If a Utah company fabricates massive equipment (400-ton autoclave vessels) that gets shipped out of state and permanently bolted to a foundation there, does Utah sales or use tax apply to the fabrication and installation?

Plain-English summary

A mining company hired a Utah fabricator to build huge autoclave vessels (roughly 82 feet long, 15 feet across, 400 tons each) used to process gold slurry, then had a second Utah company install lead linings in them, before shipping the finished vessels to a mine near a Nevada town and permanently bolting them to reinforced concrete foundations. The taxpayer asked the Commission to declare the whole transaction exempt from Utah sales and use tax.

The taxpayer's main argument was that the vessels became real property once bolted down in Nevada, so Utah Code § 59-12-104(33) — which exempts property sold in Utah, shipped out of state, and incorporated into out-of-state real property — should apply. The Commission rejected that theory: sheer size, weight, and permanent bolting to a foundation don't automatically convert equipment into real property. What matters more is how the property functions. Because the autoclaves are process equipment (not structures like buildings), the Commission concluded they stayed tangible personal property even after installation, so the § 59-12-104(33) real-property exemption did not apply.

That did not mean tax was owed, though. The Commission found two separate paths to exemption on the facts presented: (1) the contract structure meant the lead-lining installer sold the completed, lined vessels to the fabricator, who then resold them to the mining company — a sale for resale, exempt as long as a proper resale exemption certificate was given; and (2) the sale from the fabricator to the mining company qualified for Utah's interstate-commerce exemption under Rule R865-19-44S, because the contract required the seller to physically deliver the vessels across the state line to the Nevada mine site, physical movement across the line was essential to the deal, and it actually occurred.

What this means for you

Manufacturers and equipment fabricators

Don't assume that permanently attaching heavy equipment to a foundation converts it to real property for Utah sales tax purposes — the Commission looks at what the item does (equipment performing a process) rather than its size or the permanence of the mounting. If your equipment stays personal property, look instead to resale exemptions in your contract chain and to Utah's interstate-commerce exemption when a contract genuinely requires shipping the finished item out of state.

Businesses selling for out-of-state delivery

The interstate-commerce exemption under Rule R865-19-44S has three real requirements: actual physical movement across the state line, that movement being essential (not incidental) to the sale, and a contractual obligation on the seller to deliver across the line. All three were independently satisfied here by the contract terms and the vessels' actual transport to Nevada.

Accountants and tax professionals

This ruling is a useful counterpoint on the real-property-vs-personal-property line for heavy manufactured equipment: contrast it with rulings addressing home-theater/automation equipment (98-034) and manufacturing support equipment like transformers (99-013), where installation purpose and removability drove the classification. Here, the Commission also declined to reach the taxpayer's Commerce Clause argument on the merits, resolving the case entirely on statutory exemption grounds instead.

Common questions

Q: Does bolting massive equipment to a foundation make it real property?
A: Not automatically. The Commission looks at how the property functions, not just its size, weight, or the permanence of attachment. Equipment that performs a process (like the autoclaves here) can remain personal property even when permanently affixed.

Q: If the vessels stayed personal property, why wasn't tax owed?
A: Because the specific contract chain here qualified independently for a sale-for-resale exemption and for Utah's interstate-commerce exemption, since the contract required delivery of the finished vessels out of state to Nevada.

Q: Does this ruling apply to my equipment sale?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts. Another taxpayer can't rely on it as binding, though it may carry weight in a later appeal depending on how closely the facts match — and the Commission expressly noted any deviation from these facts could change the outcome.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-104(33) (exemption for property incorporated into out-of-state real property)
• Utah Code Ann. § 59-12-104(28) (exemption for property taxed by another state)
• Utah Code Ann. § 59-12-104(12) (exemption for property Utah is constitutionally/statutorily barred from taxing)
• Utah Code Ann. § 59-12-102(13) (definition of tangible personal property)
• Utah Admin. Code Rule R865-19-44S (interstate-commerce exemption)
• Morton International, Inc. v. Auditing Division, 814 P.2d 581 (Utah 1991)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/93-023.pdf

Original ruling text

BEFORE THE UTAH STATE TAX COMMISSION

In Re: )

XXXXX )

Sales and Use Tax )

Exemption )

)

) REQUEST FOR AGENCY ACTION

) BY WAY OF DECLARATORY

) JUDGMENT AND REQUEST FOR

) DEPARTMENTAL CONFERENCE

)

) Case No.

