Does the sales tax exemption for manufacturing equipment used in new or expanding operations cover high-speed duplicating/photocopy machines at a printing company's satellite locations that have no printing press?

Plain-English summary

This record bundles two related items on the same underlying question: does Utah's sales tax exemption for manufacturing equipment used in new or expanding operations (§ 59-12-104(16)) cover copying/duplicating equipment at a printing business?

The substantive answer comes from a formal Commission Decision and Order (Appeal No. 90-0056, dated February 27, 1991) involving a printing/duplicating chain with five locations in the Salt Lake City area. One store was the "central plant," housing three offset printing presses that served all the stores, plus a high-speed duplicating machine. The other four "satellite" stores, located for public convenience, had only high-speed duplicating machines — no presses — and orders beyond their capability were driven to the central plant. During the audit period, the company leased high-speed duplicators and bought laser printers and computers tax-free, on the theory the whole company was a "manufacturer" under SIC code 2752 (Commercial Printing, Lithographic).

The Commission agreed the company as a whole functions within SIC 2752, since printing is what predominates when you look at the whole business. But Rule R865-19-85S requires classifying each physical location — each "establishment" — separately when distinct economic activities happen at different sites. Applying that test location by location, the central plant (with actual presses) qualifies as a manufacturing establishment, so the equipment used there is exempt. The four satellite stores, which have no press and perform only duplicating/copying, instead fall under SIC code 7332 ("Blueprinting and Photocopying") — a service classification, not manufacturing. The Commission rejected the taxpayer's argument that its duplicators use "xerography" rather than "photocopying" and so escape that classification; the SIC manual doesn't separately define xerography, and the Commission treated "photocopying" as the generic term covering it. Result: equipment used at the satellite stores does not qualify for the exemption, even though it's part of the same company's printing business.

A related 1994 follow-up letter (also part of this record) raised a closely adjacent question: whether a single, advanced photocopy machine used in lieu of a printing press — operated by press operators (not the public), at a company whose primary business is printing — should be treated differently from an ordinary photocopier, since buying an actual press for the same purpose would clearly qualify. The taxpayer argued the exemption should turn on the machine's actual use and environment, not its name. The record does not include a separate, distinctly dated written determination resolving that specific question; the 1991 Appeal No. 90-0056 decision is the concrete, dated Commission ruling in this file and the doctrine it establishes — the per-location "establishment" test — is what the Commission points to as controlling.

What this means for you

Multi-location manufacturers and printers

Don't assume that because your overall business qualifies as a "manufacturer" under a given SIC code, every piece of equipment at every location automatically qualifies for the manufacturing exemption. The Commission tests each physical location separately: a location performing the actual qualifying manufacturing activity (here, operating a printing press) supports the exemption, while a location performing only ancillary or service-type activity (here, copying/duplicating with no press) does not — even under common ownership and even if orders flow between locations.

Printers considering advanced photocopiers as press substitutes

If you're weighing a high-end photocopier against an actual printing press for the same production role, be aware the Commission has not clearly settled (in this record, at least) that a photocopier used purely as a press substitute at your sole manufacturing location gets the same treatment as the press itself would. Get a location- and fact-specific advisory opinion before assuming the exemption applies.

Accountants and tax professionals

This is a strong example of the "establishment" concept under Rule R865-19-85S: SIC classification is applied at the physical-location level, not just at the company level, whenever distinct economic activities happen at different sites. Also note the Commission's rejection of a "xerography vs. photocopying" technical distinction — generic SIC manual terms are read broadly to cover functionally similar processes.

Common questions

Q: If my company qualifies as a manufacturer, does that cover equipment at all of my locations?
A: Not necessarily. The Commission applies the manufacturing exemption on a per-location basis where a single company operates functionally distinct sites — only locations actually performing the qualifying manufacturing activity get the exemption.

Q: Does calling my duplicating process "xerography" instead of "photocopying" change its tax classification?
A: No. The Commission treats "photocopying" as the generic SIC manual term covering that type of reproduction/duplication process regardless of the specific technology used.

