98-011
Response
REQUEST
LETTER
Dear
Commissioners:
Regarding: Sales tax issues related to separate
activities conducted at the same location.
Although
some of these issues have been addressed on previous occasions, it was
suggested that we request a current opinion from the commission. One of our
clients is both a manufacturer and a construction contractor. The company sells
some of its manufactured products to other companies and uses some of its
manufactured products in its construction business. In advising this client regarding the sales or use tax
exemptions for purchases of manufacturing machinery and equipment and purchases
of fuel for industrial use, we went to great lengths to resolve
eligibility
questions.
With
regard to the sales or use tax exemption for purchases of manufacturing
machinery and equipment and normal operating replacements, our rationale is
based upon current laws, court cases, and advisory opinions and is as follows:
1. In order to qualify for the exemption,
a company must not only be involved in
the activity of manufacturing goods, the company must also fall within the
definition of "manufacturing facility."
2. For a taxpayer to qualify as a
"manufacturing facility," it
must be an "establishment" and must perform activities
described in the relevant sections of
the Standard Industrial Classification Manual.
3. For a manufacturing operation to
qualify as an "establishment,"
it must be an economic unit of operations that is generally at a single physical location. In
4. If a company performs both
manufacturing and nonmanufacturing
activities at a single physical location, each activity is treated as a
separate establishment only if no single
SIC code includes those activities combined or
if each activity comprises a separate legal entity.
5. For an activity to comprise a separate
legal entity, that activity must be economically independent of the other
activities performed by the company.
Based
upon these requirements, we advised our client that, in order to qualify for the exemption, the
manufacturing operations of the company would have to be economically viable without dependence
upon the contracting operations. We indicated
that if the manufacturing activities would not continue profitably if the contracting activities
ceased the company would not meet the
requirements for eligibility.
We
would appreciate your verifying the accuracy of this advice. We would also like
to know whether or not a manufacturing
operation must comprise a separate legal entity in order to be eligible
for the exemption from sales or use tax
for purchases of fuels for industrial use.
Neither
the law nor the rule related to this exemption defines "establishment," even though the
legal definition of "industrial use" limits exempt use of fuels in manufacturing activities to those
performed " . . . at an
establishment described in SIC Codes 2000 to 3999...',
We
realize that another element of eligibility for this exemption is predominant use of fuel that is furnished
through a single meter; however, we would
like you to clarify how this element interacts with the question of
whether or not the manufacturing
operation must be a separate legal entity.
Thank
you for your time and attention.
Sincerely,
NAME
NAME
ADDRESS
CITY
STATE ZIP
RE:
Advisory opinion - manufacturing and fuel exemption
Dear
NAME,
We have received your request for information
regarding two sales tax exemptions, the manufacturing exemption found in Utah
Code Ann. §59-12-104(15) and the industrial fuel exemption of
§59-12-104(43). We shall address each
exemption separately.
Manufacturing equipment
exemption. Being deemed a
manufacturing establishment is one of the requirements needed to qualify for
the manufacturing equipment exemption.
Your letter lists the criteria you believe are necessary to be deemed a
manufacturing establishment and receive the exemption. Both issues are addressed in Utah Admin. Code
R865-19S-85. This rule, and specifically
the “establishments” language found in it, was recently amended in August,
1997. This opinion will relate only to
interpretation of the rule as amended.
You have listed five requirements
that you believe a manufacturer must meet to qualify for this exemption. After reviewing the language of the exemption
statute and the amended rule, we concur with the interpretations you reach in
your first four requirements. However,
your fifth requirement concerns the interpretation of “separate legal entity,”
as found in section (D)(1) of the rule.
You conclude that an activity comprises a separate legal entity when
that activity is economically independent of the another activity performed by
the company. You then add that to be
economically independent, an activity must be economically viable without
dependence on another activity. Whether
two activities are “separate legal entities” for purposes of the amended rule
is not determined by their economic independence from one another.
Rule 865-19S-85(D) states in
pertinent part:
1. Each activity
is treated as a separate and distinct establishment if:
a) no single SIC code includes those activities
combined; or
b) each activity comprises a separate legal
entity.”
If either section (a) or (b) is
satisfied, both activities are considered separate establishments. Please note that each
activity need not be a separate legal entity to satisfy section (a). Instead, to qualify as a separate
establishment under section (a), first look to see if there is a
nonmanufacturing SIC code that covers both activities. If there is not, section (a) is satisfied. To illustrate this point, consider a retail
bakery. Although it manufactures food, a
single SIC code does exist for a business that manufactures baked goods for
sale on its premises. On that basis, the
two activities do not qualify as separate establishments. As that single SIC code is not a
manufacturing one, the activity is not a manufacturing establishment, and the
exemption is not available.
As another example, consider
an eating establishment which both manufactures beer and operates a restaurant
that sells that beer on the same premises.
There is no single SIC code that includes both of these activities, so
each activity qualifies as a separate establishment under section (a). As the SIC code for a manufacturer of beer
is a manufacturing code, this activity does qualify as a separate manufacturing
establishment. Accordingly, should all
other requirements be met, this activity would qualify for the exemption.
However, please note that
although an activity may be deemed a separate manufacturing establishment, it
does not automatically qualify for the manufacturing equipment exemption. Rule 865-19S-85(D)(2) only allows the exemption when
use of the equipment in the nonmanufacturing activity is de minimis. The consequence of this requirement can be
seen in the above eating establishment example.
Should the beer manufacturing equipment also produce beer for the
nonmanufacturing activity (the restaurant),
the equipment would not qualify for the exemption unless that use for
the restaurant was considered de minimis.
To be deemed a separate
establishment under section (b), the two activities must comprise separate
legal organizations, corporations, subsidiaries, etc. No consideration of economic independence is
needed to determine how the corporations are legally formed.
Industrial fuel exemption. Your second question asks how a manufacturer
may qualify as an establishment for purposes of the industrial fuel
exemption. Specifically, you ask whether
the manufacturer must qualify as a “separate legal entity,” the standard found
in the manufacturing equipment exemption rule, before it is also considered an
establishment for purposes of the industrial fuel exemption.
The Commission shall not presently
address this issue in an advisory opinion.
Utah Admin. Code R861-1A-34 requires that the Commission defer from
issuing an advisory opinion concerning an issue currently pending before the
Commission in an audit, appeal or other action.
Interpretation of “establishment” for purposes of the industrial fuel
exemption is an issue now pending before the Commission in an appeal. For these reasons, the Commission shall not
address this issue in an advisory opinion at this time.
Please contact us if you have any other questions.
For
the Commission,
Joe
B. Pacheco,
Commissioner
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