Pursuant
to Utah Code Ann. � 63-46b-1-21 (1991) and Rules R861-1-4A and R861-1-5A.lQ of
the Administrative Rules of the Utah State Tax Commission, XXXXX
("XXXXX") petitions the Utah State Tax Commission ("Tax
Commission") for an Order declaring the fabrication of autoclave vessels
and the installation of lead linings therein, which vessels were immediately
transported to Nevada and attached to real property in Nevada, are exempt from
taxes imposed by the Sales and Use Tax Act, Utah Code Ann. � 59-12-101 et. seq.

I.

PETITIONER

XXXXX

By
and through

XXXXX

XXXXX

of
and for

XXXXX

Attorneys
for XXXXX.

XXXXX

XXXXX

II.

TAXES
INVOLVED

The
taxes at issue would be imposed by the Sales and Use Tax Act, Utah Code Ann. �
59-12-101 et seq. The potential sales taxes would be imposed for tax period
XXXXX upon XXXXX ("XXXXX"), of XXXXX, Massachusetts and XXXXX
("XXXXX") of XXXXX, New York. XXXXX is the purchaser of the property
and, according to the contracts between XXXXX, XXXXX, XXXXX is responsible for
the payment of state and local taxes.

III.

ACTION
SOUGHT

XXXXX
seeks a Declaratory Order, pursuant to Utah Code Ann. � 63-46b-21, declaring
that the fabrication of autoclave vessels and the installation of lead linings
therein, which vessels were immediately transported to Nevada and attached to
real property in Nevada are exempt from the tax imposed by the Sales and Use
Tax Act, Utah Code Ann. � 59-12-101 et seq.

XXXXX
requests a Departmental Conference to discuss this Request for Declaratory
Order.

IV.

STATUTES
AND RULES RELIED UPON

1. Utah Code Ann. � 63-46b-21 -- allows the Tax
   Commission to issue declaratory orders determining the applicability of a
   statute or rule within the Tax Commission's primary jurisdiction.

2. Utah Code Ann. � 59-12-101 et seq. -- Utah's
   Sales and Use Tax Act.

3. Utah Code Ann. � 59-12-104(12) -- provides
   an exemption from Utah's sales and use taxes for sales or use of property which
   Utah is prohibited from taxing under the United States Constitution or the laws
   of Utah.

4. Utah Code Ann. � 59-12-104(28) -- provides
   an exemption from Utah's sales and use taxes for property upon which a sales or
   use tax was paid to another state.

5. Utah Code Ann. � 59-12-104(33) -- provides
   an exemption from Utah's sales and use taxes for property sold in Utah, but
   subsequently shipped outside Utah and incorporated into and becomes real
   property located outside Utah.

6. Utah Administrative Code Rule R865-19-44S --
   provides that sales made in interstate commerce are not subject to the sales
   and use taxes imposed by Utah.

7. Utah Administrative Code Rule R865-19-58S --
   defines a real property contractor for purposes of Utah Code Ann. �
   59-12-104(33).

STATEMENT
OF FACTS

The
following facts are uncontroverted.

1.
XXXXX is a Colorado corporation qualified to do business in the state of
Nevada. XXXXX has developed and is operating certain mining properties located
approximately 25 miles north of XXXXX, Nevada.

2.
On or about XXXXX, XXXXX (by and through its agent XXXXX) contracted with XXXXX
("XXXXX") to fabricate, erect and construct autoclave vessels at its
XXXXX mine site. XXXXX, in turn, subcontracted with various material providers
and subcontractors for divisible portions of the fabrication, erection and
construction of the autoclaves and certain additions thereto. The autoclave
vessels were primarily fabricated by XXXXX in Salt Lake City, Utah.

