Newspaper Agency Corp. v. Auditing Div. of Utah State Tax Com'n

• Decision Date: 28 March 1997
• Docket Number: No. 950187,950187
• Citation: 938 P.2d 266
• Parties: 313 Utah Adv. Rep. 41 NEWSPAPER AGENCY CORPORATION, Petitioner, v. AUDITING DIVISION OF THE UTAH STATE TAX COMMISSION, Respondent.
• Court: Utah Supreme Court

Page 266

938 P.2d 266

313 Utah Adv. Rep. 41

NEWSPAPER AGENCY CORPORATION, Petitioner, v. AUDITING DIVISION OF THE UTAH STATE TAX COMMISSION, Respondent.

No. 950187.

Supreme Court of Utah.

March 28, 1997.

Rehearing Denied June 3, 1997.

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.

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 emphasized 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...