Newspaper Agency Corp. v. Auditing Division of 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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Newspaper Agency Corporation,

Petitioner,

v.

Auditing Division of the Utah

State Tax Commission,

Respondent.

No. 950187

F I L E D

March 28, 1997

Original Proceeding in the Court of Appeals

Attorneys: Bruce E. Babcock, David N. Sonnenreich, Sharon E.

Sonnenreich, Salt Lake City, for petitioner

Jan Graham, Att'y Gen., Gale K. Francis, Asst.

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

Maxwell A. Miller, Kent Winterholler, Salt Lake

City, for amicus Utah Manufacturers Assoc. and

amicus Utah Taxpayers Assoc.

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On Certiorari to the Utah Court of Appeals

ZIMMERMAN, Chief Justice:

We granted certiorari to review a court of appeals decision reversing the Utah State Tax

Commission's ("the Commission") assessment of sales tax on Newspaper Agency Corporation's

("NAC") purchase and reconfiguration of printing presses. See Newspaper Agency Corp. v.

Utah State Tax Comm'n, 892 P.2d 17 (Ct. App.), cert. granted, 910 P.2d 425 (Utah 1995). In

Newspaper Agency Corp., the court of appeals first invalidated the Commission's rule defining

the phrase "new or expanding operations" found in section 59-12-104(16) of the Utah Code. Id.

at 21-22; see Utah Admin. Code R865-19-85S(A)(3) (1991). The court of appeals reasoned that

the rule improperly restricted the exemption's availability and then addressed NAC's claim for a

tax exemption under the statute. Newspaper Agency Corp., 892 P.2d at 21-22. It concluded that

the purchases in question were made for "new or expanding operations" under the plain terms of

section 59-12-104(16) and were therefore entitled to a sales tax exemption. Id. at 22-23. We

reverse.

NAC provides advertising, printing, and circulation services for The Salt Lake Tribune and the

Deseret News. Between 1988 and 1991, NAC spent $37,000,000 to renovate its Regent Street

plant in downtown Salt Lake City. NAC's renovation project was extensive: "The existing

building was expanded by approximately 25% on property already owned by NAC[,] [f]orty

percent of the building's walls were rebuilt[,] [and] [a] new foundation was built to support new

printing presses." Id. at 19. Prior to the renovation, NAC operated two letter presses and one

offset press. The renovation included reconfiguring the offset press and replacing the two letter

presses with new offset presses. The new and reconfigured presses increased NAC's printing

capacity and allowed NAC to produce new advertising formats.

In late 1991, the Auditing Division of the Commission assessed a sales tax on NAC's purchase

and reconfiguration of the presses. NAC filed a petition for redetermination, disputing the tax

assessment and claiming that it was exempt from the tax. The Commission then held a full

evidentiary hearing in which NAC presented expert and fact witnesses. After the hearing, the

Commission rejected NAC's argument that the presses were exempt from sales tax under section

59-12-104(16) as a purchase for a "new or expanding operation" in a "manufacturing facility."

The Commission found that the presses did not meet any of the three alternative tests for "new or

expanding operations" found in the Commission's rule defining that term. See Utah Admin.

Code R865-19-85S(A)(3) (1991). NAC filed a petition for reconsideration, which was denied.

NAC filed a petition for review, which we granted. We transferred the case to the court of

appeals. The court of appeals reversed the Commission, holding that the presses were exempt.

Newspaper Agency Corp., 892 P.2d at 23. The court of appeals held that the Commission's rule

defining "new or expanding operations" was inconsistent with the terms of the statute it

purported to construe, section 59-12-104(16), and that under the plain language of that section,

NAC's purchases qualified for the "new or expanding operations" exemption. Id. at 21-23. The

Commission sought review by this court, which we granted. 910 P.2d 425.

