Does the industrial-use fuel exemption apply to a real property contractor (plumbing/HVAC installer) that also claims to run a separate manufacturing operation making the parts it installs?

Plain-English summary

An attorney or accountant wrote after Commission auditors denied a client's claimed sales tax exemption on fuel purchases — an exemption the requester said had previously been approved both verbally and in writing by a Commission staff member. The requester pressed two theories: first, whether the Commission is legally bound by a staff member's verbal or written pre-approval of an exemption; and second, a detailed argument that the client — a firm doing plumbing/heating/air-conditioning installation that also fabricated pipe, pipe fittings, and sheet metal work — should be treated as having a genuine, separate "manufacturing establishment" under SIC codes 3498 (fabricated pipe/fittings) and 3444 (sheet metal work), distinct from its real-property-contracting operation, entitling its fuel purchases to the industrial-use exemption.

The Commission's response is notably a non-ruling on the specific facts — it said it had inadequate information to determine whether the client actually qualified as a manufacturer, and expressly declined to resolve the client's tax issue in the letter. But it offered general guidance that cuts against the taxpayer's theory:

• Utah taxes fuel sold for "commercial use" under § 59-12-103, and "commercial use" is defined to exclude "industrial use." Industrial use, in turn, means manufacturing at an establishment classified under SIC codes 2000-3999.
• Critically, a contractor who merely assembles sheet metal and plumbing parts on-site while installing a heating or air-conditioning system is a real property contractor, not a manufacturer. Unless the client actually manufactures the plumbing fixtures, furnaces, or air conditioning units themselves — not just installs pre-made or on-site-assembled components — its operation likely doesn't fit any manufacturing classification. On-site assembly of construction materials is explicitly not a manufacturing activity.
• Where a single fuel meter serves both an industrial use and an ordinary commercial use, Rule R865-19S-35 applies a predominant-use test: the exemption is available only if the predominant use through that meter is the qualifying manufacturing operation.
• The Commission told the taxpayer that if it wanted to pursue a refund for taxes already paid, it should make a written request to the Sales Tax Refund Unit — but warned that unit would require actual evidence of a qualifying manufacturing facility before granting the exemption.

The Commission did not address the requester's separate question about whether a staff member's prior verbal or written approval binds the Commission going forward.

What this means for you

Real property contractors who also fabricate parts

Don't assume that having your own fabrication shop (even a real one, off-site, with its own SIC classification) automatically extends the fuel exemption to your installation/contracting operations. The exemption only reaches fuel actually used in the qualifying manufacturing establishment itself — and on-site assembly during installation is never treated as manufacturing, no matter how the company is otherwise organized.

Businesses claiming a "separate establishment" for exemption purposes

Build your factual record before claiming the exemption: distinct physical location, significant employment in the manufacturing activity, and separately trackable data (employees, wages, sales) for that activity, consistent with Rule R865-19S-85's definition of "establishment." A conclusory claim of being a "manufacturer" isn't enough — the Commission will ask for evidence.

Businesses relying on informal staff approvals of exemptions

This ruling doesn't resolve whether a prior verbal or informal written approval by Commission staff binds the agency — treat informal approvals as provisional and get exemption positions confirmed through a formal private letter ruling or refund request if the stakes are meaningful.

Common questions

Q: Does assembling plumbing or sheet metal parts on-site during installation qualify as manufacturing for the fuel exemption?
A: No. The Commission specifically said on-site assembly of construction materials during installation is not a manufacturing activity, even if the installer separately claims to be a manufacturer.

Q: What SIC codes qualify for the industrial-use fuel exemption?
A: Manufacturing operations classified under SIC codes 2000 through 3999 of the 1987 Standard Industrial Classification Manual.

Q: If my fuel meter serves both a manufacturing operation and ordinary commercial use, is any of it exempt?
A: Only if the predominant use through that single meter is the qualifying industrial/manufacturing use, per Rule R865-19S-35.

Q: Did the Commission decide whether this taxpayer qualifies for the exemption?
A: No — the Commission said it had inadequate facts to determine whether the client was a genuine manufacturer, and expressly declined to resolve the specific tax issue in this letter.

