Does a document-plotting, scanning, and reproduction business qualify for Utah's manufacturing sales tax exemption on its equipment as a separate manufacturing establishment?

Plain-English summary

A Utah business that traditionally did something else had expanded into a new "Service Bureau" division offering large-document laser plotting, color electrostatic plotting, document enlargement and reduction, and scanning/vectorizing of engineering and architectural drawings. An audit had taxed the equipment the business bought for that division, and the business asked the Tax Commission for an advisory opinion that the equipment should instead qualify for Utah's sales/use tax exemption for manufacturing machinery and equipment under Code Section 59-12-104(15). Specifically, the taxpayer wanted the Commission to recognize its new Service Bureau division as a "Separate Establishment in a Manufacturing Activity," distinct from its traditional business.

The Commission referred the request to its Auditing Division and adopted that division's recommendations. The threshold rule: to qualify for the manufacturing machinery/equipment exemption, an activity must fall under SIC codes 2000 to 3999 and must involve manufacturing a product for sale as tangible personal property. A business can have one manufacturing activity that qualifies as a "separate establishment" even if the rest of the business doesn't manufacture anything — but each activity has to be examined on its own to see whether it actually is manufacturing.

Applying that test, the Commission found none of the Service Bureau's four activities qualified. Laser plotting and color electrostatic plotting were "professional services" comparable to what a draftsman or architect provides — using specialized equipment to output a customized drawing doesn't make the underlying activity manufacturing. Document enlargement and reduction was compared to a photocopy service, not an offset-printing (manufacturing) process. Document scanning fell under SIC Code 7374 (Computer Processing and Data Preparation and Processing Service), a service classification, not a manufacturing one. Finally, the Commission rejected the argument that producing output digitally rather than photographically changed the analysis — the method of producing the output doesn't convert a service into manufacturing.

The Commission agreed with the Auditing Division's recommendations "based upon the facts presented," expressly noting that if the actual facts differed, the conclusion could change.

What this means for you

Reprographics, plotting, scanning, and drafting-service businesses

If your business's output is a customized drawing, plot, print, or digital file produced to a customer's specifications — even using expensive specialized equipment — Utah is likely to treat that as a professional or data-processing service, not manufacturing, for sales tax exemption purposes. That was true here even though the taxpayer argued it was taking "raw material" (a customer's design or hardcopy) and adding value to create an "end product." The relevant test looks at the SIC classification of the activity (2000-3999 for manufacturing) and whether the output is a product for sale as tangible personal property, not simply whether equipment is used to transform an input.

Businesses with mixed manufacturing and non-manufacturing operations

The ruling confirms Utah does recognize that a single business can have a "separate establishment" engaged in genuine manufacturing even if its other operations don't qualify — so a mixed business isn't automatically excluded from the exemption just because part of what it does is non-manufacturing. But you have to show that the specific activity you're claiming the exemption for actually is manufacturing (SIC 2000-3999, producing tangible personal property for sale); simply carving out a "division" and calling it manufacturing isn't enough if the underlying activity is really a service.

Accountants and tax professionals

When evaluating a client's manufacturing equipment exemption claim under (what was, in 1992) § 59-12-104(15), look first at the SIC classification of the specific activity in question, not the business as a whole. This ruling illustrates the Commission distinguishing manufacturing-like activities (offset printing) from superficially similar service activities (plotting, photocopying, document scanning/data processing) that use similar or even identical equipment. Also note the Commission's caveat that its conclusion depends entirely on the facts as presented — deviations from those facts could change the outcome.

Common questions

Q: We invested in expensive equipment and use it to transform a customer's raw materials into a finished product — doesn't that make us a manufacturer?
A: Not necessarily. The Commission rejected that reasoning here. It looked at whether the specific activity fell under a manufacturing SIC code (2000-3999) and produced tangible personal property for sale, not just whether equipment was used to add value to an input.

Q: Can part of our business qualify for the manufacturing exemption even if the rest doesn't?
A: Yes, in principle — the ruling recognizes that a separate manufacturing activity within a business may qualify as a "separate establishment" eligible for exemption. But the specific activity still has to independently meet the manufacturing test.

Q: Does producing output digitally instead of by older methods (like photography) change the analysis?
A: No. The Commission specifically found that deriving the output through digital methods rather than photographic methods didn't change the nature of the activity — none of the taxpayer's plotting, enlargement/reduction, or scanning activities were manufacturing either way.

Q: Is document scanning/digitizing considered manufacturing?
A: Not in this ruling. The Commission classified the taxpayer's document scanning service under SIC Code 7374 (Computer Processing and Data Preparation and Processing Service) rather than a manufacturing SIC code.

Q: Can I rely on this ruling for my own business?
A: Not as binding precedent. This is a private letter ruling that bound the Commission only as to the taxpayer and facts described in this specific request; the Commission itself noted that different facts could produce a different result. It's also a 1992 ruling — Utah's statutes and rules have since been renumbered and amended, so confirm current law before relying on any citation here.

Citations and references

Statutes:

• Utah Code § 59-12-104(15) (as in effect in 1992) — sales/use tax exemption for manufacturing machinery and equipment; the ruling applies the requirement that the activity fall under SIC codes 2000-3999 and involve manufacturing a product for sale as tangible personal property.