We begin by stating the appropriate standard of review. We review the court of appeals'

decision for correctness and give its conclusions of law no deference. State v. Christensen, 866

P.2d 533, 535 (Utah 1993). In turn, the correctness of the court of appeals' decision turns on

whether the court of appeals reviewed the decision of the Commission with the appropriate

standard of review. As the court of appeals recognized, section 59-1-610 governs the standard of

review because this case is a review of a formal adjudicative proceeding commenced before the

Commission. Newspaper Agency Corp., 892 P.2d at 19; see also Utah Code Ann. 59-1-610(1);

Utah Admin. Code R861-1A-5(B). That section provides that an appellate court shall "grant the

commission deference concerning its written findings of fact, applying a substantial evidence

standard on review." Utah Code Ann. 59-1-610(1)(a). Section 59-1-610 also states that the

Commission should be granted "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." Id. 59-1-610(1)(b) (emphasis added). If the Commission is granted discretion by the

statute at issue, then the standard of review is narrower. The court is to defer to the

Commission's conclusions of law, applying a reasonableness standard. Eaton Kenway, Inc. v.

Auditing Div., 906 P.2d 882, 884 (Utah 1995).

Disposition of this appeal turns on the language of section 59-12-104(16),⁽¹⁾ which defines the

sales tax exemption, and the Commission's rules purporting to define some critical terms of the

statute. Section 59-12-104(16) provides in relevant part:

The following sales and uses are exempt from the taxes imposed by this chapter:

. . . ;

(16) sales or leases of machinery and equipment purchased or leased by a manufacturer for use in

new or expanding operations (excluding normal operating replacements, which includes

replacement machinery and equipment even though they may increase plant production or

capacity, as determined by the commission) in any manufacturing facility in Utah. Normal

operating replacements shall include replacement machinery and equipment which increases

plant production or capacity. . . . For purposes of this subsection, the commission shall by rule

define "new or expanding operations" . . . .

Utah Code Ann. 59-12-104(16) (emphasis added). Pursuant to the authority granted it by the

two underlined portions of section 59-12-104(16), the Commission promulgated two separate

rules pertinent to this case. The first, rule 865-19-85S(A)(6), defines "normal operating

replacements," and the second, R865-19-85S(A)(3), defines "new or expanding operations."

Because the statute at issue contains two explicit grants of discretion to the Commission, we

apply a reasonableness standard to the Commission's conclusions regarding "normal operating

replacements" and "new or expanding operations." Eaton Kenway, 906 P.2d at 884. Though the

Commission has an explicit grant of authority to define "new or expanding operations" and to

determine what constitutes a "normal operating replacement," the Commission's conclusion that

the "normal operating replacements" exclusion applies to both new and expanding operations is a

question of statutory interpretation that we review for correctness. State v. Brooks, 908 P.2d

856, 858-59 (Utah 1995).

We first address the question of whether the Commission's rule defining "normal operating

replacements" is a reasonable interpretation of that term as used in section 59-12-104(16). That

section provides that "normal operating replacements" include "replacement machinery and

equipment even though they may increase plant production or capacity." To provide further

direction in the application of the statute, the Commission promulgated rule 865-19-85S(A)(6),

which defined "normal operating replacements" as

machinery or equipment which replaces existing machinery or equipment of a similar nature,

even if the use results in increased plant production or capacity.

(a) If new machinery or equipment is purchased or leased which has the same or similar purpose

as machinery or equipment retired from service within 12 months before or after the purchase

date, such machinery or equipment is considered as replacement and is not exempt.

(b) If existing machinery or equipment is kept for back-up or infrequent use; new, similar

machinery or equipment purchased would be considered as replacement and is not exempt.

Utah Admin. Code R865-19-85S(A)(6) (1991).⁽²⁾

The court of appeals, addressing the matter without any guidance from this court, held that this

rule is "invalid because it is contrary to section 59-12-104(16) and impermissibly restricts the

availability of sales tax exemptions." Newspaper Agency Corp., 892 P.2d at 22. The court

reasoned that businesses replacing equipment and machinery in working order should not be

denied the exemption on the ground that it was a normal operating replacement. Id. However,

after the court of appeals handed down its decision in this case, we explicitly addressed this

question. See Eaton Kenway, 906 P.2d at 887. There we noted that "[m]odernizing and

upgrading machinery and equipment are normally done in the regular course of business, even

though the replaced items may be in good working order." Id. (emphasis added). We also

emphasized that the statute explicitly provides that normal operating replacements shall include

machinery and equipment that increase plant production or capacity. Id. We concluded that

"rule 865-19-85S(A)(6) is reasonable and fairly defines 'normal operating replacements.'" Id.

