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

• Decision Date: 07 March 1995
• Docket Number: No. 940694-CA,940694-CA
• Citation: 892 P.2d 17
• Parties: NEWSPAPER AGENCY CORP., Petitioner, v. UTAH STATE TAX COMMISSION, AUDITING DIVISION, Respondent.
• Court: Utah Court of Appeals

Page 17

892 P.2d 17

NEWSPAPER AGENCY CORP., Petitioner, v. UTAH STATE TAX COMMISSION, AUDITING DIVISION, Respondent.

No. 940694-CA.

Court of Appeals of Utah.

March 7, 1995.

Rehearing Denied March 31, 1995.

David B. Thompson, Tesch, Thompson & Sonnenreich, L.C., Park City, and Sharon E. Sonnenreich, Gen. Counsel, Newspaper Agency Corp., Salt Lake City, for petitioner.

Jan Graham, State Atty. Gen., and Gale K. Francis, Asst. Atty. Gen., Salt Lake City, for respondent.

Kent W. Winterholler and Maxwell A. Miller, Parsons Behle & Latimer, Salt Lake City, for amici curiae, Utah Taxpayers Ass'n and Utah Mfrs. Ass'n.

Before BENCH, DAVIS and ORME, JJ.

OPINION

BENCH, Judge:

Petitioner Newspaper Agency Corporation (NAC) petitions for review of a decision by the Utah Tax Commission (Commission) assessing sales tax on NAC's purchases of new equipment and machinery. We reverse.

FACTS

In 1952, the Kearns-Tribune and Deseret News Publishing Company formed NAC to provide printing services for both the Salt Lake Tribune and the Deseret News. Printing was done at a plant on Regent Street in downtown Salt Lake City. In the mid-1980s, NAC decided to build a new plant. The Commission made the following findings of fact with respect to NAC's construction of its new plant:

The decision [to build a new plant] was prompted by two motives: First, modernization would permit faster and higher quality printing of the Salt Lake Tribune and Deseret News. Second, it would allow NAC to print local editions of national newspapers, advertising supplements ("preprints") and other contract printing.

NAC had occasionally done contract printing in the past, but was not competitive in that field due to limited capacity and inadequate quality.

Having decided to modernize, NAC faced another decision: Whether to reconstruct the Regent Street plant or build a new plant somewhere else. NAC chose to reconstruct its Regent Street plant in order to maintain its presence in the city center and contribute to the economic health of the downtown area.

NAC reconstructed and re-equipped the Regent Street plant during the audit period. The existing building was expanded by approximately 25% on property already owned by NAC. Forty percent of the building's walls were rebuilt. A new foundation was built to support new printing presses. New plumbing, electrical, ventilation and cooling systems, as well as dust and ink collection systems, were installed.

NAC also purchased additional adjacent land for loading docks and truck parking.

NAC's cost to reconstruct its plant was 95% of what an entirely new building would have cost. The only significant saving was NAC's ability to use land which it already owned.

Before reconstruction, the Regent Street plant contained two letter presses and one offset press. The letter presses were removed from service, the existing offset press was reconfigured, and two new offset presses with supporting machinery and equipment were added. The cost of equipment for the Regent Street plant was 80% of the cost to equip a new plant.

Reconstruction of the Regent Street plant increased NAC's newspaper printing capacity by 20% and its total printing capacity by two-thirds.

In addition to increased capacity, new equipment at the Regent Street plant allowed NAC to produce advertising formats such as "gatefold" and "spadia" that had not been technically possible before.

As a result of NAC's improved quality and increased capacity, it is able to compete for preprint and contract printing.

Construction took three years and cost $37,000,000. Following completion of construction, the Auditing Division of the Tax Commission sent NAC a notice of additional sales tax assessments, a negligence penalty, and interest in connection with NAC's purchase of new equipment and machinery for its new plant. The additional assessment totaled $839,609.21, of which $710,240.90 was for sales tax on the purchase of new equipment and machinery. NAC petitioned for redetermination, claiming that its purchases of equipment and machinery were exempt from sales tax under Utah Code Ann. § 59-12-104(16) (Supp.1989) ¹ (providing sales tax exemptions for the purchase of new equipment or machinery in "new or expanding operations"). NAC also requested a refund of $687,299.99, plus interest, for sales taxes it had already paid on purchases of new machinery.

