Does fuel and electricity used to recap (retread) tires qualify for Utah's noncommercial-use sales tax exemption that applies to mining, agriculture, and manufacturing?

Plain-English summary

A company that recaps (retreads) tires argued its shop's fuel and electricity purchases should be tax-free as "noncommercial" use under Utah Admin. Rule R865-19S-35, which exempts fuel/power used in mining, agriculture, and manufacturing. The company's theory: since about 1990, the Auditing Division had informally limited the exemption to businesses within SIC codes 2000-3999 (the standard manufacturing code range), but the company argued the rule and underlying statute don't actually say that -- what should matter, they said, is whether fuel/power is used to "compound, process, manufacture, create or fabricate" a product that will itself be taxed when sold, regardless of SIC code. They pointed to a pending change (H.B. 203, effective July 1, 1996) that would newly restrict the exemption to "industrial use" companies, arguing this only pertained to future transactions and that their request covered the period before that law took effect.

The Commission disagreed on both fronts:

The exemption is deliberately industry-limited, not activity-limited. The Commission found the legislature had specifically created these exemptions for mining, agriculture, and manufacturing -- not as a general "any resale-directed processing" exemption. It noted that when the 1996 legislature amended the exemption to reference manufacturing SIC codes, that was meant to clarify and codify the Commission's existing practice, not create a new limitation out of nothing -- reinforcing that the SIC-code-based approach reflected the legislature's actual intent even for the pre-1996 period at issue.

Tire recapping specifically isn't manufacturing. Independent of the SIC-code debate, the Commission noted that tire recapping is its own separately classified activity under SIC code 7534 -- a repair service, not manufacturing. So even if the company's broader retail/wholesale operation used a different SIC code, the recapping activity itself is characterized as a repair service and doesn't qualify for the manufacturing exemption on its own terms.

A procedural coda: the company pushed back, arguing the 1996 amendment was really just formalizing a series of the Commission's own prior informal practices (like treating oxygen as an exempt "other fuel," and exempting all commercial greenhouses) -- and asked the Commission to issue a formal declaratory judgment so the dispute could be tested. The Commission declined. It explained that when a genuine controversy exists (as here), the proper venue is the adjudicative process -- specifically, the standard refund-request or audit-appeal procedure -- rather than a declaratory order, so that a full factual record can be developed for eventual judicial review if needed. It directed its Customer Service Division to act on the company's pending refund request, appealable within 30 days of that action if the company disagreed with the outcome.

What this means for you

Businesses that "process" or "recondition" a product without falling under a manufacturing SIC code

Utah's fuel/electricity exemption for noncommercial use is tied to the mining, agriculture, and manufacturing industries specifically -- being in the general business of "creating a resold product" isn't enough if your specific activity is classified as a service (like repair) rather than manufacturing.

Tire recapping, retreading, or similar reconditioning businesses

This ruling specifically found recapping falls under SIC code 7534 as a repair service, not manufacturing -- expect fuel and electricity used in recapping operations to be treated as commercial (taxable) use.

Businesses wanting a declaratory judgment to test a Commission position

If your dispute is the kind that could be raised through an audit assessment, collection action, or refund claim, expect the Commission to redirect you to that process rather than issue a standalone declaratory order -- even if you'd prefer a faster, more formal ruling.

Common questions

Q: Does Utah's fuel/electricity noncommercial-use exemption cover any business that processes a product for resale?
A: No -- it's specifically limited to mining, agriculture, and manufacturing activities, not a general processing-for-resale standard.

Q: Is tire recapping considered manufacturing for this exemption?
A: No, the Commission classified it as a repair service under SIC code 7534, not manufacturing.

Q: Does a company's own SIC code (e.g., retail or wholesale) determine whether a specific activity like recapping qualifies?
A: The Commission looked at the recapping activity's own classification (repair service) rather than resolving the exemption purely based on the company's broader retail/wholesale SIC code.

Q: Can a taxpayer get a declaratory judgment from the Commission on a disputed tax position?
A: Not necessarily -- if the dispute can be raised through an audit appeal, collections procedure, or refund claim, the Commission may decline a declaratory order and redirect the taxpayer to that adjudicative process instead.

Q: Can another tire recapper or similar business rely on this ruling?
A: No -- it binds the Commission only for the taxpayer and facts described. A business in a similar situation should confirm its own SIC classification and exemption eligibility with the Commission or a Utah tax professional.