We adhere to Eaton Kenway and therefore reverse the court of appeals' holding that rule 865-19-85S(A)(6) is invalid.

We next move to a determination of whether the Commission acted reasonably in concluding

that the circumstances here fall within the definition of "normal operating replacements" in rule

865-19-85S(A)(6). Under the rule, an inquiry must be made into the nature and purpose of the

new and reconfigured presses that replaced NAC's old presses. Pursuant to this direction, the

Commission examined the functional similarities between the old and new presses. Both the old

and the new presses were used to print newspapers and advertisements. To meet publication

demands, NAC kept three presses operating at all times during the renovation and press

conversions. Each of the two new presses and the reconfigured press literally replaced an old

press. Thus, NAC used the new presses to perform the same tasks performed by the old presses--printing newspapers and advertisements--though the new and reconfigured presses increased

NAC's printing capacity and allowed NAC to produce new advertising formats. Finding that the

old presses and the new and reconfigured presses performed the same essential functions, the

Commission concluded that the new and reconfigured presses were normal operating

replacements.

On the basis of the foregoing facts, which are not challenged by NAC, we cannot hold as a matter

of law that the Commission was unreasonable in finding that the presses were "normal operating

replacements." These facts evidence the replacement of old machinery with similar machinery

that is more technologically advanced, efficient, and productive. Section 59-12-104(16),

however, expressly provides that "normal operating replacements" include "replacement

machinery and equipment even though they may increase plant production or capacity." In

addition, this is precisely the type of replacement that we said in Eaton Kenway constitutes a

normal operating replacement. 906 P.2d at 887. The facts do not demonstrate sufficient

differences between the old presses and the new and reconfigured presses to conclude that the

Commission was unreasonable in finding that the presses were normal operating replacements.

Therefore, the court of appeals should have upheld the Commission's finding.

Having concluded that the Commission was reasonable in finding that the presses were normal

operating replacements, we must address NAC's argument that the Commission erred by

concluding that the normal operating replacements limitation applies to both new and expanding

operations.⁽³⁾ This inquiry necessitates a close reading of section 59-12-104(16).

That section provides in relevant part:

The following sales and uses are exempt from the taxes imposed by this chapter:

. . . ;

(16) sales or leases of machinery and equipment purchased or leased by a manufacturer for use in

new or expanding operations (excluding normal operating replacements, which includes

replacement machinery and equipment even though they may increase plant production or

capacity, as determined by the commission) in any manufacturing facility in Utah. Normal

operating replacements shall include replacement machinery and equipment which increases

plant production or capacity. . . . For purposes of this subsection, the commission shall by rule

define "new or expanding operations" . . . .

Utah Code Ann. 59-12-104(16) (emphasis added). The resolution of NAC's challenge turns on

whether the parenthetical exclusion of "normal operating replacements" applies to the entire

phrase "new or expanding operations" that immediately precedes it or only to the second part of

that phrase, "expanding operations." NAC argues for the latter position; the Commission, for the

former.

We start from the premise that because this is an exemption from taxation, we construe it strictly

against the taxpayer. Eaton Kenway, 906 P.2d at 886; Parsons Asphalt Prods., Inc. v. Utah State

Tax Comm'n, 617 P.2d 397, 398 (Utah 1990). When interpreting a statute, we look first to the

plain language. State v. Vigil, 842 P.2d 843, 845 (Utah 1992). On its face, the words "new" and

"expanding" both modify the word "operations," suggesting that the exclusion applies to the

entire phrase. Supporting this suggestion that the legislature knowingly used the entire phrase

together is the fact that the last sentence of the quoted material gives the Commission power to

define by rule "new or expanding operations," again using the phrase as a unit.

In view of this plain reading of the statute, we reject NAC's position. The parenthetical sentence

in section 59-12-104(16) excluding normal operating replacements applies to the entire phrase

"new or expanding operations."

