Does software that lets customers upload digital graphic files to a printing company's server qualify for Utah's manufacturing equipment sales tax exemption?

Plain-English summary

A large-format digital printing company — a qualifying manufacturer under SIC code 2759 — lets customers upload their digital graphic files through its website. The uploaded files sit on the company's server until a technician sends them to a specific printer, which uses separate software to convert the file into a usable format and produce the final printed product. The company bought "canned" (off-the-shelf, non-customized) software specifically for the upload/storage function and asked whether that purchase qualified for Utah's sales/use tax exemption on manufacturing machinery and equipment.

The Commission explained the exemption's scope: under Utah Code Ann. § 59-12-104(14), a qualifying manufacturer can buy machinery and equipment tax-free if it's used in the manufacturing process and has at least a three-year economic life. For computer-aided equipment specifically, that exemption extends to computers and software — but only software used exclusively to control the operation of equipment within the manufacturing process. Rule R865-19S-85 frames the underlying test as whether the software is part of a "continuous manufacturing process" running from where actual processing begins through the finished product.

Applying that test, the Commission found the upload software didn't qualify. It functions solely to receive and store customer graphic files for later processing — it doesn't operate or control the printers or any other manufacturing equipment. That makes it a delivery function, not a manufacturing function, and the line between those two is what decides exemption eligibility. Because the software never actually controls equipment inside the manufacturing process itself, its purchase is taxable.

What this means for you

Manufacturers buying software for customer-facing or administrative functions

Not all software your business uses in connection with production is exempt, even if you're a qualifying manufacturer. The exemption tracks a narrow test: does the software actually control equipment operating within the continuous manufacturing process? Software that merely receives, stores, routes, or otherwise handles inputs before production begins doesn't meet that test, even if production couldn't happen without it.

Print shops, fabricators, and other order-intake-heavy manufacturers

Draw a clear line in your own recordkeeping between (1) software that runs your production equipment (potentially exempt, if it meets the 3-year economic life requirement) and (2) software that manages customer files, orders, or communications before production starts (taxable). The physical proximity of the software to your manufacturing operation doesn't matter — its actual function does.

Accountants advising manufacturing clients on equipment purchases

When evaluating a software purchase against § 59-12-104(14)/Rule R865-19S-85, ask specifically whether the software operates or controls manufacturing machinery, not just whether it's essential to the overall business process. A necessary-but-non-controlling role (like file intake) fails the test even for an otherwise qualifying manufacturer.

Common questions

Q: Would the answer change if the software also controlled the printers?
A: The ruling assumed the upload software was separate from the printer-control software. If a single software product both received files AND directly controlled the printing equipment, that would raise a different question not addressed here.

Q: Does it matter that the software is "canned" (off-the-shelf) rather than custom-built?
A: The Commission noted this fact but the outcome turned on the software's function (delivery, not equipment control), not on whether it was custom or off-the-shelf.

Q: Can this ruling be relied on by other manufacturers with similar upload software?
A: No. It binds the Commission only for this taxpayer and the specific facts presented. Other manufacturers with different software configurations should seek their own guidance.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-104(14) (manufacturing machinery and equipment exemption; 3-year economic life requirement)
• Utah Admin. Rule R865-19S-85 (definition of "machinery and equipment"; software exemption limited to software controlling equipment in a continuous manufacturing process)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/05-019.pdf

Original ruling text

05-019

NAME
ADDRESS

Dear Representative:

This letter is to obtain clarification regarding Utah Admin Code R865-19S-85 Sales and
Use Tax Exemptions for New or Expanding Operating Replacements and receive a ruling
relating to the applicability of use tax to a specific transaction.

As noted in Utah Admin Code R865-19S-85, the term “machinery and equipment” is
defined as
a) an electronic or mechanical device incorporated into a manufacturing
process from the initial stage where actual processing begins, through the
completion of the finished end product, and including final processing,
finishing, or packaging of articles sold as tangible personal property. This
definition includes automated material handling and storage devices when
those devices are part of the integrated continuous production cycle; and
b) any accessory that is essential to a continuous manufacturing process.

For your information, COMPANY is a large format printer of digital graphics. In order to
manufacture commercial graphics, COMPANY clients must upload their digital graphic
files to our server. These files are then manipulated into a language from which our
digital printers can read and then produce.

Does the software technology purchased by COMPANY to be used by their clients
to upload their digital graphics files qualify as an “electronic device incorporated
into a manufacturing process” for purposes of qualifying for exemption from use
tax for machinery and equipment?

Due to the complex nature of this transaction, we respectfully request a ruling on this
matter. If you have any questions or need further information, please contact me at
PHONE NUMBER.

Sincerely,

NAME
TITLE

RESPONSE

Page 2

                                    June 26, 2006

NAME
ADDRESS

Re: Private Letter Ruling 05-019
Applicability of Sales Tax to Purchase of Software

Dear NAME,

This letter is in response to your request for tax guidance. This letter ruling is not
intended as a statement of broad Tax Commission policy. It is an interpretation and
application of the tax law as it relates to the facts presented in your request letter and in
telephone conversations. If the facts are not correctly described in this letter ruling, please
let me know so we can assure a more accurate response to your circumstances.

                                        Facts

COMPANY is in the business of commercial and large format digital printing. The
company is a manufacturer, falling within the 1987 SIC code of 2759. As a qualifying
manufacturer, COMPANY is eligible for tax exemptions on certain purchases of
manufacturing equipment and devices. COMPANY seeks advice as to whether its
purchase of software is exempt.

COMPANY produces some of its product from graphic files provided by its customers.
The customer typically delivers the graphic file by uploading the file via COMPANY
web site. Once the file is uploaded, it is stored on COMPANY server until a technician
directs it to a particular printing device. The printing devices are operated in conjunction
with software that converts a graphic file to a useable format and produces the final
product.

The software at issue here is not used specifically to operate the printers. It is the
software that allows customers to upload files online to the company’s server. We assume
for purposes of this opinion letter that the software is “canned” software and that the
company did not contract with a programmer to write customized software solely for
your company’s purposes.

Your company has already purchased this software, and you have verified that this
purchase is not the subject of an audit.

Page 3

                                     Analysis

COMPANY as a qualifying manufacturer, may purchase certain machinery and
equipment free of sales tax if it is used in a manufacturing process and if it has an
economic life of three or more years. See, Utah Code Ann. §59-12-104 (14). In the case
of computer-aided machinery or equipment, the exemption extends to computers and
software that are used exclusively to control the operation of the equipment in the
manufacturing process, so long as it has an economic life of three or more years.

The issue here is whether this software is used in a continuous manufacturing process,
“from the stage where processing begins to the completion of the end product.” Utah
Administrative Rule R865-19S-85. COMPANY clients use this software to deliver the
graphics files to COMPANY. This software functions solely to upload and store graphic
files for later processing. It does not operate or control the printers or other
manufacturing equipment.

                                       Ruling

The software at issue here serves a delivery function rather than a manufacturing
function. It is not used in the manufacturing process itself. Therefore, the purchase of the
software does not qualify for exemption.

   Please contact us if you have other questions.


                                                          Sincerely,


                                                          Marc B. Johnson
                                                          Commissioner