96-104
Response
July 22, 1996
Request
FROM: XXXXX
THROUGH: XXXXX
DATE: June 19, 1996
RE: XXXXX
I
believe that XXXXX needs an advisory opinion regarding administrative rule
R865-19S-85, paragraph 3 as reproduced below:
3. a) “New or expanding operations” means
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.
b) The definition of new or
expanding operations is subject to limitations dealing with normal operating
replacements.
In
my letter dated XXXXX, my answer was pretty much a verbatim quotation of your
response to me.
XXXXX
holds that the answer means that paragraph 3(b) normal operating replacements -
of administrative rule R865-19S-85 doesn't apply in the instance of a new
manufacturing site paragraph 3(a)(2).
Her conclusion appears to be logical.
Her
present question is this:
If paragraph 3(b) doesn't apply to
Paragraph 3(a)(2), does it apply to parts (1) & (3)?
In other words, has the
normal-operating-replacements limitation been eliminated?
Commissioners
Utah
State Tax Commission
210
North 1950 West
Salt
Lake City, Utah 84134
Dear
Commissioners:
Regarding:
Sales tax exemption for purchases of machinery and equipment for new
or expanding operations
This
question relates to a specific situation in which sales or use tax was paid by
one
of
our clients on sales or leases of manufacturing machinery and equipment and in
which we advised our client not to request a refund. Since that time we have
received some information which has caused us to question that advice.
Normally,
as I understand the procedure we should follow, we would write to customer
service for an advisory opinion since our question pertains to tax that has
already been paid. However, I have spoken with XXXXX, who wrote the letter that
resulted in our question. His suggestion was that I write to you since he
didn't feel this question could be answered by customer service.
I
have attached copies of my previous inquiry to customer service and the
response I
received
from XXXXX.
The
machinery and equipment mentioned in the first paragraph did increase
production or capacity, but it was performing essentially the same function as
the old Equipment. We reasoned that even though the purchases met the criteria
for new or expanding operations, the purchases would be replacement machinery
and equipment and, therefore, not exempt. We are familiar with Utah Supreme
Court Case Number 940126, Eaton Kenway, Inc. v. Auditing Division of the
Utah State Tax Commission, November 6,
1995. The ruling in that case supports this view.
Our
question relates in part to a statement in XXXXX's letter of XXXXX. He states,
“. . . any one definition of 'new or expanding operations' is all that is
necessary to qualify for exemption.”
As
you can see from the attached correspondence, our question in that instance was
with regard to another of the criteria for new or expanding operations, that of
moving to a new physical plant location in Utah. We were relying on rulings in
Appeal Number 93-1634. I will restate the significant rulings that are evident
in that case:
1. The three parts of the definition of new or expanding
operations set forth in R865-19S-85 are disjunctive, to be viewed individually
and separately from each other; only one of the three requirements need be met.
2. Purchases of machinery and equipment which do not
qualify for the exemption under the “normal operating replacements” theory can,
and in the subject case did, qualify for the exemption under the “new or
expanding operations” theory.
The
case suggests--and this is contrary to my understanding of the law and the
rule--that the definition of “new or expanding operations” is not subject to
limitations dealing with normal operating replacements. In other words, a
company can move to a new location and purchase replacement machinery or equipment,
and those purchases qualify for exemption.
To
extend the reasoning further, if the three criteria for new or expanding
operations are disjunctive and assumably of equal weight, either each would be subject
to limitations dealing with normal operating replacements or none would be
subject to limitations dealing with normal operating replacements. That would
mean--and, again, this is contrary to my understanding of the law and the
rule--that a company could purchase replacement machinery or equipment which
increased production or capacity, and those purchases would be exempt.
It
seems inconsistent to me that purchases of replacement machinery or equipment
for a company moving to a new location would qualify for exemption, while
purchases of replacement machinery or equipment which increases a company's
production or capacity would not qualify.
I
realize that the wording of Tax Commission Rule R865-19S-85 changed slightly in
1994 and that prior to that time the limitation dealing with normal operating
replacements appeared to be related most closely to the new or expanding
operations criteria of increased production or capacity. However, the law
through the same period has consistently excluded normal operating replacements
from qualifying machinery or equipment for new or expanding operations. And new
or expanding operations are defined as those which meet any one of the criteria
offered in the rule.
The
letter I received from XXXXX provided only an answer to my question. It did not
include any rationale. When I spoke with him on the phone, he indicated that he
had answered according to your instruction. But in order for me to understand
the answer I received and its implications for other situations, it would be
helpful if you could give me some explanations that would address the concerns
I have raised.
To
return to my original question, would the purchases I mentioned in the first
paragraph of this letter qualify for the exemption? And, if not, why would they
not qualify when the purchases made by the company I mentioned in my XXXXX,
letter to customer service did qualify for the exemption?
I
will phone XXXXX in a few days to see if this letter has been received and if
my questions are clear. This seems to be a complex issue, and I would like to
do whatever I can to expedite a responsive exchange.
Sincerely,
XXXXX
XXXXX
RE:
Manufacturing - Normal Operating Replacements
Dear
Madam:
We
are responding to your letter dated XXXXX.
