Salt Lake Brewing Co. v. Auditing Division, Utah State Tax Comm.

This opinion is subject to revision before final publication in the Pacific Reporter.

IN THE SUPREME COURT OF THE STATE OF UTAH

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Original Proceeding in this Court

Attorneys: David E. Leta, Sheleigh A. Chalkley, Salt Lake

City, for petitioner

Jan Graham, Att'y Gen., Brian L. Tarbet, Asst.

Att'y Gen., Salt Lake City, for respondent

DURHAM, Justice:

Petitioner Salt Lake Brewing Company (SLBC) seeks review of an order by the Utah State Tax

Commission (Commission) holding that SLBC does not qualify for a sales tax exemption under

section 59-12-104(16)⁽¹⁾ (1989) of the Utah Code. The Commission determined that the

restaurant and brewery operated by SLBC constituted one establishment engaged primarily in

retail trade and thus the brewery could not qualify as a manufacturing facility exempt from sales

tax on purchases of equipment for its new and expanding operations. We affirm.

BACKGROUND

SLBC began operating a restaurant and brewery in downtown Salt Lake City in 1989, retailing

food and souvenirs as well as beer, ale, and other fermented malt beverages, which it produced on

premises. From 1989 to 1992, SLBC did not pay any sales tax on machinery and equipment it

purchased for the commencement and expansion of its brewery operations, claiming the

exemption given to manufacturers under section 59-12-104(16) (1989) of the Utah Code. In

1993, SLBC received a notice of deficiency for its failure to pay sales tax on the equipment

purchased during this period. SLBC petitioned the Commission for a redetermination, and the

Commission ruled that SLBC did not qualify for the exemption.

During the audit period, SLBC ran a brew pub⁽²⁾ in which beer brewed on the premises was sold

at retail to customers in the adjoining restaurant. Although SLBC physically segregated its

brewery operations from its restaurant pursuant to regulations of the Bureau of Alcohol,

Tobacco, and Firearms, see 27 C.F.R. 25.25, over ninety percent of the beer produced by SLBC

was sold and consumed at the restaurant, and no beer was sold at wholesale.

Throughout the period in question, SLBC operated as a single corporate entity with two cost

centers (i.e., the brewery and the restaurant) for accounting purposes. SLBC conducted both the

restaurant and the brewery operations in a single building under one lease and with one business

license. The restaurant employed about ninety persons, while one part-time and four full-time

employees worked in the brewery; no employees shared duties in both the brewery and the

restaurant. SLBC maintained only one checking account. The gas and water were metered

separately, but the electrical and phone services were shared. The entire business, including both

the restaurant and the brewery, maintained only one profit and loss statement, although some

separate accounting was made for each cost center. Raw materials for the production of beer

were counted as a loss to the restaurant, and no financial record was made of beer transferring

from the brewery to the restaurant.⁽³⁾

ANALYSIS

Statute dictates the standard of review in this case:

When reviewing formal adjudicative proceedings commenced before the commission, the Court of

Appeals or Supreme Court shall:

(a) grant the commission deference concerning its written findings of fact, applying a substantial

evidence standard on review; and

(b) grant the commission no deference concerning its conclusions of law, applying a correction of

error standard, unless there is an explicit grant of discretion contained in a statute at issue before

the appellate court.

Utah Code Ann. 59-1-610(1) (emphasis added); see Newspaper Agency Corp. v. Auditing Div.,

938 P.2d 266, 267-68 (Utah 1997). This case reviews a formal adjudicative proceeding, see Utah

Admin. Code R861-1-5A(B) (defining formal adjudicative proceedings), and involves only issues

of law because the parties stipulated to all material facts.

This case involves the application of the sales tax exemption contained in section 59-12-104(16)

(1989) of the Utah Code. Because the Commission's determination is a matter of statutory

construction, it is a conclusion of law. See Visitor Info. Ctr. Auth. v. Customer Serv. Div., Utah

State Tax Comm'n, 930 P.2d 1196, 1197 (Utah 1997). The exemption includes in pertinent part

sales or leases of machinery and equipment purchased or leased by a manufacturer for use in new

or expanding operations . . . in any manufacturing facility in Utah. . . . Manufacturing facility

means an establishment described in SIC Codes 2000 to 3999 of the Standard Industrial

Classification Manual 1972, of the federal Executive Office of the President, Office of

Management and Budget. For purposes of this subsection, the commission shall by rule define

"new or expanding operations" and "establishment."