Classification references (not statutes, but central to the analysis):

• Standard Industrial Classification (SIC) Manual, codes 2000-3999 — the manufacturing-activity range the exemption depends on.
• SIC Code 7374 (Computer Processing and Data Preparation and Processing Service) — the classification the Commission assigned to the taxpayer's document scanning activity.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/92-018.htm

Original ruling text

Response
July 30, 1992

July
30, 1992

XXXXX

Re:
Advisory Opinion - Manufacturing Exemption

Dear
XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling that
the purchase of plotting and scanning equipment and enlargement or reduction
equipment may qualify for exemption from sales or use tax under the provisions
of Code Section 59-12-104(15). These purchases were taxed in an audit which was
paid on XXXXX.

The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your
request was referred to the Tax Commission's Auditing Division for their
analysis and recommendations. The division's recommendations are as follows:

1.
In order to qualify for exemption from sales tax on machinery and equipment
purchases, the activity must be one described in the Standard Industrial
Classification Manual under SIC code 2000 to 3999. The activity must be to manufacture a product for sale as
tangible personal property. A separate activity of manufacturing tangible
personal property within a business may qualify as a "separate
establishment" and may be eligible for exemption.

2. XXXXX's laser plotting and color
   electrostatic plotting services are professional services much the same as the
   service of a draftsman or an architect. The use of special equipment does not
   change the intended output which is providing a service on a customized basis.

3. XXXXX's activity to sell document
   enlargements or reductions is the same as a photocopy service. It is not like
   an offset printing service.

4.
The document scanning service is classified under SIC Code 7374, Computer
Processing and Data Preparation and Processing Service.

5.
The fact that the output is derived through digital methods rather than
photographic methods does not change the nature of the activity. None of the
activities performed by XXXXX are considered manufacturing activities.

Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these facts
this opinion may be negated.

If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of that hearing would constitute a
declaratory judgment and be appealable to the Utah State Supreme Court. A
Notice of Appeal Rights and a copy of the Utah Taxpayer Bill of Rights are
attached.

For
the Commission

Joe
B. Pacheco

Commissioner

Utah
State Tax Commission

Auditing
Division

Sales
& Use Tax

XXXXX

We
at XXXXX made the decision to expand our scope of business to include a Service
Bureau division. Since that time we have engaged in the business of Laser
Plotting, Color Electrostatic Plotting, Large Document Enlargement and
Reduction and Scanning of Engineering & Architectural drawings.

In
each case equipment has been purchased and employees have been hired to take a
raw material and create an end product that we have added value to. Many of our
services were formerly not available in Utah or any of the surrounding states.
At this time we are attracting business from many Western states as well as
some in the Eastern United States.

Because
of this Service Bureau division in our company XXXXX is now requesting an
Advisory Opinion to establish a "Separate Establishment in a Manufacturing
Activity" to separate our new business from our traditional one.

In
an effort to help you visualize the process and the end product, we are
composing a description of each service and a sample of the finished product.

Our
Sales Brochure is also enclosed.

Large
Document Laser Plotting

In
the Architectural and Engineering world, a large majority of the design is done
using a Computer Aided Drafting ( C.A.D.) system. After the design is complete,
they need to plot the drawing on a hard copy. Plotting can be a very slow
process unless you invest in a high speed Laser Plotter at a cost of about
$$$$$.XXXXX invested in such a plotter and now offers the fast, high quality
plots to our customers. The customer brings us their designs on a disc. We
install the disc in our C.A.D. system and plot the drawings to their
specifications. We take a blank sheet of 100% rag vellum and plot an image on
the surface, creating a finished drawing.

See
example "A"

Color
Electrostatic Plotting

The
Color Plotting process is similar to the Laser Plotting process. The customer
still presents us with a disc and we plot the drawing to their specifications.
A color plotter is used to create a drawing with up to 30 colors possible. The
size limitation for our color plotting is 36 inches wide x 50 inches long.

See
example "B"

Large
Document Scanning

XXXXX
has the ability to convert a drawing created by hand into a file that is usable
on a Computer Aided Drafting (C.A.D.) system. This is valuable to customers who
don't have the time to redraw drawings in a C.A.D. format. Our customers bring
us hardcopies or blueprints which we Scan and Vectorize. The finished product
is a file with the images from the hardcopy in a digital form on a floppy disc.

Many
of our customers have 100's or 1,000's of old drawings in their files.
Converting them into a digital format by any other means would be difficult if
not impossible.

See
example "C"

The
processes we perform have not been widely recognized or understood until
recently. We feel that when the last SIC manuals were published that they had
not considered classifying the processes we use. An appropriate SIC number
would allow us to recover monies paid as a result of a XXXXX audit, as well as
making it more feasible to continue to invest in new equipment and expand our
business.

As
you can see our process's are not unlike the offset press process. Our output
is derived through digital methods instead of the photographic methods they
use.

If
the descriptions of our processes, along with our samples, do not give you a
clear picture of our finished products, we would invite you to visit our
facility for a first hand inspection.

I
have also enclosed a copy of the XXXXX Audit, pertaining to the equipment used
in Service Bureau Department.

Thank
you for meeting with me and considering our situation.

XXXXX