96-077
Response May 9, 1996 and June 5, 1996
Request
XXXXX
Utah
State Tax Commission
210
North 1950 West
Salt
Lake City, Utah 84134
RE:
Request for an Advisory Opinion (XXXXX)
Dear
XXXXX
As
noted in XXXXX's letter dated March 19, 1996, it was suggested we ask for an
advisory opinion on the issue of fuel/power used primarily for recapping
tires. Please consider this letter as
our request for your opinion that fuel and/or power used primarily to
manufacture or for producing or compounding a product which will be resold may
be purchased tax free as noncommercial under the existing Rule R865-19S-35.
In
support of our position that power used by XXXXX should be considered
noncommercial for sales tax purposes, we offer the following information for
your consideration.
In
recent years (since about 1990), the Auditing Division seems to have taken the
position that only manufacturers within SIC Codes 2000-3999 (see XXXXX's
letter) are allowed to be considered noncommercial for sales tax purposes and
that all "retail" establishments (per 59-12-102,3(a)) are commercial
and subject to tax on fuel purchases.
It
seems logical to us that the term "retail establishment" in
59-12-102(3)(a) must mean companies that sell to final consumers where fuel or
power is not used to compound, process, manufacture, create or fabricate
merchandise which, when completed, would be subject to a sales tax (refer to
present Rule 35, November 10, 1954 Tax Commission memorandum, and XXXXX court
case - copies attached and marked "Exhibit A"). For sales tax purposes, these type
"retail commercial" companies would include hotels, motels, warehouses,
full service restaurants, hardware stores, clothiers, grocery stores, and
similar businesses that buy products for sale to individuals or businesses
where further processing of the product by the retailer is minimal or
nonexistent. To rule differently from
the pre-1990 policy of allowing all businesses that compound, process, create,
manufacture or fabricate to buy fuel and power tax free, presents some obvious
inconsistencies and conflicts.
Retailers
for sales tax purposes include all companies selling to final consumers (59-12
102(14)(a)), such as individuals, contractors and other businesses that do not
resale tangible personal property. This
would include many manufacturers as defined in the SIC code book (e.g.,
ready-mixed concrete companies, printing companies, newspaper publishers, wood
cabinet shops, manufacturers of wood pallets and skids, asphalt mixture
producers, certain fabricators of steel products, etc.). It is a fact that certain manufacturers, as
noted above and others with SIC codes between 2000-3999 sell to final consumers
and therefore are "retailers" under Utah sales tax law definition.
Wholesale
trade (refer to attachment Exhibit B from SIC code manual) are those
establishments selling merchandise to retailers (also see attachment which
defines retail trade), to industrial, commercial, institutional, farm
construction contractors, or professional business users, etc. It is obvious "wholesale" is
different for SIC manual purposes compared to the "sell for resale"
wholesale definition for sales tax purposes.
XXXXX
is a retailer for sales tax purposes (i.e., sell to final consumers), but is in
the wholesale service business for SIC purposes since a majority of their sales
are to other businesses (e.g., trucking companies, contractors, to other
businesses using vehicles).
Does
the Auditing Division presently require tax on fuel used by ready-mixed
concrete companies since 90 to 100% of sales are retail? Did the Tax Commission, prior to 1990, tax
fuel used by recapping companies or "retail" bakeries? In both cases, the answer is NO! Why not?
Because in both cases fuel and power was being used to process, compound, or
create a product that was to be sold and taxed. This concept is made clear in
the Tax Commission's present rule (no mention of SIC Code), the 1954
memorandum, and the 1967 XXXXX case.
The
new law, H.B. 203, effective July 1, 1996, will tax all power and fuels used by
nonindustrial companies, as defined. XXXXX and other compounders, processors,
retail bakeries and candy manufacturers, will all be precluded from purchasing
fuels and power tax free. Our request
for an opinion only pertains to those transactions prior to July 1, 1996.
Our
request is that your opinion will find that XXXXX should be allowed to purchase
power used at their recapping shop tax free.
The power use at their shop locations are clearly predominantly for
producing, compounding or creating remanufactured items that will be taxed when
sold.
Since
a similar "fuel" issue is the object of an appeal with XXXXX, I would
suggest your answer and this request be put in their file for cross reference.
Sincerely,
XXXXX
XXXXX
Dear
XXXXX
We have received your request for an
advisory opinion regarding the application of the fuels and electricity
exemption for XXXXX’s recapping activities.