Utah Code Ann. 59-12-104(16) (1989) (emphasis added).

For a taxpayer to qualify as a "manufacturing facility" to which the exemption is available, it must

be an "establishment" under the definition given to that term by the Commission, and it must

perform activities described in the relevant sections of the Standard Industrial Classifications

(SIC) manual. While the Commission does not have authority to define "manufacturer," see

Sanders Brine Shrimp v. Audit Div., 846 P.2d 1304, 1306 (Utah 1993), the statute grants it

explicit authority to define "establishment." Therefore, we must defer to the Commission's

conclusion of law regarding whether the brewery constitutes an establishment within the definition

of "manufacturing facility" for purposes of the sales tax exemption; we apply a reasonableness

standard. See Newspaper Agency Corp., 938 P.2d at 268.

The Commission has defined "establishment" by administrative rule as "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." Utah Admin.

Code R865-19-85S(5). The Commission held that the brewery and restaurant were not separate

economic units because both functioned together for the primary objective of selling beer at retail

for immediate consumption by the customer. We conclude that the Commission's finding is

reasonable. SLBC's operations during the audit period, viewed as a whole, may reasonably be

described as one retail business. Although the beer was "manufactured" on premises, none of it

was sold at wholesale, and it was sold entirely through the restaurant for immediate consumption.

SLBC's financial records and the daily operations of the pub reveal that it is one economic unit of

operations, not two.

The Commission also properly applied the statute to determine that SLBC did not qualify as a

manufacturing facility under section 59-12-104. The Commission did not rely on a definition of

"manufacturer" inconsistent with the statute, as occurred in Sanders Brine Shrimp, 846 P.2d at

1306, but rather restricted its discussion to the definition of "manufacturing" found in the Code

(i.e., activities described in sections 2000 to 3999 of the SIC classifications). Having exercised its

discretion in determining that both of SLBC's operations constituted one establishment, the

Commission found that the brew pub could be best described as both an "eating place" (SIC Code

5812. and a "drinking place for alcoholic beverages" (SIC Code 5813) and therefore was not a

manufacturer for purposes of the sales tax exemption. The brewery's operations are

indistinguishable from those, for example, of a retail bakery that produces bread entirely for retail

sale to the public; such a bakery would not qualify as a manufacturer because its activities are not

described within the relevant SIC Codes mentioned in section 59-12-104(15) (1989).

SLBC argues that because it has been treated as a beer manufacturer for the purposes of the beer

tax, denying it the manufacturers' sales tax exemption is inconsistent and discriminatory. We

disagree. To qualify for the exemption, the taxpayer must operate a "manufacturing facility" as

defined in the statute. A company can be involved in the activity of manufacturing goods and yet

not fall within the definition of "manufacturing facility." The beer tax, on the other hand, applies

to any entity that manufactures beer regardless of whether it operates a manufacturing facility.

For example, a bed and breakfast inn that brews its own beer to provide unique services and

entice customers would be subject to Utah's beer tax as well as many other state and federal

regulations affecting the production of beer. However, such an activity would not legally

transform a bed and breakfast inn, primarily concerned with providing sleeping and eating

accommodations, into a manufacturing facility under section 59-12-104(15).

We recognize that a restaurant and brewery operation similar to SLBC's might qualify for the

manufacturers' sales tax exemption under different facts. The Commission's standard for

determining whether separate establishments may exist at the same location requires "distinct and

separate economic activities." Utah Admin. Code R865-19-85S(5). This definition suggests that

clear legal and economic segregation of the activities of the different establishments would give

rise to a different result. In the instant case, however, the brewery and the restaurant are so

economically interdependent that, given the standard of review, we must uphold as reasonable the

Commission's determination that they constitute one establishment that is not a manufacturer.

Affirmed.

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Chief Justice Zimmerman, Justice Howe, and Justice Russon concur in Justice Durham's opinion.

Associate Chief Justice Stewart concurs in the result.

Opinion Endnotes:

1. The relevant statute has since been amended and renumbered as subsection 15 in the Code, but

none of the changes in the law affect this case.

2. During the Commission's hearing, petitioner distinguished its enterprise, a "brew pub," which

produces all or some of its beer for retail sale, from a "microbrewery," which produces all of its

product for wholesale distribution.

3. The beer was transferred through refrigerated pipes directly from tanks in the brewery to taps in

the bar. The beer sold in the restaurant was not charged as an expense to the restaurant, and the

brewery's profits were figured in terms of retail sales.