No. XXXXX
) Tax
Type: Sales & Use
__________________________________________
STATEMENT OF
CASE
This matter came before the Utah State Tax
Commission for a formal hearing on XXXXX.
XXXXX, Administrative Law Judge, heard the matter for and on behalf of
the Commission. Present and
representing the Petitioner was XXXXX and XXXXX. Present and representing the Respondent was XXXXX, Assistant
Attorney General, together with XXXXX, of the auditing division of the Utah
State Tax Commission.
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 periods in question are XXXXX.
3.
Respondent made an audit assessment against XXXXX for the above stated
periods. After the proposed audit
assessment was sent to the Petitioner, a timely appeal of that audit assessment
was filed. Through proper procedural
hearings, the Commission has entered an Order of Default as to XXXXX and XXXXX
for all periods after XXXXX. The
significance of the XXXXX date is that XXXXX resigned as of the end of XXXXX,
and the company is now out of business.
Therefore, XXXXX does not object to a default order being entered for
the periods after XXXXX, because he would not be personally responsible for any
audit assessment for such period.
Therefore, the default of XXXXX is entered for the period after
XXXXX. The default of all other parties
for all periods has been or is hereby, duly entered.
4.
Notwithstanding the statements contained in the prior paragraph and
elsewhere in this decision, the hearing did not involve the issue of personal
responsibility of any officer, shareholder, or director of the company, and as
of the time of the hearing, the auditing division has not proposed any such
personal assessment against any officer, shareholder, or director.
5.
The Petitioner is a company which was involved in the installation,
sale, and repair of refrigeration units.
These refrigeration units were not for residential use but were those
which were utilized by commercial establishments.
6.
The refrigeration units which Petitioner repaired were such items as
walk-in refrigeration units for butcher shops, grocery stores, and restaurants,
compressors, racks, piping to operate the refrigeration items, delicatessen
cases, glass door cases, frozen food cases, dairy cases, and beverage cases at
grocery stores and other eating establishments. The equipment which was installed, repaired and maintained by the
Petitioner included all of the stated types of refrigeration units together
with the air handler, heat reclaim units, air conditioning, piping, hardwired
electrical panels, remote sumps for evaporative condensers, and all other fixed
equipment utilized in the operation of the refrigeration units.
7.
At the hearing, the Petitioner introduced numerous photographs which
were taken at a XXXXX store in XXXXX, Utah, and the Petitioner represented that
the refrigeration units shown in the photographs were representative of the
types of refrigeration units and equipment on which the Petitioner performed
its installation, sales, repairs and maintenance services.
8.
Most of the issues arising in the sales tax audit have been resolved
between the Petitioner and the Respondent.
However, the single remaining issue involves whether sales tax should
have been charged and paid by Petitioner on the labor portion of the repairs to
the refrigeration units and equipment.
It is the position of Petitioner that the refrigeration units are either
permanently or semi-permanently attached to the real property, and as such, the
repairs were to real property and the labor is not taxable. The position of the Respondent is that the
refrigeration units and corresponding equipment are tangible personal property,
and that therefore repairs of such refrigeration units and equipment are
repairs of tangible personal property and are therefore pursuant to the
provisions of §59-12-103(g), Utah Code Ann. as amended.
9.
The refrigeration units on which the repairs were performed are of
numerous types. The first type of unit
is a walk-in box which is a large room sized refrigeration unit used for
storing large, bulk items such as hinging meat and boxes of produce. The walk-in units are set in channels in the
floor, and those channels are poured in concrete at the time the building is
constructed. The walls are attached in
those channels and are heavily insulated, and the walls are also attached to
the ceiling at the top. To look at the
units gives the appearance of looking at a room. The refrigeration units which provide the cooling, are located in
a different part of the building, and the refrigerant is brought to the walk-in
units by way of piping which is placed in separate channels in the floor. The walk-in units are also hardwired
directly to the electrical panels in the compressor room. Further, there is a direct hookup to the
sanitary sewer drain, similar to the type of direct hookup which would go from
a sink or toilet, so that any moisture drains into the drain and does not
simply drain into a trough which empties into a drain. Many of the walk-in units were lifted into
the building by crane when the building was constructed, and to remove the
walk-in units would require the removal of a portion of the roof of the
building.