3. On or about XXXXX, pursuant to a separate
   contract, XXXXX (by and through its agent XXXXX) contracted with XXXXX to
   supply, install and test lead linings in the autoclave vessels. XXXXX installed
   and tested the lead linings in the vessels at XXXXX facilities in Salt Lake
   City. XXXXX then transported the autoclaves to XXXXX mine site and permanently
   affixed them to their foundations.

4. Title passage to XXXXX of the autoclave
   vessels and the materials used in the fabrication thereof is controlled by
   Section 20.1 of the contract. Section 20.1 states:

From
and after payment by the Purchaser of any installment or part of the Purchase
Order Price all materials and equipment covered by the purchase Order and each
portion thereof and everything intended for incorporation therein shall, as
soon as they arrive in the Vendor's premises or, being already in the Vendor's
premises, are appropriated to the Purchase Order be the Purchaser's property
but without prejudice to the Vendor's lien thereon for money due to the Vendor
in respect thereof, for the Vendor's obligation to hold them in safe custody on
behalf of the Purchaser until delivery. When under this Clause property in the
equipment and materials or part thereof is deemed to pass to the Purchaser, the
Vendor, shall where practicable affix a label or plate to be provided by the
Purchaser stating that the said equipment and materials or part thereof are the
property of the Purchaser. The Purchaser shall be entitled at all reasonable
time to inspect the said equipment and materials or part thereof at the
Vendor's premises to insure that this Clause has been observed and if it has
not been observed to affix a label or plate to be provided by Purchaser as
aforesaid on the equipment and materials. No payment of or on account of the
Purchase Order Price shall constitute an admission by the Purchaser as to the
performance by the Vendor of his obligations hereunder.

Although
this language is somewhat unclear and contradictory, XXXXX held and retained
possession and control of the autoclave vessels (and the materials and
equipment incorporated therein) until completion of the erection and attachment
of the autoclave vessels at XXXXX mine site.

5. XXXXX's autoclaves are used to oxidize gold
   slurry as part of the gold extraction process. Each of XXXXX's autoclaves are
   huge horizontal cylinders measuring roughly 82 feet long and 15 feet in
   diameter and weighing approximately 400 tons. At the mine site, each autoclave
   is supported by specially designed, reinforced and constructed footings and
   foundations consisting of approximately 250 cubic yards of concrete and
   reinforcing steel. Each autoclave is permanently attached to the footings and
   foundations by bolts, supporting steel uprights and beams, and concrete. Once
   affixed, the autoclaves are immovable and become permanent improvements to the
   real property.

6. After permanently affixing the vessels to their foundations,
   numerous additions and improvements are constructed thereto including flanges,
   piping, flash and splash tanks, and ceramic brick linings. These improvements
   are constructed on site piece-by-piece by brick masons, cement contractors, and
   other construction workers.

7.
Nevada has imposed a sales use or transaction tax on the autoclaves, including
the lead lining at the rate of 6.5%.

VI.

SUMMARY
OF LAW AND ARGUMENTS

A. Exemption Provided In Utah Code Ann. ____�
59-12-104(33)

Utah
Code Ann. � 59-12-104(33) states that a sale of property is exempt from Utah's
sales and use tax if it involves "sales of tangible personal property to
persons within this state that is subsequently shipped outside the state and
incorporated pursuant to contract into and becomes a part of real property
located outside of this state." The exemption only applies if the other
state does not allow a credit for Utah taxes.

XXXXX
qualifies for the exemption provided in this section because (1) the autoclave
vessels and lead liners were tangible personal property within the state of
Utah, (2) the autoclaves in which the lead liners are placed were shipped to
Nevada and permanently affixed to real property [i.e. the autoclaves become
fixtures], (3) the shipment and attachment was accomplished pursuant to the
XXXXX contract, and (4) Nevada does not allow a credit for taxes paid to other
states.

