Morton Intern., Inc. v. Auditing Div. of Utah State Tax Com'n
| Citation | 814 P.2d 581 |
| Decision Date | 24 June 1991 |
| Docket Number | No. 900325,900325 |
| Parties | MORTON INTERNATIONAL, INC., Petitioner, v. AUDITING DIVISION OF the UTAH STATE TAX COMMISSION, Respondent. |
| Court | Supreme Court of Utah |
Randy M. Grimshaw, Maxwell A. Miller, Richard M. Marsh, Salt Lake City, for Morton Intern.
R. Paul Van Dam, Brian Tarbet, Salt Lake City, for State Tax Com'n.
Petitioner Morton International, Inc. ("Morton"), seeks review of the determination of the Utah State Tax Commission ("the Commission") that certain expenditures made in the construction of facilities used in the production of sodium azide pellets and igniter material ("production facilities") are not exempt from sales and use tax under Utah Code Ann. § 59-12-104(15) or (16) (Supp.1987).
The facts underlying Morton's claims are not in dispute. In 1987, Morton began construction of facilities used in the production of sodium azide pellets and igniter material, which are components of the crash protection airbag system used in motor vehicles. The pellets and igniter material are inserted into small pressure vessels to form airbag inflaters. When the pellet is ignited, it generates nitrogen gas, which rapidly inflates the airbag. Morton has manufactured sodium azide pellets for over a decade. The new facilities, however, constitute a significant expansion of this business.
The process of manufacturing sodium azide pellets and igniter material is unique and highly specialized. The chemicals used in the process are extremely energetic, explosive, and toxic. Accordingly, the facilities were specifically designed to incorporate safety and environmental features and support specialized and massive equipment, some of which is suspended above the floor. For example, separate facilities were built for each stage of production. This was done to minimize the risk to personnel, machinery, and equipment in case of fire, explosion, or chemical contaminant reactions. There are also many environmental features that are incorporated into the buildings themselves, such as, heavy metal free areas, special conductive flooring, protective blast and blowout walls and ceilings, chemical dust collection filters, and protected double-walled piping and sumps. Many of the production areas are operated by remote control. Personnel only enter for maintenance and quality control. Due to the toxic nature of the materials, personnel are not allowed in these areas without protective clothing, including respirators.
On June 26, 1989, Morton initiated this action. By stipulation, it was agreed that the action would be treated as a request for refund and formal hearing. A hearing was held on March 7, 1990. At the hearing, Morton represented that since 1987, it had paid an excess of $325,000 in sales and use taxes with respect to the construction of its sodium azide pellet production facilities. Morton contended that it was entitled to a refund of sales and use taxes pursuant to section 59-12-104(15) on the ground that the production facilities were a "synthetic fuel processing and upgrading plant" and, alternatively, pursuant to section 59-12-104(16), on the ground that the production facilities function as, and essentially are, "equipment." On June 7, 1990, the Commission issued its findings of fact, conclusions of law, and final decision determining that the fuel pellets were not a synthetic fuel and thus the production facilities did not qualify for an exemption under section 59-12-104(15). The Commission also determined that Morton's production facilities were real property and thus the sale of materials used in construction of the production facilities did not constitute the sale of equipment under section 59-12-104(16).
On July 27, 1990, Morton filed this petition for review. The general issue before this court is whether the Commission erred in concluding that the sale of certain materials used in the construction of Morton's production facilities is not exempt from sales and use tax under Utah Code Ann. § 59-12-104(15) or (16).
The instant case was initiated after January 1, 1988, and the Commission's decision was reached following a formal hearing. Therefore, the applicable standard of review of the Commission's action is set out in the Utah Administrative Procedure Act, Utah Code Ann. § 63-46b-16, 1 which provides in pertinent part:
(1) As provided by statute, the Supreme Court or the Court of Appeals has jurisdiction to review all final agency action resulting from formal adjudicative proceedings.
....