10.
The other refrigeration units on which the repairs were performed were
of numerous types, but which all had similar characteristics. The refrigeration units included
delicatessen cases, glass door cooling units, glass door frozen food units,
island frozen food cases, dairy cases, beverage cases, and produce cases. All of those types of cooling cases sit
within the store and display the products which are for sale, but they are
refrigerated to prevent spoilage of the foods.
The cooling for almost all of those units is performed by refrigeration
compressors in a compressor room in the rear portion of the store, and the
coolant is transferred to the refrigeration units through piping which is
carried through channels in the floor.
The piping is connected directly to the refrigeration cases and also to
the compressors in the rear portion of the store. The refrigeration units also have electrical hardwiring directly
to the electrical panels, and the refrigeration units are also plumbed directly
into the sanitary sewer drain. The
produce cases are also connected directly to the culinary water system so that
water can be sprayed on the produce.
Most of the display cases are bolted directly to either the floor or the
wall by the use of angle iron brackets, which is to prevent movement of the
display cases and to prevent some of them from tipping over and causing damage
to the products or injury to customers and employees who may be near. The refrigerating units can be removed by
disconnecting a few bolts holding the units to the floor or wall, disconnecting
the electrical connections. The removal
of the refrigeration units will cause very little damage to the land or
building.
11.
Some of the repairs may have been performed to the electrical panels,
which are part of the electrical system of the building and are permanently
attached to the building.
12.
Further repairs may have been performed to the refrigerating compressors
which are housed in a separate area in the rear portions of the stores.
13.
XXXXX makes allegations that during the past XXXXX years while he has
been in the refrigeration business with various companies, his companies have
gone through at least two or three different audits from the tax commission,
where the specific issue in question was reviewed. He alleges that in those previous audits the auditors reviewed tax
on the labor on the repairs of the refrigeration units, and determined that the
refrigeration units were either permanently or semi-permanently attached to the
real property, and that as a result of that determination there was no tax
assessed on the labor to repair the refrigeration units. Petitioner did not have any evidence of that
fact except his own verbal testimony, and could not produce any copies of any
prior audit reports. XXXXX, who
testified for the auditing division, indicated that he could not find a record
of any such audits. Accordingly, there
is insufficient evidence from which a finding can be made as to whether or not
there were any such prior audits, and if there were any such prior audits, there
is insufficient evidence from which a determination can be made of the results
of those prior audits or the reasons for any such results. On this point there is conflicting evidence.
APPLICABLE LAW
Sales tax is normally not imposed upon
labor. However, sales tax is imposed
upon the full charge for services for repairs or renovations of tangible
personal property, including labor, Utah Code Ann. §59-12-103(1)(g).
Property, fixtures, or equipment attached
to real property in a permanent or semi- permanent manner, shall be considered
as real property while so attached; but, if removed form the premises for the
purpose of the repairs, shall be considered as personal tangible property. Rule R865-19S-78(F).
Amounts paid or charged for repairing,
building, or renovating real property real property, as such, are not
taxable. Rule R865-19S-78(G).
ANALYSIS
The facts which were presented in this
case were generally limited to the repairs of various types of units located at
one grocery store in XXXXX, Utah , whereas, the testimony was clear that the
repairs were performed on refrigeration units at numerous grocery stores and
other types of businesses. Apparently,
neither the Petitioner or Respondent spent the time to try to separate the
repairs which were made on each type of refrigeration units. Also, the parties did not provide any
evidence as to whether the refrigeration units were owned by the owner of the
real estate, or whether the refrigerating units were owned by the tenants of
the building. If the refrigeration
units were on leased property, there is no evidence as to whether the tenants
may remove the property upon the expiration of the lease, or whether the
refrigeration units may have been required to remain with the real estate when
the tenant vacated the premises. The
parties presented the case as though all repairs would either be subject to tax
or exempt form tax. However, additional
facts and evidence may have ultimately modified this decision.