The
vessels and lead liners are incorporated into real property because the 400 ton
autoclaves are permanently attached to reinforced concrete foundations in the
ground and are immovable. They constitute real property improvements according
to established case law and Utah Code Ann. � 59-12-102(13). Section
59-12-102(13) defines tangible personal property to include all tangible or
corporeal things or substances including property severed from real estate but
specifically excluding real estate or any interest or improvements thereon. The
only reasonable application of this definition is that the 400 ton autoclaves
when erected and attached to their supporting foundations and protective shells
become real property improvements and thereafter are not tangible personal
property.

In
Morton International, Inc,. v. Auditing Division, 814 P.2d 581 (Utah
1991), the Tax Commission successfully argued that (l) real property should be
defined as a structure permanently affixed to real property by means of cement,
plaster, etc., and (2) in order to determine whether something is permanently
affixed to real property, the Tax Commission looks to (a) the intention of the
party making the annexation, (b) the manner in which the building or structure
is annexed, and (c) its adaptation to the use of the realty. See id.
at 594 n.61 and the cases cited therein. Based upon any reasonable application of
this definition, the autoclaves clearly become and qualify as real property
improvements.

Additionally,
the purchase order between XXXXX and the purchase order between XXXXX
constitute contracts between the parties. A "contract" is defined as
a promise for which the law recognizes a duty to perform or for which the law
will provide a remedy for a breach. See Restatement (Second) of
Contracts 3. The purchase orders for the purchase of the autoclave vessels and
the lead linings are binding obligations between the parties. These contracts
clearly require that the autoclaves including the lead linings be transported
to and erected upon real property in Nevada. Therefore, the autoclaves will be
incorporated into and become a part of real property improvements pursuant to a
contract.

B. Exemption Provided in Utah Code Ann. �
59-12-104(28).

Utah
Code Ann. � 59-12-104(28) exempts a sale from Utah's sales tax if it involves
"property upon which a sales or use tax was paid to some other
state," except to the extent Utah's tax exceeds the other state's tax.

Nevada
has assessed and XXXXX has paid a sales or use tax on the autoclaves and lead
liners pursuant to Nevada's sales and use tax laws. Nevada's sales/use tax
rates are higher than Utah's rates. Therefore, according to the clear language
of the statute, XXXXX qualifies for the exemption.

C.
The United States Commerce Clause.

XXXXX
believes and asserts that the Tax Commission does not have jurisdiction or
competency to decide constitutional challenges to Utah statutes or Tax
Commission rules, either on their face as applied.1 Accordingly, this issue will, of necessity, have to be ruled upon
by the courts, if the controversy is not resolved through a ruling in XXXXX's
favor in this proceeding. In order to preserve the issue for future briefing
and argument in the courts, this issue is summarily raised and addressed
herein.

The
Commerce Clause of the United States Constitution preempts Utah's imposition of
its sales tax on the autoclave vessels and the lead linings. The determination
of whether a state tax violates the Commerce Clause is governed by the United
States Supreme Court's guidelines set forth in Complete Auto Transit Inc. v.
Brady, 430 U.S. 274 (1977). Complete Auto holds that a state tax will
be sustained against a Commerce Clause challenge where the tax (1) is applied
to an activity with a substantial nexus with the taxing state, (2) is fairly
apportioned, (3) does not discriminate against interstate commerce, and (4) is
fairly related to the services provided by the state. See Questar Pipeline
Co. v. Utah State Tax Commission, 817 P.2d 316, 318 (Utah 1991).

The
imposition of a sales tax by Utah would violate the second and third prongs of
the Complete Auto test. The second prong, fair apportionment, requires
that the tax be fairly apportioned to the taxpayer's activities within the
state. The purpose of this prong is to reduce the risk that the taxpayer will
be subject to multiple taxation by different states, which is a burden not borne
by local commerce. In this instance, the application of the second prong is
similar to the application of the third prong, discrimination, which is
intended to prevent the enactment of laws which favor local over out-of-state
interests by discriminating against interstate commerce.

