How does the Utah State Tax Commission decide whether a manufacturing activity, performed at the same location as a non-manufacturing business, counts as a 'separate and distinct' establishment eligible for the manufacturing sales tax exemption?

Plain-English summary

This is an unusual record: an internal advisory opinion the Commission wrote for its own Director of the Auditing Division, rather than a response to an outside taxpayer's request — it explains, for the auditors themselves, how to apply Admin. Rule R865-19S-85's "separate and distinct establishment" test. No specific letter date is given in the record.

The rule matters because Utah's manufacturing exemption can still apply when a manufacturing activity and a non-manufacturing activity happen at the same physical location, if the manufacturing piece qualifies as its own separate and distinct economic establishment. The Commission lays out a three-step analysis:

Step 1 — Separate entities, same premises. If a business operates multiple locations, each physical location is analyzed on its own. If the manufacturing and non-manufacturing activities are run by genuinely separate corporate entities or subsidiaries, they're presumed separate and distinct, even on the same premises — but that presumption can be overcome if an auditor finds the entities so interdependent they can't really be treated as separate (for example, if manufacturing equipment claimed for the exemption is actually shared and used in both activities).

Step 2 — SIC classification check. No single Standard Industrial Classification code should cover the combined activities at one location. If the manufacturing piece is already described as part of a non-manufacturing SIC classification, the whole facility falls outside the manufacturing code and the analysis stops — no exemption. Otherwise, move to step 3.

Step 3 — Economic viability test. The manufacturing activity is "separate and distinct" only if it is economically viable on its own — meaning it has an independent, profitable market apart from the other activity at the site, and a prudent business person would run it as a standalone business. A practical way to test this: if the non-manufacturing activity shut down, could the manufacturing activity keep going?

The Commission illustrates step 3 with three examples:

• Example A (steel fabricator/contractor): A contractor fabricates steel solely to fulfill its own construction contracts, never selling steel to others. Since it has no independent market for the steel, the fabrication is completely dependent on the construction business — not separate and distinct.
• Example B (waste steel byproduct): Even if the contractor can sell leftover scrap steel to a recycler, that alone doesn't convert the fabrication activity into a separate viable business — the real question is whether a prudent business person would run a steel-scrap-production business on its own, or whether the byproduct sale is just an incidental way to offset the construction business's costs.
• Example C (microbrewery + restaurant): A brewery operating alongside a restaurant on the same site may or may not be separate and distinct. If the brewery only exists to supply the connected restaurant and has no outside market, it isn't economically viable on its own. But if the brewery sells its product in the ordinary course of business beyond the restaurant, it can be separate and distinct — the test being whether the brewery would keep operating if the restaurant closed.

The opinion closes by noting that even after a manufacturing activity is confirmed to be separate and distinct under this analysis, the taxpayer must still satisfy all the other requirements of the manufacturing exemption being claimed.

What this means for you

Businesses running manufacturing alongside another activity at the same site

Don't assume co-locating manufacturing with a retail, service, or construction operation automatically disqualifies the manufacturing piece from the exemption — but also don't assume forming a separate LLC or subsidiary is enough on its own. Auditors will look past the corporate structure to whether the manufacturing activity genuinely functions as an independent business, including whether it uses its own (not shared) equipment.

Contractors, fabricators, and similar businesses that make components for their own projects

If you fabricate materials solely to use in your own contracts and never sell them independently in the ordinary course of business, this ruling's Example A suggests your fabrication activity won't qualify as a separate manufacturing establishment, even if you occasionally sell scrap or byproduct (Example B).

Multi-activity businesses (e.g., brewery/restaurant, bakery/café) considering the manufacturing exemption

The key question from Example C is portable to many combined-business models: could the manufacturing side of your business survive and keep selling into an outside market if the other half of your business closed tomorrow? If yes, you have a real argument for separate-and-distinct status; if the manufacturing side exists purely to feed the other business, it likely doesn't.

Accountants and tax professionals

This is a rare internal advisory opinion (written for the Auditing Division, not an outside taxpayer), so it's especially useful as a window into how the Commission's own auditors are instructed to apply R865-19S-85 — a good one to cite when a client's shared-premises manufacturing exemption claim is being audited.

Common questions

Q: We put our manufacturing operation into a separate LLC on the same property as our other business — does that guarantee the exemption?
A: No. The Commission presumes separate entities are separate and distinct, but that presumption can be overcome if the two operations are found to be functionally interdependent, such as sharing the same equipment.

Q: Our manufacturing process only produces components for our own construction/retail business, never separate outside sales — do we qualify?
A: Based on Example A in this opinion, likely not — an activity with no independent market of its own, existing solely to support another business at the same site, is not "separate and distinct."

