When a company does both manufacturing and non-manufacturing work at the same location, what makes the manufacturing part a separate 'establishment' that qualifies for Utah's manufacturing equipment exemption?

Plain-English summary

A tax practitioner who regularly advises a client running both manufacturing and construction-contracting operations at the same location asked the Commission to verify a five-part test the practitioner had developed for when a manufacturing operation qualifies as a separate "establishment" eligible for Utah's manufacturing equipment exemption (§ 59-12-104(15)). The practitioner's fifth criterion was that the manufacturing activity must be economically independent of the non-manufacturing activity -- meaning it must be able to survive profitably even if the other activity stopped.

The Commission confirmed the practitioner's first four criteria but corrected the fifth. Under the amended Utah Admin. Code R865-19S-85(D), a combined operation counts as two separate establishments if either:

• (a) no single SIC code covers both activities combined, or
• (b) each activity is organized as a genuinely separate legal entity (a separate corporation, subsidiary, etc.).

Only ONE of these needs to be true -- and critically, economic independence has nothing to do with either branch. Branch (b) turns purely on legal formation, not on whether the manufacturing side could survive without the other activity.

The Commission illustrated branch (a) with two contrasting examples:

• A retail bakery that manufactures its own baked goods and sells them on-site: a single (non-manufacturing) SIC code already covers that combined activity, so it does not qualify as a separate establishment, and the manufacturing exemption is unavailable.
• An eating establishment that both brews beer and runs a restaurant selling that beer: no single SIC code covers both, so each qualifies as a separate establishment -- and since the brewing SIC code is a manufacturing code, the brewing side qualifies as a manufacturing establishment. (But note: even then, equipment used more than a de minimis amount for the non-manufacturing restaurant side loses the exemption under Rule 865-19S-85(D)(2).)

On the practitioner's second question -- whether the same "separate legal entity" test also governs the industrial fuel exemption (§ 59-12-104(43)) -- the Commission declined to answer. Utah Admin. Code R861-1A-34 requires the Commission to defer issuing an advisory opinion on an issue that is already pending before it in an audit, appeal, or other action, and the Commission stated that exact "establishment" interpretation for the industrial fuel exemption was pending in an appeal at the time.

What this means for you

Businesses running manufacturing alongside another activity at the same site

Don't assume that being financially dependent on your other business line disqualifies your manufacturing operation from the equipment exemption -- that's not the legal test. Check instead whether (a) a single SIC code covers your combined activities, or (b) your manufacturing operation is set up as a genuinely separate legal entity. Either one alone can qualify you as a separate establishment.

Tax professionals advising mixed manufacturing/non-manufacturing clients

This ruling is a clean, citable correction of a plausible-sounding but wrong economic-independence theory -- useful if you encounter the same argument. Also note the de minimis trap: qualifying as a separate manufacturing establishment doesn't automatically mean your equipment qualifies, if that equipment is also used more than minimally in the non-manufacturing activity.

Businesses asking about the industrial fuel exemption's "establishment" definition

The Commission expressly would not extend its manufacturing-exemption "establishment" reasoning to the industrial fuel exemption in this letter, because that exact question was pending in an active appeal. If you need an answer on this point, check whether that appeal has since been resolved rather than relying on silence here.

Common questions

Q: Does my manufacturing operation have to be profitable on its own to qualify as a separate establishment?
A: No. The Commission rejected that "economic independence" theory. What matters is whether a single SIC code covers your combined activities, or whether the activities are organized as separate legal entities.

Q: If my manufacturing and non-manufacturing activities qualify as separate establishments, is my equipment automatically exempt?
A: Not necessarily. Under Rule 865-19S-85(D)(2), if the equipment is also used more than a de minimis amount in the non-manufacturing activity, it can still lose the exemption.

Q: Did this ruling decide how "establishment" is defined for the industrial fuel exemption?
A: No. The Commission declined to address that question because it was pending before the Commission in a separate appeal at the time.

Q: Does this ruling apply to my business?
A: No. It binds the Commission only for the requesting practitioner's client and the facts described. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes and rules:

• § 59-12-104(15) (manufacturing machinery and equipment exemption)
• § 59-12-104(43) (industrial fuel exemption)
• Utah Admin. Code R865-19S-85 (manufacturing establishment / separate establishment test)
• Utah Admin. Code R861-1A-34 (deferral on issues pending in an audit/appeal)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/98-011.htm

Original ruling text

98-011

Response

REQUEST
LETTER

Dear
Commissioners:

Regarding: Sales tax issues related to separate
activities conducted at the same location.

Although
some of these issues have been addressed on previous occasions, it was
suggested that we request a current opinion from the commission. One of our
clients is both a manufacturer and a construction contractor. The company sells
some of its manufactured products to other companies and uses some of its
manufactured products in its construction business. In advising this client regarding the sales or use tax
exemptions for purchases of manufacturing machinery and equipment and purchases
of fuel for industrial use, we went to great lengths to resolve

eligibility
questions.

With
regard to the sales or use tax exemption for purchases of manufacturing
machinery and equipment and normal operating replacements, our rationale is
based upon current laws, court cases, and advisory opinions and is as follows:

1. In order to qualify for the exemption,
   a company must not only be involved in
   the activity of manufacturing goods, the company must also fall within the
   definition of "manufacturing facility."

2. For a taxpayer to qualify as a
   "manufacturing facility," it
   must be an "establishment" and must perform activities
   described in the relevant sections of
   the Standard Industrial Classification Manual.