Citations and references

Statutes, rules, and legislation cited:

• Utah Code Ann. § 59-12-102(3)(a) (definition of retail establishment / commercial use)
• Utah Code Ann. § 59-12-102(14)(a) (definition of retailer)
• Utah Code Ann. § 59-12-102(4) (component part exemption cross-reference)
• Utah Code Ann. § 59-12-104(28) (fuel exemption for commercial greenhouses and off-highway farm machinery)
• Utah Admin. Rule R865-19S-35 (noncommercial fuel/electricity exemption for mining, agriculture, and manufacturing)
• H.B. 203 (1996 Utah Legislature) (codified the manufacturing-SIC-code approach to the industrial-use fuel exemption)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-077.pdf

Original ruling text

96-077

Response May 9, 1996 and June 5, 1996

Request

April 17, 1996

XXXXX

Utah State Tax Commission

210 North 1950 West

Salt Lake City, Utah 84134

RE: Request for an Advisory Opinion (XXXXX)

Dear XXXXX

As noted in XXXXX's letter dated March 19, 1996, it was suggested we ask for an advisory opinion on the issue of fuel/power used primarily for recapping tires. Please consider this letter as our request for your opinion that fuel and/or power used primarily to manufacture or for producing or compounding a product which will be resold may be purchased tax free as noncommercial under the existing Rule R865-19S-35.

In support of our position that power used by XXXXX should be considered noncommercial for sales tax purposes, we offer the following information for your consideration.

In recent years (since about 1990), the Auditing Division seems to have taken the position that only manufacturers within SIC Codes 2000-3999 (see XXXXX's letter) are allowed to be considered noncommercial for sales tax purposes and that all "retail" establishments (per 59-12-102,3(a)) are commercial and subject to tax on fuel purchases.

It seems logical to us that the term "retail establishment" in 59-12-102(3)(a) must mean companies that sell to final consumers where fuel or power is not used to compound, process, manufacture, create or fabricate merchandise which, when completed, would be subject to a sales tax (refer to present Rule 35, November 10, 1954 Tax Commission memorandum, and XXXXX court case - copies attached and marked "Exhibit A"). For sales tax purposes, these type "retail commercial" companies would include hotels, motels, warehouses, full service restaurants, hardware stores, clothiers, grocery stores, and similar businesses that buy products for sale to individuals or businesses where further processing of the product by the retailer is minimal or nonexistent. To rule differently from the pre-1990 policy of allowing all businesses that compound, process, create, manufacture or fabricate to buy fuel and power tax free, presents some obvious inconsistencies and conflicts.

Retailers for sales tax purposes include all companies selling to final consumers (59-12 102(14)(a)), such as individuals, contractors and other businesses that do not resale tangible personal property. This would include many manufacturers as defined in the SIC code book (e.g., ready-mixed concrete companies, printing companies, newspaper publishers, wood cabinet shops, manufacturers of wood pallets and skids, asphalt mixture producers, certain fabricators of steel products, etc.). It is a fact that certain manufacturers, as noted above and others with SIC codes between 2000-3999 sell to final consumers and therefore are "retailers" under Utah sales tax law definition.

Wholesale trade (refer to attachment Exhibit B from SIC code manual) are those establishments selling merchandise to retailers (also see attachment which defines retail trade), to industrial, commercial, institutional, farm construction contractors, or professional business users, etc. It is obvious "wholesale" is different for SIC manual purposes compared to the "sell for resale" wholesale definition for sales tax purposes.

XXXXX is a retailer for sales tax purposes (i.e., sell to final consumers), but is in the wholesale service business for SIC purposes since a majority of their sales are to other businesses (e.g., trucking companies, contractors, to other businesses using vehicles).

Does the Auditing Division presently require tax on fuel used by ready-mixed concrete companies since 90 to 100% of sales are retail? Did the Tax Commission, prior to 1990, tax fuel used by recapping companies or "retail" bakeries? In both cases, the answer is NO! Why not? Because in both cases fuel and power was being used to process, compound, or create a product that was to be sold and taxed. This concept is made clear in the Tax Commission's present rule (no mention of SIC Code), the 1954 memorandum, and the 1967 XXXXX case.

The new law, H.B. 203, effective July 1, 1996, will tax all power and fuels used by nonindustrial companies, as defined. XXXXX and other compounders, processors, retail bakeries and candy manufacturers, will all be precluded from purchasing fuels and power tax free. Our request for an opinion only pertains to those transactions prior to July 1, 1996.

Our request is that your opinion will find that XXXXX should be allowed to purchase power used at their recapping shop tax free. The power use at their shop locations are clearly predominantly for producing, compounding or creating remanufactured items that will be taxed when sold.