Q: Does this ruling apply to my company's fuel purchases?
A: Not automatically, and here the Commission didn't even resolve the specific taxpayer's question. This is a private letter ruling binding only on the Commission as to a specific taxpayer's facts, and it can't be relied on as binding by anyone else.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-103 (fuel sold for commercial use is taxable; industrial use excluded from commercial use)
• Utah Code Ann. § 59-12-102(10) (industrial use — manufacturing at an establishment in SIC 2000-3999)
• Utah Code Ann. § 59-12-102(7) (definition of construction materials)
• Utah Code Ann. § 59-12-104(15)(i)(B) (Commission to define "establishment" by rule)
• Utah Admin. Rule R865-19S-35 (predominant-use test for single-metered fuel serving mixed uses)
• Utah Admin. Rule R865-19S-85 (definition of "establishment" for the manufacturing exemption)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-063.pdf

Original ruling text

97-063

Response
November 18, 1997

REQUEST
LETTER

October
8, 1997

Dear
NAME,

Your
auditors have recently declined a sales tax exemption on fuels for one of my
clients. I would appreciate an advisory
opinion from you concerning the following issues. This exemption was approved verbally
by NAME and was approved formally by him when the documents were sent to the
utilities. I would like to know whether the Tax Commission is bound by verbal
and/or written approvals of tax exemptions by their employees?

I
would also like your opinion as to whether the sales tax exemption on
industrial use of fuel as defined in code section 50-12-102(10) is available to
real property contractors who also have a manufacturing operation when the
product manufactured is passed without a sale or sales tax to the real property
contracting operation of the firm and is installed on the real property by the
real property contracting operation whether the installation is by employees or
subcontractors.

In
a letter from NAME of your office dated June 30, 1997 it indicates that "Fuels
consumed to manufacture tangible personal property at an establishment
described in SIC codes 200 to 399 of the Standard Industrial Classification
Manual of 1987 are exempt as an "industrial use."" Therefore the issue seems to be simply whether the manufacturing
operation qualifies as a separate establishment under the State Tax Code.

There
is no specific section of the tax code that makes construction materials
subject to sales tax. The definitions section at 59-12-102 (7) indicates that
"construction materials means any tangible personal property that will be
converted into real property." Section 59-12-103 indicates that tax is levied
on "(a) retail sales of tangible personal property made within the state;." From this and other sections of the statute,
it appears that sales of tangible personal property that will be converted into
real estate is subject to sales tax except when that sales is exempt under one
of the exemptions in section 59-12-104.

Whether
sales of fuel to a manufacturing operation of a firm who also owns a real
property contracting operation is exempt under section 59-12-104-43 appears to
be contingent upon whether the manufacturing operation should be considered to
be a manufacturing establishment. Section 43 mentioned above says that
industrial use is exempt. Industrial use under section 59-12-102(10) is defined
as " manufacturing tangible personal property at an establishment..." described
in one of the manufacturing SIC codes.

At
section 59-12-104 (15) (i) (B) it indicates that the Tax Commission shall by
rule define

the
word "establishment." While this definition is not binding with respect to the
fuels exemption it is interesting to note that at R865-19S-85 item 5 you
defined it as follows: ""Establishment" means an economic unit of operations
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."

While
this definition does not necessarily apply to the fuels exemption, it is
interesting to note that your definition is exactly the same as the definition
in the 1987 Edition of the Standard Industrial Classification manual. At page
11 under principals of classification at item (2) it indicates that each
establishment is to be classified according to its primary activity. At page 12
under the heading "Definition of an Establishment it says: For purposes of this
classification, an establishment is an economic unit, generally at a single
physical location, where business is conducted or where services or industrial
operations are performed.... Where distinct and separate economic activities
are performed at a single physical location,... each activity shall be treated
as a separate establishment.... An establishment is not necessarily identical
with the enterprise (company) which may consist of one or more establishments."

Under
Exceptions and Borderlines on page 13 it indicates that "Some establishments
that meet the general definition of auxiliaries are nevertheless treated as
operating establishments. They are listed below:" and at "1. Establishments
primarily engaged in producing goods or providing services for other
establishments of the same enterprise when such goods or services are covered
by industries in ... Construction, ... and Manufacturing.. are classified as
operating establishments in such Divisions on the basis of their primary
activity."