As
we understand your letter, your client had a manufacturing site in Utah. When
they decided to replace the manufacturing machinery and equipment, they moved
to a new manufacturing facility and installed the new manufacturing machinery
there. Your opinion is that the new machinery was “normal operating
replacements” that would have been taxable if installed at the old site. Your
question is: Because the machinery was installed at a new site, does it qualify
as new or expanding manufacturing equipment as defined by administrative rule
R865-19S-85.
Your
question comes up at this time because Appeal No. 93-1634 held that the three
factors used by the rule to define “new or expanding operations” are to be
separately considered. That is, any one definition of “new or expanding
operations” is all that is necessary to qualify for exemption.
Under
the Commission’s current interpretation of the rule and case law, moving to a
new facility is enough to qualify for the exemption.
The
Commission recognizes the need to amend rule R865-19S-85. However, there is an
appeal on this issue pending before the State Supreme Court. The amendment will
be drafted upon completion of that appeal.
Sincerely,
XXXXX
XXXXX
Dear
XXXXX
Regarding:
Sales tax exemption for purchases of machinery and equipment for new
or
expanding operations
We
have been working with a manufacturer whose establishment is described in SIC
Codes 2000 to 3999. This manufacturer moved its manufacturing operation from
one location in Utah to a new physical plant location in Utah about two years
ago. In conjunction with the move, new pieces of machinery and equipment were
purchased.
Even
though the new machines and equipment improved product quality and are more
efficient, they perform essentially the same functions as the machines and
equipment that were in the old plant.
After
evaluating the question of whether or not the purchases of machinery and
equipment would qualify for the exemption for sales or leases of machinery and
equipment purchased or leased by a manufacturer for use in new or expanding
operations [UCA 59-12-104 (16) (a) (I)], we concluded that they would not
qualify.
Our
rationale was as follows:
1. According to Tax Commission Rules R865-19S-85, one of the
criteria for new or expanding operations is that manufacturing activities are
begun in a new physical plant location in Utah. Our client meets this
requirement.
2. The definition of new or expanding operations is
limited by the definition of normal operating replacements. The machinery and
equipment purchased by our client appear to be normal operating replacements.
3. Purchases of
normal operating replacements do not qualify for the exemption regardless of
whether or not the manufacturing activity is in the category of new or
expanding operations.
Subsequently,
we became aware of a decision on appeal to the Tax Commission (Appeal Number
93-1634). This case appears to establish some important precedents that are
particularly applicable to our client's situation. They are:
1. The three parts of the definition of new or expanding
operations set forth in R865-19S-85 are disjunctive, to be viewed individually
and separately from each other; only one of the three requirements need be met.
2. Purchases of machinery and equipment which do not
qualify for the exemption under the “normal operating replacements” theory can,
and in the subject case did, qualify for the exemption under the “new or
expanding operations” theory.
My
understanding of the case is difficult for me to reconcile with my
interpretation of the law and the rule. Nevertheless, I believe the purchases
made by our client qualify for the exemption in the same way that the purchases
made by the manufacturer described in the case qualified for the exemption.
We
have not yet applied for a refund of sales tax on behalf of our client. Before
we do that, we would appreciate an advisory opinion as to whether or not the
purchases I have described would qualify for the exemption. If you have any information
that will give us a different perspective of the facts and conclusions
described in the case, that information would be helpful.
Thank
you for taking the time to consider and respond to our concerns. If you can
think of other information that would useful in preparing your response, please
let us know.
Sincerely,
XXXXX
XXXXX
Advisory
Opinion - Application of Rule R865-19S-85 to business moving to a new location.
Dear
XXXXX
We have received your request for an
advisory opinion regarding the application of Administrative Rule
R865-19S-85. As you know, this rule is
under review. We anticipate one or more
amendments to this rule in the future to clarify how the partial exemption on
normal operating replacements will be administered and how the limited
exemption for normal operating replacements will apply to “new or expanding”
manufacturing operations. This issue
that is at the heart of your request.
You are probably aware that this
issue is pending before the Supreme Court in an appeal from the Court of
Appeals decision in Newspaper Agency Corporation. We are reluctant to reconsider this portion
of R865-19S-85 or the position enunciated in our appeals decisions until the
court offers its guidance in the form of a ruling. Therefore, we issue this opinion as our current position on the
question posed in your request with the caveat that our position is subject to
change upon the outcome of that case and future review of the rule.
In recent appeals decisions, the
Commission has had the opportunity to consider cases in which an entire manufacturing business was destroyed. It has been our view that replacement of
equipment, whether destroyed by catastrophe or destroyed by wear, constitutes a
normal operating replacement. However,
when a business has been destroyed, then rebuilt at a new location, we find
that rationale bumping up against the language in R865-19S-85. Under that rule, a business qualifies as a
“new” business under the definition of “new or expanding” operation if it is
“begun in a new physical plant location in Utah.” Although the rationale
offered in your opinion is reasonable, we are, for the moment, bound by the
language of the rule. Using that theory,
any operation which moves to a new facility qualifies as a “new and expanding”
operation.
Again, this rule will be reviewed in
the future to determine if this kind of outcome fulfills legislative
intent. In the meantime, if you have
other questions, please let us know.
For
the Commission,
Alice
Shearer,
Commissioner