Q: Does this ruling apply to my business?
A: Not automatically. This is a private letter ruling / formal decision binding only on the Commission as to the taxpayers and facts involved. 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.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-104(16) (manufacturing equipment exemption for new/expanding operations)
• Utah Admin. Rule R865-19-85S ("manufacturer" and "establishment" definitions)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/94-024.pdf

Original ruling text

94-024

Request
August 17, 1994

Response

Tax Commissioners

Utah State Tax
Commission

210 North 1950 West

Salt Lake City, Utah
84134

Dear Commissioners:

Regarding: Exemption
for equipment used in new or expanding operations, Photocopy machine used in
lieu of a printing press.

In correspondence with
your auditing division between XXXXX, we requested and received an opinion
regarding the above issue. Although we
appreciated the response and the rationale presented in the XXXXX letter from
XXXXX, we would like the commission to evaluate and provide us with a written
determination on the question. Pending
any final ruling, we would appreciate your scheduling an informal meeting where
we can explain our circumstances in more detail.

We are representing a
printing company classified as a manufacturer under SIC code 2752. This printer leased and paid sales tax on a
very advanced photocopy machine which is used in lieu of a printing press. The press operators, not the public, operate
this piece of equipment; and this printing company is engaged primarily in the
business of printing, not photocopying.
Had the printing company chosen instead to expand its operation by
purchasing a on-color press, there would be no question that such a purchase
would qualify for the exemption from sales tax allowed by the Utah Code
59-12-104(15) for equipment used in new or expanding operations. It is our contention that the photocopy
machine in question ineligible for the same exemption.

It would be helpful if
we could explain our position in a forum that will allow for an exemption of
questions, concerns, and opinions. As a
preface to the information we plan to present in person, an abbreviated version
of some of our arguments follow:

1.
In his letter, XXXXX states, �The description of SIC code 2752
specifically excludes photocopy
machines from this category...�
The description states that �Establishments primarily engaged in
providing photocopying services are classified in Services, Industry
7334.� And it does except photocopy
service from quick printing and instant printing. But we would argue that these statements do not necessarily
exclude photocopy machines from the 2752 category. We believe the description focuses on
function rather than form.

2.
When multiple versions of a document or image are requested by a
customer, a printer can either burn a plate and make the reproductions on a
press or that printer can created those reproductions using a photocopying
machine. It is true that there may be
differences between an image produced by a press and an image produced by a
photocopy machine. It is true that
there may be differences between an image produced by a press and an image
produced by a photocopy machine; but the less sophisticated the press and the
more sophisticated the photocopy, the more indistinct the difference.

3.
The printing company we are discussing also has a less complex photocopy
machine in front of the customer. This
machine is available to the public for making self-service copies. Since the use of this machine is more in
keeping with that described in SIC code 7334, we do not think it qualifies for
the exemption for equipment used in new or expanding operations.

It is our position
that the use and the environment rather than the name of the machine is the
determining factor relating to its exemption status. We would appreciated your careful consideration of the language
in the Standard Industrialization Classification Manual as is relates to the
Utah Code 59-12-104(15) and the Tax Commission Rules R865-9-85S.

We look forward to the
opportunity to discuss this issue with you.

Sincerely,

XXXXX

BEFORE THE UTAH STATE TAX COMMISSION

XXXXX

Petitioner, )

) FINDINGS
OF FACT,

v. ) CONCLUSIONS OF LAW,

AUDITING DIVISION OF
THE ) AND FINAL DECISION

UTAH STATE TAX
COMMISSION)

Respondent. ) Appeal
No. 90-0056

STATEMENT OF CASE

This matter came before the Utah State Tax
Commission for a formal hearing on XXXXX.
XXXXX, Presiding Officer, heard the matter for and on behalf of the
Commission. Present and representing
the Petitioner was XXXXX, Attorney at Law.
Present and representing the Respondent was XXXXX, Assistant Attorney
General.

Based upon the evidence and testimony
presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is sales and use
   tax.

2. The audit period in question is XXXXX
   through XXXXX.

3. The Petitioner operates XXXXX in the
   Salt Lake City area which provide printing and duplicating services. XXXXX of those stores are within a one block
   radius of each other. The fifth is
   located approximately ten blocks away from the other four.

4. Of the XXXXX, one is considered to be
   the central plant. That store houses
   three offset printers which service the printing needs for all of the
   stores. In addition to the printing
   presses, the central store also has a high speed duplicating machine which is
   commonly referred to, albeit inaccurately, as a �photo copying machine.� Each of the other stores also has a high
   speed duplicating machine.