Since a similar "fuel" issue is the object of an appeal with XXXXX, I would suggest your answer and this request be put in their file for cross reference.

Sincerely,

XXXXX

May 9, 1996

XXXXX

Dear XXXXX

We have received your request for an advisory opinion regarding the application of the fuels and electricity exemption for XXXXX's recapping activities. We find as follows:

Under Utah Administrative Rule R865-19S-35, the sales tax exemption for non-commercial uses of electricity and certain other fuels applies to uses associated with mining, agriculture and manufacturing. With regard to manufacturing, the administrative rule defines a qualifying use as one in which a product is manufactured, produced or compounded. Neither the current statute nor the administrative rule specifically tie the exemption to the manufacturing SIC codes. However, as a practical matter, the activities that qualify for this exemption also fall within the SIC manufacturing classifications.

You are suggesting that activities outside the manufacturing SIC codes are eligible for this exemption. We do not agree. The legislature has deliberately created tax exemptions for the mining, agricultural, and manufacturing industries. It is no mistake that the fuel exemption is tied to these industries, and there is no indication that the legislature intended any broader application of the exemption. In fact, when the 1996 legislature amended the exemption to include a reference to the manufacturing SIC codes, it did so to clarify its intentions and to codify our current practices. (See H.B. 203.) It is our position that the exemption only applies to mining, agricultural and manufacturing industries.

Your letter indicates that XXXXX acts as both a retailer and wholesaler, and that it uses a retail SIC code for sales tax purposes. Setting aside for the moment the SIC code that XXXXX uses for sales tax reporting, when we look strictly at the recapping operation we note that such activity is classified as a service in SIC code 7534. Even if the recapping facility is considered a separate and distinct establishment from the retail and wholesale operations, the recapping activities are characterized as repair services, not manufacturing activities. Therefore, XXXXX is not entitled to the fuel exemption.

If you disagree with this opinion, you may petition for a declaratory judgment on the issue within 30 days of the date of this letter. If you have other questions, please contact us.

For the Commission,

Alice Shearer,

Commissioner

May 28, 1996

Alice Shearer, Commissioner

Office of the Commission

210 North 1950 West

Salt Lake City, Utah 84134

RE: Advisory opinion on "fuels" for XXXXX

Dear Commissioner Shearer:

In response to your advisory opinion, please consider our original request for the advisory opinion and this letter our petition for a declaratory judgement.

In contrast to what was written in the advisory opinion, I would suggest that the 1996 legislature "amended the exemption" to clarify the Tax Commission's intention to codify your recent (during the last few years only) practices of:

a. considering oxygen as an "other fuel" and exempt (for a short period in the 1990s, oxygen was being taxed as a non-fuel by state auditors);

b. exempting all commercial greenhouses from tax on fuel; and

c. limiting "fuel" exemption to companies eligible for the manufacturing exemption.

It is interesting that beginning July 1, 1996, there will be a double exemption for agricultural producers. In section 59-12-102(4), the component part exemption (59-12-104(28) includes fuel used by commercial greenhouses doing a majority of their business in wholesale sales and for providing power for off-highway type farm machinery. The new "industrial use" exemption duplicates this existing exemption and expands it as reflected in the present rule. Because of this type error and other honest legislative and rule making mistakes that are later corrected, it is not too difficult to conclude that legislative action is often a reaction to the intentions of tax administrators and/or lobbyists.

Respectfully,

XXXXX

June 5, 1996

XXXXX

Re: XXXXX

Dear XXXXX

We have received your petition for declaratory judgment on the XXXXX issue. Although we invited you to petition for a declaratory order, we have reassessed the facts in this case and determined that XXXXX' appropriate avenue of appeal is through the refund request procedure. Therefore, we decline to issue a declaratory order on this matter.

By way of further explanation, we are in the process of reviewing our appeals procedures and advisory opinion processes. We have concluded that when a controversy exists that lends itself to the adjudicative process, it is imperative that the taxpayer and the Commission use the adjudicative process to "flesh out" the arguments and develop a full record upon which judicial review may be based. Therefore, the Commission will not issue a declaratory order on an matter that can be raised on appeal from an audit assessment, collections procedure, or claim for refund.

To date, the Customer Service Division has neither granted nor denied XXXXX's refund request. We will direct the Customer Service Division to take action on the request. If XXXXX is dissatisfied with the response, it may appeal within 30 days of the date of that action.

We apologize for any inconvenience to you or XXXXX from our previous instructions.

For the Commission,

Alice Shearer,

Commissioner