97-070

Response December 8, 1997

REQUEST LETTER

August 25, 1997

Dear Commissioners:

Regarding: Clarification of the application of certain portions of R865-19S-78 and R865-195-58 and Publication 42, "Sales Tax Guidelines," revised May 1997.

Section B.2. of R865-19S-78 explains the taxability of labor charges to service, repair or renovate real property improvements or items of personal property that are attached to real property. The same section refers to R865-19S-58 for guidance on taxation of purchases of parts and materials used in service and repair. The "Sales Tax Guidelines" explains these provisions in more detail and lists examples to better enable consumers and providers to make appropriate decisions.

These efforts to clarify and provide guidance are very helpful, and we realize that the questions these documents address cannot be perfectly defined for all situations. It would be useful, however, if you could answer a few questions that have come to our minds as we have tried to evaluate the application of these rules and guidelines.

It is stated in several places that, in determining application of sales tax to charges for service, repair, or renovation labor, tangible personal property that is permanently attached to real property is treated as real property while it is so attached. It is also stated that moveable items that are attached merely for convenience, stability, or for an obvious temporary purpose remain personal property.

Also according to the rules and guidelines, an item is considered permanently attached if attachment is essential to the operation or use of the item and the manner of attachment suggests that the item will remain affixed in the same place over the useful life of the item.

We assume that if an item is attached for stability, as many pieces of manufacturing machinery and equipment are, but if stability is essential to the accurate operation of the item, that item could be considered permanently attached.

In the examples section of the "Sales Tax Guidelines" a printing press and a lathe are among the items listed for which labor would not be taxable as long as the manner of attachment indicates that it is essential to the operation of the item and that the item will remain in place over its useful life. These are also items which may be attached for stability but which must produce a product to a fine tolerance, making stability an issue in operation.

Since we do not want "attachment for stability" to become a frequent area of dispute, we want to make sure we are interpreting the intent correctly. We do understand that we will have to make judgments in each case individually according to the criteria provided, but this additional clarification would be helpful.

Another area we would like to discuss is the criteria for determining that an item is attached in such a manner that it is considered part of the real property for the purpose of application of sales tax not only to charges for repair labor but also for charges for repair parts (which would be taxed as construction materials).

On page 6 of the "Sales Tax Guidelines," under the heading, Items Not Converted to Real Property, and the discussion on trade fixtures, it states, "An item installed to serve the trade or business may be considered part of real property if the building is specially adapted to accommodate the item." We assume this provision applies to manufacturing equipment and other items which may be installed in a building as well as to trade fixtures.

One of our clients has a large extrusion press and cooling tower. In order for the building to house this piece of machinery, a pit the size of an Olympic swimming pool was made in the floor, large footings were poured, part of the roof was removed, and the machine was set in the concrete pit and bolted to the floor.

Since this machine is attached to real property in a manner that suggest it will remain in place over its useful life and that suggests it is essential to the operation of the equipment, and since the building is specially adapted to accommodate the machine, we would say that charges for repair parts would be subject to sales tax as construction materials and repair labor would not be taxable because the machine would be regarded as real property. We would like to know if that

interpretation is accurate.

We understand that manufacturing machinery or equipment which qualifies for a sales or use tax exemption under Section 59-12-104 (15), would retain its character as personal property for the purpose of sales tax on the purchase of the machinery or equipment itself and in most cases on the purchase of repair parts. We also understand that this same machinery or equipment would be

classified as personal property for the purpose of property tax. Nevertheless, we understand that the manner of installation of certain pieces of manufacturing machinery or equipment may, at the same time, cause it to be regarded as real property for the purpose of sales tax on charges for labor and in some cases on purchases of repair parts.

The above paragraph reflects our current understanding of the rules and guidelines we have cited. This is, however, a departure from our previous view. In the past we had taken the position that an item, once determined to be either real property or personal property, must retain its character as either real property or personal property for the application of all kinds of taxes. Because this is a change for us, we would appreciate your confirming the accuracy of our present interpretation.

We realize these questions relate to issues which have already received much written attention, so we appreciate your patience and responsiveness.

Sincerely,

NAME

RESPONSE LETTER

December 8, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion - Clarification of Rules R865-19S-58 and R865-19S-78

Dear NAME,

This opinion is in response to your request for clarification of Utah Administrative Rules R865-19S-58 and R865-19S-78, and their application to manufacturing equipment. We offer the following:

Your first question concerns items that are attached for stability, but stability of the equipment is essential for proper operation. We agree with you that for proper operation of some equipment, attachment is necessary to minimize vibration or movement that would interfere with performance. Although attachment stabilizes the equipment, the stabilization is, in some cases, essential to the operation of the item.

In your second question, you talk about trade fixtures. However, you describe an item that would probably not be considered a trade fixture as defined by R865-19S-60 (copy enclosed). However, You have described an extrusion press which, we assume, otherwise qualifies as manufacturing equipment. From your description, the press is installed in a manner that suggests that, once attached, it is treated as real property for purposes of repair labor under R865-19S-78.

Finally, you point out that an item may be characterized differently for sales tax purposes than it is for property tax purposes. That is true. Appraisers or assessors in the property tax area rely on appraisal guidelines and standards that, in some cases, classify property differently than the system established in the sales tax area. For that matter, a firm may also characterize equipment differently for accounting and tax purposes when it is to the firm’s advantage to do so. Unlike the corporate tax area or property tax area where tax determinations are made by trained auditors, accountants or appraisers, sales tax determinations are made by vendors and repair people who are not skilled tax practitioners. The sales tax rules have been crafted to allow them to make sales tax determinations on the only information that is available to them: the manner of installation and, in some cases, the use of the item.

Please let us know if you have other questions.

For the Commission,

Joe B. Pacheco,

Commissioner

^^