5. The Petitioner employs the use of two
   motor vehicles which make pick ups and deliveries between each store and the
   central plant throughout the day.

6. The XXXXX �satellite� stores are
   located at their various sites primarily for the convenience of the
   public. In the event that a job is
   placed with them which is outside of their capability to produce, the above
   described vehicles pick up that order and take it to a location which is
   capable of completing the job.

7. During the audit period, the Petitioner
   leased, tax exempt, several high speed, high volume duplicating machines for
   use in it business. The machines were
   leased to expand the Petitioner�s business by increasing production capacity
   and not as replacements for worn or outdated machinery.

8. During the audit period, the Petitioner
   also purchases several laser printers and Macintosh computers used to drive the
   laser printers. Those items were
   purchased tax exempt. The laser
   printers are primarily used to create a high quality original from which
   multiple copies are made either by offset print or through high speed
   duplicating machines. Approximately 10%
   of the work generated through the computers and laser printers is the creation
   of making high quality multiple copies not to exceed 25 copies.

9. In addition to copying and printing
   services, the Petitioner also provides binding services at each of the XXXXX
   locations. The type of binding
   available, however, may vary from store to store. For example, the central store where the offset printing presses
   are located, has a huge collator, a huge paper cutter, and a three spindle
   drill that none of the other stores have.

10. When calculated on a number of
    impressions basis, approximately 75% of the number of impressions generated by
    the Petitioner�s overall business is performed by the offset printers. The remaining 25% is generated by the high
    speed duplicators. When calculated on a
    revenue basis, however, the amount of revenue generated by the offset printers
    and the high speed duplicators is approximately equal. This is due to the fact that the Petitioner
    charges his customers more for high speed duplicator work than for offset
    printing work.

CONCLUSIONS OF LAW

Sales or leases of machinery and equipment
purchased or leased by a manufacturer for use in new or expanding operations
(excluding normal operating replacements) in any manufacturing facility in Utah
are exempt from sales tax.
Manufacturing facility means an establishment described in SIC Code
Classification 2000-3999 of the Standard Industrialization Classification
Manual 1972, of the Federal Executive Office of the President, Office of
Management and Budget. (Utah Code Ann.
�59-12-104(16).) �Manufacturer� means a
person who:

a. Functions within the activities
included in SIC Code Classification 2000-3999;

b. Produces a new, reconditioned, or
remanufactured product, article, substance, or commodity from raw, semi-finished,
or used material; and

c. In the normal course of business,
produces products for sale as tangible personal property.

�Establishment� means and economic unit of
operation that is generally at a single physical location in Utah where qualifying
manufacturing activities are performed.
Where distinct and separate economic activities are performed at a
single physical location, each activity should be treated as a separate
establishment. (Utah State Tax
Commission Administrative Rule R865-19-85S.)

DECISION AND ORDER

In the present case, there is no question
that the high speed duplicating machines are equipment or machinery, and there
is no question that the high speed duplicators were purchased with the intent to
expand the Petitioner�s operation.

The issue before the Commission is whether
or not the Petitioner is a �manufacturer� within the meaning of Utah Code Ann.
�59-12-104(16) and Utah State Tax Commission Rule R865-19-85S.

Utah State Tax Commission Administrative
Rule R865-19-85S defines a Manufacturer as a person who �(a) functions within
the activities included in SIC Code Classification 2000-3999; (b) produces a
new, reconditioned, or remanufactured product, article, substance, or commodity
from raw, semi-finished, or used material; and (c) in the normal course of
business produces products for sale as tangible personal property.�

The Respondent contends that the
Petitioner�s activities do not fall within the requisite SIC Code
Classification. The Respondent contends
that the activities of the Petitioner fall within SIC Code Classification
number 7332 or 7339 as either �establishments primarily engaged in reproducing
drawings, plans, maps or other copy by blueprinting or photocopying� (SIC Code
Classification 7332), or as �an establishment primarily engaged in furnishing
stenographic services; and reproduction services other than printing, blue
printing and photocopying, and reproduction in connection with direct mail
advertising.� (SIC Code Classification
7339.)

The Petitioner argued that its activities
fell within SIC Code Classification number 2752, �Commercial Printing,
Lithographic.� That industry number
classification includes establishments which are primarily engaged in printing
by the lithographic method.

