95-033
Responses
November 18, 1994 and November 28, 1995
Request
Utah
State Tax Commission
210
North 1950 West
Salt
Lake City, UT 84134-0001
Dear
Members,
The
purpose of this letter is to request an Advisory Opinion as to the
applicability of the sales tax exemption available for manufacturing machinery
and equipment in new or expanded operations in the following circumstances.
Our
client’s manufacturing facility, along with all equipment, was recently
destroyed by fire. The business has
functioned within the activities included in SIC Codes 2000 through 3999,
produced new products from semifinished materials and sold them as tangible
personal property. If the facility is rebuilt it will occupy the old building
site and new equipment will be purchased.
Rule
R865-19S-85 defines “new or expanding operations” as manufacturing, processing
or assembling activities that:
1.
Are substantially different in nature, character or purpose from prior
activities;
2.
Are begun in a new physical plant location in Utah; or
3.
Increase production or capacity.
The
rule also defines “normal operating replacements” as machinery or equipment that
replaces existing machinery or equipment of similar nature, even if the use
results in increase plant production or capacity.
Our
client takes the position that since fire destroyed the manufacturing facility,
that any rebuilding or if it will qualify as a “new physical plant location”
and the purchase of new equipment does not qualify as replacement equipment
because replacement will not occur in the “normal” operation of his business.
Currently
we are assessing the economic alternatives of using the insurance proceeds to
rebuild the manufacturing facility and replacing equipment or simply
liquidating the business. One of the factors being considered is whether the
purchase of manufacturing equipment will qualify for sales tax exemption.
Your
prompt attention to this request for an Advisory Opinion will be greatly
appreciated.
Very
truly yours,
XXXXX
XXXXX
Dear
XXXXX:
In
response to your letter of XXXXX (copy attached), and in confirmation of our
telephone conversation of this date, I am providing you with the following
information.
Since
the issues which are subject of your advisory opinion request are also
currently issues before the Utah State Tax Commission in the formal appeals
process, we are unable either to confirm or deny applicability of the
“manufacturing exemption” to the circumstances of your client.
This
letter is provided at your request to acknowledge receipt of your advisory
opinion request and to advise you that as soon as the Commission has ruled in
the cases before it, I will draft the Auditing Division’s recommendations for
an advisory opinion with regard to your client’s situation.
Respectfully,
XXXXX
Auditing
Division
XXXXX
RE:
Advisory Opinion - Availability of sales tax exemption to manufacturing
equipment purchased to replace equipment destroyed by fire.
Dear
XXXXX,
In
XXXXX, you requested an advisory opinion regarding the applicability of the
manufacturing sales tax exemption to equipment purchased to replace equipment
destroyed in a fire. XXXXX of our Auditing Division informed you that the
Commission was considering a similar situation on appeal and that we would
reply to your request upon conclusion of those cases. We are prepared to offer
you an advisory opinion now.
In
cases such as this, the Tax Commission has held that manufacturing equipment
purchased to replace equipment destroyed in a fire does not qualify for the
sales tax exemption because the purchases constitute normal operating
replacements. This policy is bolstered by a recent Utah Supreme Court decision
which states that “[t]he exemption was enacted to encourage new manufacturers
to locate in Utah and existing manufacturers to expand their operations, not to
upgrade existing operations.” Eaton Kenway, Inc. V. Auditing Division,___P.2d___(Utah
1995). The act of rebuilding a business after a fire is equivalent to replacing
the business as it existed prior to the fire. It does not fulfill the purpose
of the statute by locating a new business in Utah or expanding an existing
business. Unless your client can show that he or she meets other relevant
exemption criteria, replacement of equipment destroyed by fire is not enough to
qualify for the exemption.
Although
Utah law does not currently allow an exemption for normal operating purchases,
an exemption will be phased in over the next few years as follows:
1.
A 30% exemption will be allowed for purchases made on or after July 1, 1996.
2.
A 60% exemption will be allowed for purchases made on or after July 1, 1997.
3.
As of July 1, 1998, a 100% exemption will be allowed.
Your
client may wish to structure his or her future purchases to take advantage of
this exemption.
For
the Commission,
Alice
Shearer
Commissioner