This is precisely how the Commission read the statute when it exercised its discretion in defining

the phrase. At the time this controversy arose, administrative rule 865-19-85S(A)(3) provided:

"New or expanding operations" means manufacturing, processing, or assembling activities

which:

(a) are substantially different in nature, character, or purpose from prior activities;

(b) are begun in a new physical plant location in Utah; or

(c) increase production or capacity. This definition is subject to limitations dealing with normal

operating replacements.

Utah Admin. Code R865-19-85S(A)(3) (1991) (emphasis added).⁽⁴⁾

NAC makes a rather convoluted argument under rule 865-19-85S(A)(3) that because of the

placement of the last sentence of the quoted portion, the Commission has acknowledged that the

"normal operating replacement" exclusion applies only to expanding operations, not to new ones.

NAC further contends that this rule also too narrowly defines "new operations" and that NAC's

remodeling qualifies as a "new" operation. We need not dwell on this contention. It amounts to

a claim that the tail should wag the dog.

Section 59-12-104(16) gives the Commission the power to define by rule the phrase "new or

expanding operations," but that delegation of authority does not include the power to define the

phrase in a way that flatly contradicts the statute. Sanders Brine Shrimp v. Auditing Div., 846

P.2d 1304, 1306 (Utah 1993); Robert H. Hinkley, Inc. v. State Tax Comm'n, 404 P.2d 662, 668

(Utah 1965). As we have noted, the statute's plain language makes the exclusion applicable to

the entire phrase. The Commission's rule cannot do otherwise, and we do not find that when

read fairly, it does so.

A fair reading of the rule applies elementary rules of punctuation and grammar. The

Commission defined "new or expanding operations" by setting forth three alternative tests.

These tests are listed in a single sentence, albeit one separated into three subparts by a colon and

semicolons. Utah Admin. Code R865-19-85S(A)(3) (1991). This sentence is followed by a

sentence that states, "This definition is subject to limitations dealing with normal operating

replacements." Id. (emphasis added). Because the preceding sentence containing the three tests

defines "new or expanding operations," the plain meaning of the words "[t]his definition" in the

last sentence is to refer to the entire sentence defining "new or expanding operations," not merely

to the last alternative test, as NAC argues.

Thus, the language of both section 59-12-104(16) and rule 865-19-85S(A)(3) confirm that the

normal operating replacements limitation applies to both new and expanding operations.

Because the Commission reasonably found that the presses were normal operating replacements

and because the normal operating replacements limitation applies to both new and expanding

operations, NAC is not entitled to the section 59-12-104(16) exemption. Consequently, the court

of appeals erred in overruling the Commission. We therefore reverse the court of appeals.

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Justice Howe, Justice Durham, Justice Russon, and Judge Noel concur in Chief Justice

Zimmerman's opinion.

Having disqualified himself, Associate Chief Justice Stewart does not participate herein; District

Judge Frank G. Noel sat.

Endnotes:

1. Section 59-12-104(16) was amended in 1991 and renumbered 59-12-104(15). Act of Jan. 21,

1991, ch. 5, 57, 1991 Utah Laws 45. Section 59-12-104(15) was significantly amended in 1995

to phase in a full exemption even for "normal operating replacements." Act of Mar. 1, 1995,

ch. 327, 1, 1995 Utah Laws 1240-41. All subsequent citations are to section 59-12-104(16) as

it stood prior to the 1991 amendment.

2. The Commission has since renumbered and made minor grammatical changes to this rule. See

Utah Code Admin. R865-19S-85(A)(6).

3. The court of appeals did not reach this issue, as it had determined that the normal operating

replacements limitation applied only to businesses replacing worn out machinery.

4. The Commission amended and renumbered this rule in 1994. It now provides:

(a) "New or expanding operations" means manufacturing, processing, or assembling activities

that:

(1) are substantially different in nature, character, or purpose from prior activities;

(2) are begun in a new physical plant location in Utah; or

(3) increase production or capacity.

(b) The definition of new or expanding operations is subject to limitations dealing with normal

operating replacements.

Utah Admin. Code R865-19S-85(A)(3).