In properly assigning the Petitioner�s
business an industry code, the Commission turns to the SIC manual for guidance
in making that determination. The
Standard Industrial Classification Manual, 1972, states:

Each establishment is assigned an industry
code on the basis of its primary activity, which is determined by its principal
product or group of products produced or distributed, or services
rendered. Ideally, the principal
product or service should be determined
by its relative share of value added at the establishment. In practice, however, it is rarely possible
to obtain this measure for individual products or services; typically, it is
necessary to adopt some other criterion which may be expected to give
approximately the same results in determining the primary activity of an
establishment.� Id. at page 12.

The SIC manual goes on to state that for
manufacturing, the data measure which should be used in determining its
principal product is the value of production, and for services, the data
measure used should be the value of receipts or revenues. Applying the above data measure to the case
at hand, it is apparent that the Petitioner�s business, when taken as a whole,
functions within SIC group number 2752 �Commercial Printing, Lithographic.� That classification applies to
establishments primarily engaged in printing by the lithographic process and
includes offset printing, photo-offset printing, and photolithographing. It should be noted that because of the
variety of the types of printing jobs the Petitioner performs, it could
conceivably fall within a number of SIC classification numbers, however, all of
them would be within the SIC major group 27 category.

Although the Petitioner�s overall business
functions within the requisite SIC Classification, each of the Petitioner�s
stores must be classified according to the activities performed there. This is required by Utah State Tax
Commission Administrative Rule R865-19-85S, which states:

�Establishments� means an economic unit of
operation that is generally at a single physical location in Utah where
qualifying manufacturing activities are performed. Where distinct and separate economic activities are performed at
a single physical location, each activity should be treated as a separate
establishment.�

In the present case, the Petitioner
maintains XXXXX separate stores which are physically located apart from each
other. Therefore, one must examine the
activities that are being performed at each of those locations to determine whether
or not qualifying activities are taking place.
After so doing, it is clear that at the XXXXX locations where there are
no printing presses located, the predominant activities do not fall within SIC
Code Classification 2000-3999 because no printing activities are conducted
there. The Tax Commission finds that
the appropriate SIC Code Classification for those establishments is 7332
�Blueprinting and Photocopying.�

The Petitioner claimed that the term
�photocopying� as used in the industry, refers to a specific process by which
reproductions or duplications are made.
Petitioner goes on to argue that the high speed duplicators used by it
at its several locations utilizes a duplication method referred to as �Xerography�
and not photocopying. Therefore, the
Petitioner argues, it does not fall within SIC industry number 73322 which
encompasses establishments primarily engaged in reproducing drawings, plans,
maps or other copy by blueprinting or photocopying.

The Tax Commission is not persuaded by the
Petitioner�s argument. The Tax
Commission finds that the term �photocopying� as used in the SIC manual is a
generic term which includes the reproduction or duplication of copy by both
photocopying and xerography methods.
This is based upon the fact that nowhere in the SIC manual is there a
specific group or industry classification for xerography services, nor is the
term xerography used.

Even if one were to accept the
Petitioner�s position that because it does not make reproductions by photocopy,
its services would nevertheless fall within SIC industry number 7339
�Stenographic Services; and Reproduction Services, not elsewhere
classified.� That category covers
establishments which are primarily engaged in furnishing stenographic services;
and reproduction services other than blueprinting and photocopying, and
reproduction in connection with direct mail advertising.

Based upon the foregoing, the Tax
Commission finds that the lease of the high speed duplicating machines and the
purchase of its personal computers and laser printers which are used by the
Petitioner at its central store are exempt form sales and use tax, and further,
that the leases of the high speed duplicating machines and the purchase of the
personal computers and laser printers used at its satellite stores are not
exempt from sales and use tax. The
Auditing Division is ordered to amend its audit in accordance with this
decision. It is so ordered.

DATED this 27 day of February, 1991.

BY ORDER OF THE UTAH
STATE TAX COMMISSION

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

NOTICE: You have
twenty (20) days after the date of the final order to file a request for
reconsideration or thirty (30) days after the date of final order to file in
Supreme Court a petition for judicial review.
Utah Code Ann. ��63-46b-13(1), 63-46b-14(2)(a).