The
application of the second and third prongs of the Complete Auto
test are that a state may not impose a tax that subjects interstate commerce to
the burden of multiple taxation. See Mossberg-Hubbard Division v. Norberg,
432 A.2d 1176 (R.I. 1981), citing Michigan-Wisconsin Pipeline Company
v. Calvert, 347 U.S. 157 (1954). Multistate tax burdens can
constitutionally be avoided by either allowing an offset or credit for sales
and use taxes paid in another state, or by a system of apportionment. See
Director of Revenue v. Superior Aircraft Leasing Company, 734
S.W.2d 504 (Mo. 1987), citing International Harvester Company v.
Department of Treasury, 322 U.S. 340 (1944). Unless the Tax
Commission exempts the transaction from the imposition of Utah's sales tax,
multiple taxation, in violation of the Commerce Clause, will occur.

D. Exemption Provided by Rule 865-19-44S.

Utah
Administrative Code R865-19-44S provides that sales made in interstate commerce
are not subject to the Sales and Use Tax Act. Subpart lB of Rule R865-19-44S
states:

1B.
Before a sale qualifies as a sale made in interstate commerce/ the following
must be complied with:

11.
the transaction must involve actual and physical movement of the property sold
across the state line;

12.
such movement must be an essential and not an incidental part of the sale;

13.
the seller must be obligated by the express or unavoidable implied terms of the
sale, or contract to sale, or contract to sell, to make physical delivery of the
property across a state boundary line to the buyer.

The
requirements of this Rule have been specifically met in the transaction
described above. First, the Rule states that "the transaction must involve
actual and physical movement of property sold across the state line." It
is uncontroverted that the autoclaves, with the lead liners installed therein,
were transported immediately upon the completion of their fabrication to
XXXXX's mine site near XXXXX, Nevada. The contract required the transportation of
the property outside Utah, which movement has occurred.

Second,
the Rule states that "such movement must be an essential part of the
sale." The contract entered into between XXXXX and XXXXX required the
autoclaves, with the lead liners installed therein, be transported and erected
at XXXXX's mine site in Nevada by XXXXX. All parties understood the fabricated
autoclaves and lead liners would be erected in Nevada at XXXXX�s mine site. The
contracts between XXXXX and XXXXX would not have been consummated without the
specific undertaking of XXXXX to transport and erect the autoclaves at the mine
site where they could be of use by XXXXX in its mining operations. Thus, the
transport of the property to Nevada was an essential element of the
transaction.

Third,
the Rule requires that "the seller (XXXXX) must be obligated by the
express or unavoidable implied terms of the sale, . . . to make physical
delivery across a state boundary line to the buyer (XXXXX)." Again the
contract is specific on this issue. Following certain fabrication activities in
Utah, the autoclaves including the lead lining were transported and erected by
XXXXX mine site in Nevada. Specifically, the contract requires that certain
work be performed in Utah and certain work to be performed at the job site in
Nevada. Under the present facts Rule R865-19-44S relating to the interstate
commerce exemption is easily satisfied by XXXXX.

E. Exemption Provided in Utah Code Ann. ____�
59-12-104(12)

Utah
Code Ann. � 59-12-104(12) provides an exemption from Utah's sales tax for
"sales or use of property which the state is prohibited from taxing under
the Constitution or laws of the United States or under the laws of this
state." As described above, the imposition of a Utah sales tax upon the
sale of the vessels and lead linings violates the United States Commerce
Clause, and disregards Utah Code Ann. � 59-12-104(28) and (33).

CONCLUSION

XXXXX
purchased autoclave vessels from XXXXX which were primarily fabricated in Utah.
XXXXX purchased lead linings from XXXXX which were installed in and became part
of the autoclave vessels. XXXXX transported and erected the vessels as real
property improvements at XXXXX's mine site near XXXXX, Nevada. To the extent
that Nevada taxes XXXXX's purchases or use of the vessels and lead linings, and
does not extend credits against such taxes for any taxes paid to Utah, XXXXX�s
purchases of the vessels and lead linings should be exempt from Utah sales and
use taxes as provided for by Utah Code Ann. � 59-12-104(12),(28),(33) and Rule
865-19-44S.

DATED
this 29th day of June, 1993.

XXXXX

1 "[I]t is not for the Tax Commission to
determine questions of legality or constitutionality of legislative
enactments." Shea v. State Tax Commission, 120 P.2d 274, 275 (Utah
1941).