Most of the repairs in question were
performed on property which is commonly referred to as “fixtures.” Fixtures are objects which were originally
personal property but because of either their annexation or association with
real property, are deemed to have become a part of the realty. However, those items retain their separate
identity and are capable of regaining their status as personal property upon
their separation from the realty.
Fixtures are on the border line or dividing line between real property
and personal property.
Fixtures are normally deemed to be part of
the real property. However, if they can
be easily removed without causing significant harm or damage to the realty,
then they would normally retain their status as personal property.
Trade fixtures, as distinguished from
regular fixtures, are items of personal property which are brought upon the
land by a tenant. Trade fixtures are
necessary for the tenant to carry on the trade of business to which the land
will be devoted. Trade fixtures normally
remain the personal property of the tenant or occupant of the land, and they
may be removed at the end or expiration of the term of occupancy of the tenant.
To determine whether fixtures and trade
fixtures have become part of the realty, there are three general tests that are
applied, as follows:
1.
Whether the fixture or trad fixture has been annexed to the realty.
2.
Whether the fixture or trade fixture has been adapted to the use to
which the realty is devoted.
3.
Whether there is a demonstrated intention that the object become a
permanent accession to the freehold.
Some of the other factors which would be
considered would be:
1. The relationship of the parties (i.e.
landlord -- tenant, or mortgagor - mortgagee).
2.
The relative difficulty of removal of the property.
3.
The nature of the article annexed.
4.
Whether the annexation is open and apparent.
In the case of Paul v. First National
Bank, 52 Ohio Misc. 77, 6 Ohio ops. 3rd 207, 369 N.E. 2nd 488, the Court
held that whether an item is personal property or realty is determined by six factors,
as follows:
1.
The nature of the items in question.
2.
The manner of the annexation of those items to the realty.
3.
The purpose for which the annexation is made.
4.
The intention of the annexing party,
5.
The degree of difficulty and extent of loss involved in removing the
item from the realty.
6.
The damage to the severed property caused by the removal.
Based upon a review of the above tests and
determining factors, it appears that the walk-in refrigeration units,
electrical panels, and refrigeration compressors meet sufficient of the above
test to be considered to be part of the realty. As to the remainder of the refrigeration units which are used as
part of the display and marketing programs of the businesses, it appears that
those items are probably trade fixtures which are firmly attached to the realty
for stability, but they can also be removed from the premises with very little
effort or work, and with very little damage or harm being caused to either the
realty or to the property removed.
DECISION AND ORDER
Based on the foregoing, the Tax Commission
finds that the walk-in refrigeration units are real property, because they have
been attached to real property in a permanent or semi- permanent manner. As to the refrigeration compressors, and
electrical panels, the Commission also finds that such items have been attached
to real property in a permanent or semi-permanent manner and are therefore part
of the real property. As to the other
refrigeration units, including the delicatessen cases, glass door cases, frozen
food cases, dairy cases, and beverage cases, the Commission find that those
items have been firmly attached to the real property, but they have retained
their status as trade fixtures and have remained as personal property. Accordingly, the audit assessment of the
auditing division is reversed as to all portions which were made on items which
have been determined herein to be real property, but only as to the parties and
the periods for which an order or decision of default has not been previously
entered or isn’t hereby entered. The
audit assessment is affirmed as to those items which have been determined
herein to be trade fixtures and not part of the real property, and as to the
parties and periods to which defaults are applicable. The Auditing Division is directed to review the audit and to
adjust it in accordance with this decision.
It is so ordered.
DATED this 30 day of September, 1994.
BY ORDER OF THE UTAH
STATE TAX COMMISSION.
W. Val Oveson Roger O. Tew
Chairman Commissioner
Joe B. Pacheco Alice Shearer
Commissioner Commissioner
NOTICE: You have twenty (20) days after the date of
a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for
Reconsideration with the Commission, you have thirty (30) days after the date
of a final order to file a.) A Petition for Judicial Review in the Supreme
Court, or b.) A Petition for Judicial Review by trial de novo in district
court. (Utah Administrative Rule
R861-1-5A (P) and Utah Code Ann. §§59-1-601(1), 63-46b-13(1), 63-46-14(3)(a).)