Gull Laboratories, Inc. v. Utah State Tax Com'n, Auditing Div.

• Decision Date: 03 April 1997
• Docket Number: No. 960792-CA,960792-CA
• Citation: 936 P.2d 1082
• Parties: 314 Utah Adv. Rep. 3 GULL LABORATORIES, INC., Petitioner and Appellant, v. UTAH STATE TAX COMMISSION, AUDITING DIVISION, Respondent and Appellee.
• Court: Utah Court of Appeals

Page 1082

936 P.2d 1082

314 Utah Adv. Rep. 3

GULL LABORATORIES, INC., Petitioner and Appellant, v. UTAH STATE TAX COMMISSION, AUDITING DIVISION, Respondent and Appellee.

No. 960792-CA.

Court of Appeals of Utah.

April 3, 1997.

John M. Bradley and Thomas R. Barton, Salt Lake City, for Appellant.

Jan Graham and Gale K. Francis, Salt Lake City, for Appellees.

Before WILKINS, BENCH and JACKSON, JJ.

JACKSON, Judge:

Gull Laboratories, Inc. (Gull) appeals the Utah State Tax Commission's decision that Gull must pay sales tax on certain material bought to help make medical diagnostic test kits (kits). We affirm.

BACKGROUND

Gull makes kits which are used by doctors and hospitals to treat patients. The kits contain antigen slides, conjugate with counterstain, positive and negative control sera, "PBS powder," mounting fluid, and instructions.

An antigen slide is a glass slide upon which a thin layer of human cells has been spread. Using the other items in the kit, medical personnel apply a patient's serum to the cells on the slide to detect certain infections or diseases. Based on the results, a doctor may make a diagnosis and recommend a course of treatment.

Gull grows the cells by placing about one hundred thousand cells in a flask, adding fluid known as "culture media," and then sealing the flask and putting it in an incubator. In three to seven days, the cells grow and multiply into about ten to twenty million cells. When the process is complete, Gull personnel harvest the surviving cells, ¹ affixing about half to the glass slides contained in the kits, while retaining the other half in storage flasks.

The culture media is made of purified water and serum combined with "media mix," which is a powder containing salts and minerals, amino acids, sugars, proteins, vitamins, hormones, and "other growth factors." By volume, only one percent of the culture media is actually media mix. ² The cells must ingest elements of the media mix to grow and divide. For example, the cells use proteins and amino acids to make their cell walls, and they use sugars to produce energy to grow and divide. Some elements of the media mix--e.g., salts and some minerals, which constitute a large portion of the media mix--are used more to create an environment for the cells than to provide building blocks for the cells. Other elements--e.g., the amino acid glutamine--have very short half-lives and disintegrate before the cells can use them.

As the cells grow and divide, they excrete waste back into the culture media. When the waste reaches toxic levels, the culture media is poured off and disposed of. New culture media is then added or the cells are harvested.

It is undisputed that Gull has paid sales tax on its purchases of purified water, serum, and other catalysts used in producing the kits and that Gull properly assesses sales taxes on its retail sales of the kits. However, Gull did not pay sales taxes assessed on its media mix purchases, arguing those purchases are exempt from taxation because the nutrients in the media mix become "component parts" or "ingredients" of the cells in the kits. See Utah Code Ann. § 59-12-104(27) (1996). ³ From July 1991 through June 1994, the assessed tax on the media mix purchases was $4130.90, including related interest.

The Commission held a formal hearing to consider Gull's arguments, then issued its decision requiring Gull to pay sales tax on media mix purchases. In its decision, the Commission determined that Gull could not qualify for the "component-part exemption" because that exemption applies only to agricultural entities. Citing Nucor Corp. v. Utah State Tax Commission, 832 P.2d 1294 (Utah 1992), and Union Portland Cement Co. v. State Tax Commission, 110 Utah 135, 170 P.2d 164 (1946), the Commission further concluded that the media mix purchases are Gull appeals the Commission's decision, arguing (1) the Commission incorrectly determined only agricultural entities may use the component-part exemption; ⁴ (2) media mix purchases are exempt from taxation solely because the mix is "feed" within the definition of "component part" found in Utah Code Ann. § 59-12-102 (1996); and (3) the Commission was incorrect in essentially concluding that Gull must pay sales tax because it is the ultimate consumer of the media mix.

taxable because the mix is consumed in the manufacturing process and the nutrients from the mix are only incidental ingredients of the cells in the kits.