Q: We sell scrap or byproduct from our manufacturing process to an outside buyer — does that make us separate and distinct?
A: Not by itself, per Example B. The test is whether a prudent business person would run that scrap/byproduct activity as its own standalone business, not merely whether there happens to be an outside buyer.

Q: If our manufacturing activity does pass this "separate and distinct" test, are we automatically exempt?
A: No — the opinion is explicit that passing this test is necessary but not sufficient; the taxpayer must still meet every other requirement of the specific manufacturing exemption being claimed.

Citations and references

Statutes and rules:

• Utah Admin. Rule R865-19S-85 (manufacturing exemption — separate and distinct economic establishment test)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-102.htm

Original ruling text

96-102

Response

Request

XXXXX

Director

Auditing
Division

Internal
Advisory Opinion - Determining when a manufacturing activity comprises a
�separate and distinct� establishment.

Dear
XXXXX,

Under
Administrative Rule R865-19S-85, when manufacturing activities are performed at
the same physical location as non-manufacturing activities, the manufacturing
activities may qualify for sales tax exemptions if that activity comprises a
separate and distinct economic activity.
You asked us for guidance on how to make that determination. We offer the following:

When
a business conducts manufacturing and non-manufacturing activities on the same
premise, the determination that the manufacturing activity is a separate and
distinct economic establishment rests on the following analysis:

1. If a business operates in more than
   one location (e.g. branch or satellite offices), each physical location is
   considered separately from any other locations operated by the same business.

If each activity comprises a
separate corporate entity or subsidiary, the two establishments are presumed to
be separate and distinct from each other, even if operated on the same
premise. However, this presumption may
be overcome if evidence turned up by an auditor reveals that the entities are
so interdependent that they cannot be considered separate and distinct from one
another. For instance, if the taxpayer
is claiming a manufacturing equipment exemption, but the equipment is used in
both activities, the activities probably are not separate and distinct from one
another.

Assuming that qualifying and
non-qualify activities take place on the same premise, and a reasonable
question exists as to whether the manufacturing activities constitute separate
and distinct economic activity.

2. No single SIC classification
   includes or encompasses the combined activities conducted at a single physical
   location. If the manufacturing
   activities are described as part of a non- manufacturing classification, the
   entire facility is outside the manufacturing code and no further analysis is
   required. Otherwise, move to step 3 of
   the analysis.

3. The activities conducted on the same
   premise are or could be economically independent from one another. If each of the activities, when considered by
   itself, could be economically viable, the activities are �separate and
   distinct.� A manufacturing activity is
   economically viable if it has an independent and profitable market outside of
   the non-qualifying activities conducted on the same premise and if a prudent
   business person would undertake the business apart from the other activities
   conducted at the facility.

One approach to determining the economic
viability of the manufacturing activity is to ask: if the non-qualifying
activities closed down, could the qualifying activities continue? The following examples help illustrate this
point.

Example A: A contractor agrees to furnish and install
the steel that is incorporated into a building project. The contractor engages in steel fabrication
activities solely to produce the steel to fulfill his construction
contract. Since the contractor does not
manufacture steel for sale in the ordinary course of business, the steel
fabrication activities serve only to support the building activities. The contractor has no independent market for
his steel fabrication activities, and the activities are completely interdependent. The steel fabrication activities do not
constitute a separate and distinct manufacturing establishment.

Example B: The by-product of the contractor�s
fabrication activities in example A is waste steel. Although the contractor may have an
independent market for the by-product (e.g. a recycling company), the sale of
the by-product, by itself, does not convert the fabrication activities to a
separate economically viable business.
Here the question is whether a prudent business person would undertake
to produce waste steel for sale to recyclers, or if the sale of the waste steel
is merely an opportunity to reduce business expenses associated with the non-
qualifying construction activities.

Example C: A micro brewery operating on the same premise
as a restaurant may be a separate and distinct economic activity if the
activities can operate independently as viable businesses. Obviously a restaurant is not dependent upon
having a brewery located on the same premise.
The brewery, however, may or may not be dependent upon the restaurant. If the brewery exists only to produce a
product for sale in the connected restaurant, and the brewery has no
independent market outside the restaurant, it has no separate economic
viability. On the other hand, if the
brewery arm of the business can sell its product in the ordinary course of
business outside the connected restaurant, it may be a separate and
economically viable activity. In this
case the question is this: would a
prudent business person continue to operate this brewery activity if the
restaurant closed? If the brewery could
remain in business even if the restaurant closed, the brewery may have an
independent economic viability. If the
brewery is completely dependent upon the restaurant for its sales, it has no
separate economic viability.

Assuming that, upon conclusion of
the analysis, the manufacturing operation constitutes a separate and distinct
economic activity, the taxpayer must still meet all other qualifications for
the manufacturing exemption claimed.

For
the Commission,

Alice
Shearer,

Commissioner