CERTIFICATE OF HAND DELIVERY

I hereby certify that I caused to be hand-delivered,
a true and correct copy of the foregoing REQUEST FOR AGENCY ACTION BY WAY OF
DECLARATORY JUDGMENT AND REQUEST FOR DEPARTMENT CONFERENCE to the following
on this 29th day of June, 1993:

August
12, 1993

XXXXX

Appeals
and Legal Affairs

Utah
State Tax Commission

160
East 300 South

Salt
Lake City, Utah 84134

Re: Appeal No. 93-1593

Dear
XXXXX:

On
XXXXX, on behalf of XXXXX, we filed a Request for Agency Action by Way of Declaratory
Judgement and Request for Departmental Conference pursuant to Utah Code Ann.
63-46b-21. The purpose and intent of
the request was to obtain a Declaratory Order/Advisory Opinion on the sales tax
treatment of the transaction outlined in our request. Apparently, the request was forwarded to your division for
processing. An appeal number has been
assigned and a Notice dated XXXXX was sent to us. I became aware of the assignment to your division upon receipt of
the Notice this date.

As
we discussed by telephone this day, rather than have this matter scheduled for
a hearing in the appellate process, we would like to have the Request forwarded
to Commissioner Joe B. Pacheco for issuance of an advisory opinion. Following the issuance of the advisory
opinion, if the taxpayer remains unsatisfied, we understand that we will then
have the opportunity to appeal the advisory opinion to your section.

If
you have questions or if this matter requires further dialogue, would you
please call the undersigned.

Very
truly yours,

XXXXX

April
8, 1994

XXXXX

Re:
Request for Declaratory Judgment - XXXXX

Dear
XXXXX:

This
letter is in response to your request dated XXXXX (copy attached) for the Tax Commission
to issue a declaratory judgment that the fabrication and purchase of XXXXX and
the installation of lead linings therein are exempt from the Utah sales or use
tax.

Although
your inquiry was framed as a request for a declaratory judgment, Tax Commission
policy is to treat all such inquires as requests for advisory opinions. As
such, it was referred to the Tax Commission's Auditing Division for their
analysis and recommendations. The division's recommendations are as follows:

A.
The first issue to be considered is whether the autoclaves remain personal
property after being attached to realty or whether they have been converted to
real property. We conclude that the autoclave vessels remain personal property.

1.
Property is not real property just because of size or weight. How property
functions is more determinative. Permanent or semipermanent attachment to real
property, likewise, does not change personal property into real property.
Personal property does not become real property because removal of it would
require demolishing protective or supporting structures.

2.
Petitioner cites the case of XXXXX, which Respondent agrees is on line with
this case. The court ruled that the special buildings were real property and
the equipment was personal property and was eligible for exemption under the
expanding manufacturer's exemption. Much of the machinery and equipment was
attached to the realty. The autoclaves are equipment items, not real property
structures.

Since
the autoclaves are considered to be personal property rather than realty, the
exemption provided in Utah Code Annotated 59-12-104(33) does not apply.

B. The modification of Paragraph 33, of Article
V, Statement of Facts as indicated in your letter of XXXXX (copy attached)
leads to the conclusion that the contract to furnish, install and test the
autoclave linings was a contract between XXXXX rather than between XXXXX. Consequently, in view of the determination
that the autoclaves remain tangible personal property after installation in
Nevada; the transaction between XXXXX is exempt from tax as a sale for resale,
assuming XXXXX gives XXXXX a properly completed exemption certificate. XXXXX is purchasing tangible personal
property from XXXXX for resale as tangible personal property to XXXXX.

C. The entire transaction between XXXXX for the
completed autoclaves does appear to qualify for exemption under Administrative
Rule R865-19-44S. The criteria of the
rule are apparently met under the terms of the contract requiring delivery
outside of Utah by the seller (XXXXX).
This rule and exemption would not apply if the autoclaves were
determined to become real property upon attachment to the realty.

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.

Sincerely,

Alice
Shearer

Commissioner