ANALYSIS

I. "Feed"

Whether media mix is "feed" under Utah Code Ann. § 59-12-102(6) (1996), see supra note 3, "is a matter of statutory construction and therefore is a conclusion of law." Cache County v. Property Tax Div. of Tax Comm'n, 922 P.2d 758, 764 (Utah 1996). Thus, because this statute grants the Commission no discretion in its interpretation, even if the Commission had determined this issue, we would not have deferred to the Commission and would have applied "a correction of error standard." Utah Code Ann. § 59-1-610(1)(b) (1996).

Our analysis is guided by several well-settled canons of statutory construction:

First, we construe statutes that grant exclusions from taxation strictly against the party seeking an exemption, and that party accordingly bears the burden of proving that it qualifies for the exemption sought. Second, in construing any statute, " 'we first examine the statute's plain language and resort to other methods of statutory interpretation only if the language is ambiguous.' " Accordingly, we read the words of a statute literally unless such a reading is unreasonably confused or inoperable, and give the words their usual and accepted meaning. Third, the reviewing court does not look beyond plain and unambiguous language to ascertain legislative intent. Finally, we presume that the "statute is valid and that the words and phrases used were chosen carefully and advisedly."

US Xpress, Inc. v. Utah State Tax Comm'n, 886 P.2d 1115, 1117 (Utah.Ct.App.1994) (citations omitted).

The Legislature has not defined "feed" for purposes of the exemption at issue. Thus, we rely on the dictionary to divine the "usual meaning" of "feed." Morton Int'l, Inc. v. Auditing Div. of Utah Tax Comm'n, 814 P.2d 581, 590 (Utah 1991); accord OSI Indus., Inc. v. Utah State Tax Comm'n, 860 P.2d 381, 384 (Utah.Ct.App.1993). Our dictionary research shows that "feed" typically means "[f]ood for animals and birds; fodder," American Heritage Dictionary 495 (2d ed. 1985); "food given to animals," Webster's New Universal Unabridged Dictionary 672 (2d ed. 1983).

Gull, however, would have us read "feed" far more liberally to include the nutrients it uses to grow cells for kits. Gull's argument is based on the appearance of "feed" in both subsections (a) and (d) of section 59-12-102(6). See Utah Code Ann. § 59-12-102(6) (1996). Gull notes that subsection (a) functions to exempt "poultry, dairy, and other livestock feed, and their components" from sales taxation, while subsection (d) functions to exempt "feed, seeds, and seedlings." Id. Thus, Gull argues the former subsection covers the usual meaning of "feed," leaving the latter subsection entirely unrestricted to include unconventional "feeds," such as "manufacturing feedstock, food for other organisms raised for commercial purposes, and food in general."

We reject Gull's interpretation of "feed," concluding that the dictionary definition--"food for animals and birds"--better comports with the rules governing our interpretation of this statute in three ways. First, the rule that we must strictly construe tax exemption statutes against those seeking exemptions requires us to adopt the more narrow definition consistent with the statute's plain language as opposed to the broad, seemingly wide-open definition proposed by Gull. See US Xpress, 886 P.2d at 1117. Using Gull's definition, active imaginations would no doubt find ways to fit endless items into this exemption. We must interpret the statute here to guard against that result.

Second, the dictionary definition of "feed" is in harmony with the general theme of the other subsections, which relate to materials used in the commercial production of animals and plants. ⁵ Gull's definition, on the other hand, would lead to the "unreasonably confused or inoperable" reading we are required to avoid. Id. at 1118. It would create a lone--potentially huge--general category in a field of otherwise fairly specific categories in this definitional section. See supra note 3. Were we to allow such a sweeping definition of "feed" as that proposed by Gull, the congruence of the materials listed in section 59-12-102(6) would be spoiled.

Finally, we are unpersuaded by Gull's contention that "feed" in subsection (d) must have an unusual, expansive definition because "poultry, dairy, and other livestock feed" is already found in subsection (a). ⁶ See Utah Code Ann. § 59-12-102(6) (1996). "Food for animals and birds" is broader than "livestock We therefore conclude media mix is not "feed" for purposes of subsection (d). Thus, media mix purchases do not automatically qualify for an exemption under the definition of "component part" found in section 59-12-102(6), and we must conduct further analysis under section 59-12-104(27).

                feed."   Considering that the Legislature is presumed to have used these terms advisedly, we assume that the Legislature wanted to clearly exempt feed for traditional farm animals 7 and yet wanted to also include a broader category of feed for other types of animals and birds raised commercially. 8
                

II. "Purchased for Resale"

It is undisputed that the cells in the kits contain as ingredients elements of the media mix. However, just because a manufacturer buys a material that becomes an ingredient or component part in a final product does not mean that purchase is exempt from sales tax under section 59-12-104(27). See Utah Code Ann. § 59-12-104(27) (1996). We therefore shift our focus to the critical requirement that ingredients...