Since
the legislature defined industrial use of fuels as being exempt and the statue
defines industrial use as manufacturing SIC codes as identified in the 1987
classification, then the whole issue is whether firms which have a construction
operation and a manufacturing operation are separate establishments under the
classification. I have read all of the explanations of the principals of
classification and am confident that the framers of those principals would, in
most cases, classify such companies as having a manufacturing establishment.
What is important is the "spirit" of the classification principals. To get an
idea of that spirit consider the following quotes. For example, at page 12
under Definition of an Establishment it indicates, "Where distinct and separate
economic activities are performed at a single physical location (such as
construction activities operated out of the same physical location as a lumber
yard), each activity should be treated as a separate establishment where (1) no
one industry description in the classification includes such combined
activities; (2) the employment in each such economic activity is significant;
and (3) separate reports can be prepared on the number of employees, their
wages and salaries, sales or receipts, and other types of establishment data.

My
client in question manufactures Fabricated Pipe and Pipe Fittings as described
in SIC 3498 and Sheet Metal Work as described in SIC 344. The description under sheet metal work
indicates "Establishments primarily engaged in manufacturing sheet metal work
for buildings (not including fabrication work done by construction contractors
at the place of construction)..." My clients contracting establishment would
probably be classified as SIC 1711, Plumbing, Heating and Air-Conditioning
Contractors. In that classification it says, "Sheet metal work performed by
plumbing, heating and air-conditioning contractors in conjunction with the
installation of plumbing, heating, and air-conditioning equipment is included
here." Obviously, the sheet metal work referenced here is that done at the
construction site since the definition of SIC 3498 specifically excludes work
done at the site. The point is that no classification includes the construction
site sheet metal work and the manufacturing at an off site establishment. My
client also meets the requirements of items 2 and 3 above. I could go on and on with the issue of the
"spirit" of the Classification. I will not, but I truly believe that real property
contractors who have separate manufacturing operations that can be identified
by specific SIC codes have separate establishments under the code and under
Utah Law as it relates to the fuel exemption and that they are eligible for
that exemption. If you disagree, will you please explain why my logic is
faulty? We would like to get this opinion as soon as possible, at the latest by
mid November. Thank you very much for your help.

Sincerely,

NAME

November
18, 1997

NAME

ADDRESS

CITY
STATE ZIP

Advisory
Opinion - Sales tax exemption on sales of fuel used in industrial operations.

Dear
NAME,

You recently directed a letter to
our Customer Service Division concerning the application of the sales tax
exemption on fuels sold for use in industrial operations. We cannot, from your description, determine
exactly the nature of your client's operation.
You indicate that your client is a real property contractor who
assembles sheet metal and plumbing parts to build or install plumbing, heating
and air conditioning, but you also claim that your client is a
manufacturer. A contractor who merely
assembles sheet metal and plumbing parts during the installation of an air
conditioning or heating system is a real property contractor, and not a
manufacturer. Unless your client
actually manufacturers the plumbing fixtures, furnaces or air conditioning
units that make up a plumbing, heating or air conditioning system, we doubt
that its operation fits within any manufacturing classification.

Because we have inadequate facts
upon which to determine that your client is a manufacturer, we do not attempt
to resolve your client's tax issues with this letter. We can, however, offer general guidance as to the application of
the fuels exemption. Section 59-12-103
of the Utah Code imposes sales tax on purchases of fuels sold for commercial
and residential use. Commercial use
means the use of gas, electricity, heat, coal, fuel oil, or other fuels, but
does not include industrial use.
Industrial use means use in manufacturing operations at an establishment
described in classifications 2000 through 3999 of the Standard Classification
Manual (1987).

When
a business uses fuel for both an industrial use and a commercial use, and the
fuel is furnished through a single meter, the exemption applies if the
predominate use of the fuel is in a qualifying manufacturing operation. Utah Admin. Rule R865-19S-35.

You have offered us no information
that leads us to conclude that your client is entitled to a fuels
exemption. If you wish to make a refund
request for taxes paid in error, please do so in writing to the Sales Tax
Refund Unit of our Customer Service Unit.
Before granting the exemption, they will require evidence that your
client operates a qualifying manufacturing facility. The on site assembly of construction materials is not a
manufacturing activity.

For
the Commission,

Joe
B. Pacheco,

Commissioner