3. For a manufacturing operation to
   qualify as an "establishment,"
   it must be an economic unit of operations that is generally at a single physical location. In

4. If a company performs both
   manufacturing and nonmanufacturing
   activities at a single physical location, each activity is treated as a
   separate establishment only if no single
   SIC code includes those activities combined or
   if each activity comprises a separate legal entity.

5. For an activity to comprise a separate
   legal entity, that activity must be economically independent of the other
   activities performed by the company.

Based
upon these requirements, we advised our client that, in order to qualify for the exemption, the
manufacturing operations of the company would have to be economically viable without dependence
upon the contracting operations. We indicated
that if the manufacturing activities would not continue profitably if the contracting activities
ceased the company would not meet the
requirements for eligibility.

We
would appreciate your verifying the accuracy of this advice. We would also like
to know whether or not a manufacturing
operation must comprise a separate legal entity in order to be eligible
for the exemption from sales or use tax
for purchases of fuels for industrial use.

Neither
the law nor the rule related to this exemption defines "establishment," even though the
legal definition of "industrial use" limits exempt use of fuels in manufacturing activities to those
performed " . . . at an
establishment described in SIC Codes 2000 to 3999...',

We
realize that another element of eligibility for this exemption is predominant use of fuel that is furnished
through a single meter; however, we would
like you to clarify how this element interacts with the question of
whether or not the manufacturing
operation must be a separate legal entity.

Thank
you for your time and attention.

Sincerely,

NAME

NAME

ADDRESS

CITY
STATE ZIP

RE:
Advisory opinion - manufacturing and fuel exemption

Dear
NAME,

We have received your request for information
regarding two sales tax exemptions, the manufacturing exemption found in Utah
Code Ann. �59-12-104(15) and the industrial fuel exemption of
�59-12-104(43). We shall address each
exemption separately.

Manufacturing equipment
exemption. Being deemed a
manufacturing establishment is one of the requirements needed to qualify for
the manufacturing equipment exemption.
Your letter lists the criteria you believe are necessary to be deemed a
manufacturing establishment and receive the exemption. Both issues are addressed in Utah Admin. Code
R865-19S-85. This rule, and specifically
the �establishments� language found in it, was recently amended in August,
1997. This opinion will relate only to
interpretation of the rule as amended.

You have listed five requirements
that you believe a manufacturer must meet to qualify for this exemption. After reviewing the language of the exemption
statute and the amended rule, we concur with the interpretations you reach in
your first four requirements. However,
your fifth requirement concerns the interpretation of �separate legal entity,�
as found in section (D)(1) of the rule.
You conclude that an activity comprises a separate legal entity when
that activity is economically independent of the another activity performed by
the company. You then add that to be
economically independent, an activity must be economically viable without
dependence on another activity. Whether
two activities are �separate legal entities� for purposes of the amended rule
is not determined by their economic independence from one another.

Rule 865-19S-85(D) states in
pertinent part:

1. Each activity
   is treated as a separate and distinct establishment if:

a) no single SIC code includes those activities
combined; or

b) each activity comprises a separate legal
entity.�

If either section (a) or (b) is
satisfied, both activities are considered separate establishments. Please note that each
activity need not be a separate legal entity to satisfy section (a). Instead, to qualify as a separate
establishment under section (a), first look to see if there is a
nonmanufacturing SIC code that covers both activities. If there is not, section (a) is satisfied. To illustrate this point, consider a retail
bakery. Although it manufactures food, a
single SIC code does exist for a business that manufactures baked goods for
sale on its premises. On that basis, the
two activities do not qualify as separate establishments. As that single SIC code is not a
manufacturing one, the activity is not a manufacturing establishment, and the
exemption is not available.

As another example, consider
an eating establishment which both manufactures beer and operates a restaurant
that sells that beer on the same premises.
There is no single SIC code that includes both of these activities, so
each activity qualifies as a separate establishment under section (a). As the SIC code for a manufacturer of beer
is a manufacturing code, this activity does qualify as a separate manufacturing
establishment. Accordingly, should all
other requirements be met, this activity would qualify for the exemption.

However, please note that
although an activity may be deemed a separate manufacturing establishment, it
does not automatically qualify for the manufacturing equipment exemption. Rule 865-19S-85(D)(2) only allows the exemption when
use of the equipment in the nonmanufacturing activity is de minimis. The consequence of this requirement can be
seen in the above eating establishment example.
Should the beer manufacturing equipment also produce beer for the
nonmanufacturing activity (the restaurant),
the equipment would not qualify for the exemption unless that use for
the restaurant was considered de minimis.

To be deemed a separate
establishment under section (b), the two activities must comprise separate
legal organizations, corporations, subsidiaries, etc. No consideration of economic independence is
needed to determine how the corporations are legally formed.

Industrial fuel exemption. Your second question asks how a manufacturer
may qualify as an establishment for purposes of the industrial fuel
exemption. Specifically, you ask whether
the manufacturer must qualify as a �separate legal entity,� the standard found
in the manufacturing equipment exemption rule, before it is also considered an
establishment for purposes of the industrial fuel exemption.

The Commission shall not presently
address this issue in an advisory opinion.
Utah Admin. Code R861-1A-34 requires that the Commission defer from
issuing an advisory opinion concerning an issue currently pending before the
Commission in an audit, appeal or other action.
Interpretation of �establishment� for purposes of the industrial fuel
exemption is an issue now pending before the Commission in an appeal. For these reasons, the Commission shall not
address this issue in an advisory opinion at this time.

Please contact us if you have any other questions.

For
the Commission,

Joe
B. Pacheco,

Commissioner

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