After a full evidentiary hearing, the Commission concluded that NAC did not qualify for a sales tax exemption under section 59-12-104(16) and denied NAC's petition for redetermination. ² NAC subsequently filed a request for clarification of the Commission's ruling. The Commission denied NAC's request for clarification and NAC filed this petition for review.

ANALYSIS

Because the Commission conducted a formal adjudicative proceeding, our standard of review is governed by Utah Code Ann. § 59-1-610 (Supp.1994). See Matrix v. Tax Comm'n, 868 P.2d 832, 833 (Utah App.1994); 49th Street Galleria v. Tax Comm'n, 860 P.2d 996, 999 (Utah App.1993), cert. denied, 878 P.2d 1154 (Utah 1994). Section 59-1-610(1)(b) requires this court to "grant the [C]ommission 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)(b) (Supp.1994) (emphasis added). Where the Commission has been granted discretion to interpret a term in a statute, its decision will not be overturned unless it is unreasonable. Morton Int'l, Inc. v. Tax Comm'n, 814 P.2d 581, 592 (Utah 1991). Regardless of our standard of review and the amount of discretion we are required to accord to the agency's interpretation of statutory terms, we will set aside an agency rule that is inconsistent with its governing statutes. Sanders Brine Shrimp v. Tax Comm'n, 846 P.2d 1304, 1306 (Utah 1993) (holding that a rule out of harmony with its governing statute is invalid). Additionally, "[t]he terms of [the] statute should be interpreted in accord with usually accepted meanings. In construing legislative enactments, the reviewer assumes that each term in the statute was used advisedly; thus the statutory words are read literally, unless such a reading is unreasonably confused or inoperable." Savage Indus., Inc. v. Tax Comm'n, 811 P.2d 664, 670 (Utah 1991).

Utah Code Ann. § 59-12-104(16) (Supp.1989) provides a sales tax exemption for

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 replacement 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" and "establishment."

This section expressly authorizes the Commission to define by rule "new or expanding operations." Pursuant to this authority, the Commission promulgated the following rule:

"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.R. 865-19-85S.A.3 (1994). The Commission further 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." Utah Admin.R. 865-19-85S.A.6 (1994). The Commission therefore allows the sales tax exemption only to manufacturers that satisfy one of the three subparts of Rule 865-19-85S.A.3 as "new or expanding operations."

The Commission held that NAC did not meet any one of the three subparts of Rule 865-19-85S.A.3. Specifically, the Commission made the following conclusions:

Rule R85S.A.3.'s first criterion is that the machinery and equipment be used in activities that are substantially different in nature, character, or purpose from prior activities. NAC points to the improvement in newspaper quality that results from its new equipment. NAC also points to the equipment's ability to produce special advertising formats such as "gatefold" and "spadia". NAC further points to its ability, resulting from the new machinery and equipment, to compete for "preprint" and "contract" printing jobs.

In the Commission's view, the foregoing activities are not substantially different from NAC's prior activities. Rather, they represent the incremental movement of the newspaper industry into an era where newspapers are of higher quality. The Commission finds NAC's activities along these lines to be evolutionary in nature and not substantially different from prior activities.

Rule R85S.A.3.'s second criterion for a "new and expanding operation" is that the machinery or equipment be used at "a new physical plant location in Utah." The term "location" is commonly defined as "a tract of land designated for a purpose".... [T]he Commission concludes that NAC did not use the machinery and equipment in question at a new location.

....

Rule R85S.A.3.'s third and final alternative test for "new and expanding operation" recognizes machinery and equipment used to "increase production or capacity, subject to limitations dealing with normal operating replacements".... In substance, machinery and equipment that expands capacity satisfies the "new and expanding operation", requirement only if the machinery and equipment does not replace existing machinery or equipment of a similar nature.

NAC's new offset presses and auxiliary equipment were...