(4) The appellate court shall grant relief only if, on the basis of the agency's record, it determines that a person seeking judicial review has been substantially prejudiced by any of the following:
...;
(d) the agency has erroneously interpreted or applied the law;
...;
(h) the agency action is:
(i) an abuse of the discretion delegated to the agency by statute;
(ii) contrary to a rule of the agency;
(iii) contrary to the agency's prior practice, unless the agency justifies the inconsistency by giving facts and reasons that demonstrate a fair and rational basis for the inconsistency; or
(iv) otherwise arbitrary or capricious.
The Commission maintains that section 63-46b-16(4) grants agencies greater discretion than they had under prior case law. This argument is based on the language in section 63-46b-16(4) stating that appellate relief can only be granted if "on the basis of the agency's record" the appellate court determines that a person has been "substantially prejudiced." We have always based our decisions on the agency's record. Therefore, this requirement does not disturb prior case law. 2 Furthermore, section 63-46b-16(4) deals with judicial relief, not judicial review. It is clear from this language that this section does not affect the degree of deference an appellate court grants to an agency's decision. 3 Rather, section 63-46b-16(4) ensures that relief should not be granted when, although the agency committed error, the error was harmless. Indeed, the language of section 63-46b-16(4) is similar to language in rules of procedure and evidence dealing with harmless error. 4 Given this similarity in language, we conclude that the legislature in enacting section 63-46b-16(4) intended that the same standard used for determining the harmfulness of error in appeals from judicial proceedings should apply to reviews of agency actions. Under this standard, an error will be harmless if it is "sufficiently inconsequential that ... there is no reasonable likelihood that the error affected the outcome of the proceedings." 5
Section 63-46b-16(4)(a) through (h), however, incorporates standards that appellate courts are to employ when reviewing allegations of agency error. 6 Morton's claims are based on subsections 63-46b-16(4)(d), (4)(h)(iii), and (4)(h)(iv). The question presented, therefore, is whether the standard of review incorporated into these subsections differs from the standard of review developed in our prior case law.
Prior to the adoption of the Utah Administrative Procedure Act, the Utah courts developed three levels of review in connection with agency action. First, agencies' findings of fact were granted considerable deference and would not be disturbed on appeal if supported by substantial evidence. 7 Second, a correction-of-error standard, giving no deference to agencies' decisions, was used to review agencies' rulings on issues the court characterized as concerning general law. 8 Examples of issues characterized as questions of general law include rulings concerning constitutional questions, 9 rulings concerning the agency's jurisdiction or statutory authority, 10 rulings concerning common law principles such as the interpretation of contracts and certificates, 11 and rulings concerning interpretation of statutes unrelated to the agency. 12
The correction-of-error standard was also used to review an agency's construction of, or application of the findings of fact to, the statutes which the agency is empowered to administer--when the agency's experience or expertise is not helpful in resolving the issue. 13 One example of such a situation is when a question of statutory interpretation turns on basic legislative intent. 14 Other examples include situations where the agency is construing ordinary statutory terms within the statutes which they administer, such as, application of limitation period under the workers' compensation act, 15 and the proper construction of the term "deficiency of service." 16 In fact, in any situation involving the application of the legal rules to the findings of fact, a correction-of-error standard is used if the court is as well-suited to determine the issue as the agency. 17
Finally, an intermediate standard of review, granting some deference to the agency's decisions, has been used when the agency's experience or expertise puts the agency in a better position to resolve issues concerning the application of findings of fact to the legal rules governing the case and the interpretations of the operative provisions of the statutes the agency is empowered to administer. 18 This standard was also used when it was alleged that the agency abused the discretion granted to it by statute. 19 Under the intermediate standard of review, appellate courts did not disturb an agency's decision if the decision was within the bounds of reasonableness. 20
In cases not involving discretion, it has not always been clear when the intermediate standard of review should be used. 21 In some early cases, we characterized the issues that are appropriate for the intermediate standard of review as questions of mixed fact and law 22 or, alternatively, as questions concerning the application of the law. 23 However, issues that are appropriate for the intermediate standard have also been described as questions of statutory construction, 24 questions of special law, 25...
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Case Summaries
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