We find as follows:
Under Utah Administrative Rule
R865-19S-35, the sales tax exemption for non- commercial uses of electricity
and certain other fuels applies to uses associated with mining, agriculture and
manufacturing. With regard to
manufacturing, the administrative rule defines a qualifying use as one in which
a product is manufactured, produced or compounded. Neither the current statute nor the administrative rule
specifically tie the exemption to the manufacturing SIC codes. However, as a practical matter, the
activities that qualify for this exemption also fall within the SIC
manufacturing classifications.
You are suggesting that activities
outside the manufacturing SIC codes are eligible for this exemption. We do not agree. The legislature has deliberately created tax exemptions for the
mining, agricultural, and manufacturing industries. It is no mistake that the fuel exemption is tied to these
industries, and there is no indication that the legislature intended any
broader application of the exemption.
In fact, when the 1996 legislature amended the exemption to include a
reference to the manufacturing SIC codes, it did so to clarify its intentions
and to codify our current practices.
(See H.B. 203.) It is our
position that the exemption only applies to mining, agricultural and
manufacturing industries.
Your letter indicates that XXXXX
acts as both a retailer and wholesaler, and that it uses a retail SIC code for
sales tax purposes. Setting aside for
the moment the SIC code that XXXXX uses for sales tax reporting, when we look
strictly at the recapping operation we note that such activity is classified as
a service in SIC code 7534. Even
if the recapping facility is considered a separate and distinct establishment
from the retail and wholesale operations, the recapping activities are
characterized as repair services, not manufacturing activities. Therefore, XXXXX is not entitled to the fuel
exemption.
If you disagree with this opinion,
you may petition for a declaratory judgment on the issue within 30 days of the
date of this letter. If you have other
questions, please contact us.
For the Commission,
Alice Shearer,
Commissioner
Alice
Shearer, Commissioner
Office
of the Commission
210
North 1950 West
Salt
Lake City, Utah 84134
RE:
Advisory opinion on “fuels” for XXXXX
Dear
Commissioner Shearer:
In
response to your advisory opinion, please consider our original request for the
advisory opinion and this letter our petition for a declaratory judgement.
In
contrast to what was written in the advisory opinion, I would suggest that the
1996 legislature “amended the exemption” to clarify the Tax Commission's
intention to codify your recent (during the last few years only) practices
of:
a. considering
oxygen as an “other fuel” and exempt (for a short period in the 1990s, oxygen
was being taxed as a non-fuel by state auditors);
b. exempting all commercial greenhouses from tax
on fuel; and
c. limiting
“fuel” exemption to companies eligible for the manufacturing exemption.
It
is interesting that beginning July 1, 1996, there will be a double
exemption for agricultural producers. In section 59-12-102(4), the component
part exemption (59-12-104(28) includes fuel used by commercial greenhouses
doing a majority of their business in wholesale sales and for providing
power for off-highway type farm machinery. The new “industrial use” exemption
duplicates this existing exemption and expands it as reflected in the present
rule. Because of this type error and other honest legislative and rule making
mistakes that are later corrected, it is not too difficult to conclude that
legislative action is often a reaction to the intentions of tax
administrators and/or lobbyists.
Respectfully,
XXXXX
XXXXX
Re:
XXXXX
Dear
XXXXX
We have received your petition for
declaratory judgment on the XXXXX issue. Although we invited you to petition for a declaratory order, we
have reassessed the facts in this case and determined that XXXXX’ appropriate
avenue of appeal is through the refund request procedure. Therefore, we decline to issue a declaratory
order on this matter.
By way of further explanation, we
are in the process of reviewing our appeals procedures and advisory opinion
processes. We have concluded that when
a controversy exists that lends itself to the adjudicative process, it is
imperative that the taxpayer and the Commission use the adjudicative process to “flesh out” the arguments and
develop a full record upon which judicial review may be based. Therefore, the Commission will not issue a
declaratory order on an matter that can be raised on appeal from an audit
assessment, collections procedure, or claim for refund.
To date, the Customer Service
Division has neither granted nor denied XXXXX’s refund request. We will
direct the Customer Service Division to take action on the request. If XXXXX is dissatisfied with the response,
it may appeal within 30 days of the date of that action.
We apologize for any inconvenience
to you or XXXXX from our previous instructions.
For the Commission,
Alice Shearer,
Commissioner