What Utah taxes — property, sales/use, and corporate — will apply to a new S-corporation manufacturing business locating equipment, raw materials, and operations in a Utah county?

Plain-English summary

A representative for an S-corporation manufacturer weighing whether to locate a business in a particular Utah county came to the Commission with a broad list of tax questions covering property tax, sales/use tax on equipment and raw materials, inventory tax, and corporate/franchise tax. The Commission cautioned upfront that, without specific facts about the business, it could only give general guidelines, not binding conclusions on the company's exact numbers — but it walked through each area:

Property tax. All real and personal property in Utah is assessed and taxed at fair market value each year unless specifically exempt. Real property is reassessed annually by the county assessor and can fluctuate with the market. Personal property (equipment, buildings-as-personal-property items) is valued using the Commission's depreciation schedules, which the Property Tax Division updates every year. Property held in inventory for resale is exempt from property tax. Actual tax rates vary by county and by area within the county, and change year to year — the letter cites 1997 rates in the taxpayer's county ranging from about 0.89% to 1% in unincorporated areas and roughly 1.03% to 1.15% in incorporated areas.

Sales and use tax. Because it appeared the client might be a manufacturer, the Commission gave manufacturer-specific guidance:

• Manufacturing equipment purchases/leases are exempt if the business is a qualifying manufacturer — a new or expanding operation, classified under SIC codes 2000-3999, buying equipment used directly in the manufacturing process with an economic life of three years or more.
• Replacement parts get a partial exemption that was being phased in at the time: 60% exempt for purchases between July 1, 1997 and June 30, 1998, rising to a full 100% exemption for purchases after July 1, 1998 — but only for parts that extend a machine's useful life, not for routine repair/maintenance parts.
• Raw materials bought and used as an ingredient or component of the finished product can be purchased tax-free under the resale exemption. But materials the manufacturer itself consumes during the manufacturing process are taxable, even if a small incidental amount ends up embedded in the finished product.
• Out-of-state purchases, including equipment and raw materials shipped into Utah, are subject to use tax the same way in-state purchases are subject to sales tax — meaning qualifying manufacturing equipment and qualifying raw materials stay equally exempt whether bought in-state or out-of-state.
• Utah does not charge a separate tax on manufactured or finished-goods inventory.

Corporate/franchise tax. As a valid federal Subchapter S election holder, the business is treated as a Utah Small Business Corporation. Income, expenses, losses, and credits pass through directly to Utah-resident shareholders under the same federal S-corp framework (Subtitle A, Chapter 1S, Part 2 of the IRC). For nonresident shareholders, the corporation itself must make a 5.95% withholding-style payment on the portion of its Utah-source taxable income allocable to them; the individual nonresident shareholder can then file a Utah nonresident return to claim credit for that payment — or, if they have no other Utah-source income, skip filing altogether and simply forgo the credit.

What this means for you

Businesses evaluating a Utah location

Expect only general answers to a broad "what will we owe" inquiry — the Commission needs specific facts (SIC classification, equipment list, raw material sourcing, entity structure) to give binding, itemized guidance. Follow up with a detailed request once your operational plan firms up.

Manufacturers sourcing equipment and raw materials from out of state

Don't assume out-of-state purchases escape Utah tax — use tax mirrors sales tax on shipped-in equipment and materials, but that cuts both ways: qualifying manufacturing equipment and resale-bound raw materials stay exempt from use tax the same way they'd be exempt from sales tax if bought in Utah.

S-corporations with nonresident shareholders

Budget for the 5.95% corporate-level withholding payment on Utah-source income allocable to nonresident shareholders, and communicate to those shareholders that they can either file a Utah nonresident return to claim credit for that payment, or — if they have no other Utah-source income — simply not file and forgo the credit.

Common questions

Q: Does Utah tax finished goods or manufactured inventory?
A: No. The Commission confirmed Utah does not charge a tax on manufactured or finished goods inventory.

Q: Are raw materials taxable when a manufacturer imports them into Utah?
A: It depends on their use — raw materials bought and used as an ingredient or component of the finished product can be purchased tax-free for resale (in-state or out-of-state), but materials the manufacturer consumes in the process are taxable even if they end up incidentally in the finished product.

Q: What's required for an S corporation's nonresident shareholders in Utah?
A: The corporation must pay 5.95% on the portion of Utah-source income allocable to nonresident shareholders; those shareholders can then file a Utah nonresident return for credit, or skip filing if they have no other Utah income.

Q: Does the manufacturing equipment exemption apply to equipment bought out of state?
A: Yes — use tax applies to out-of-state purchases the same way sales tax applies to in-state ones, so qualifying manufacturing equipment stays exempt either way.

Q: Does this ruling give my business specific, binding tax figures?
A: No, and not automatically for anyone. This is a private letter ruling that itself acknowledges it offers only general guidelines due to lack of specific facts. It's binding on the Commission only as to this taxpayer's actual facts, and it can't be relied on as binding by anyone else.

Citations and references

Statutes and rules:

• Utah manufacturing sales tax exemption (qualified manufacturer test: new/expanding operation, SIC 2000-3999, 3+ year economic life equipment)
• Replacement parts partial exemption phase-in (60% for 7/1/1997-6/30/1998 purchases; 100% after 7/1/1998)
• Internal Revenue Code Subtitle A, Chapter 1S, Part 2 (federal S corporation pass-through, followed by Utah)
• Utah 5.95% corporate-level payment on Utah-source income allocable to nonresident S corporation shareholders

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/98-013.pdf

Original ruling text

Response January 30, 1998

MEETING: January 28, 1998

1. TAXATION:

a. XXXXX County's tax records indicate COMPANY A will be taxed
at about $$$$$ annually or about $$$$$
for land and about $$$$$ for equipment
and buildings. Is this correct? What is
the formula? How frequent is the data
base updated? What is the projected rate for
5-10 years?

b. Sales and Use Tax on Equipment: Utah provides limited tax
credits for equipment purchased in Utah.
How does this effect equipment that
cannot be purchased or manufactured in Utah? Who determines if the equipment is taxable or non-taxable? What
can be used as a guideline for
equipment? When the company uses raw products, are the raw materials
taxed when purchased outside of the
state and shipped to Utah? How are the
taxes determined, or are they taxed? An example, the company brings rice from STATE, hard wheat and brand from
Canada soft grains from STATE, and other raw goods from indigenous areas of the
United States and Canada. How are these products treated with respect
to tax?

c. Inventory Tax: We understand Utah does not charge
manufactured or finished goods tax. It this correct?

d. Corporate Tax: COMPANY A is a type "S"
corporation. It is our understanding
the franchise tax will apply to the company, an income tax will not Is this true?"

e. Can COMPANY A get a summary statement of interpretation
concerning each of these tax questions
and issues?

January
12, 1998

NAME

ADDRESS

CITY
STATE ZIP

Advisory
Opinion: Taxation of Business Located
in XXXXX County

Dear
NAME:

This advisory opinion is a follow-up
to our conversation on Thursday, January 29, 1998. Because we do not have specific information about the business at
issue, this letter provides only general guidelines. If you or the business client need more specific tax guidance,
please contact us again with more detailed information.

1. All real and personal property in Utah
   is to be assessed and taxed at its fair market value unless otherwise
   exempt. The county assessor will assess
   the real property each year. Its value
   may vary from year to year with fluctuations in the market.

The personal property will be
assessed each year at market value.
Market value is generally determined by reference to the Tax
Commission's depreciation schedules.
These schedules are updated each year by the Tax Commission's Property
Tax Division. The current schedules are
enclosed for your review. There is a
property tax exemption for property held in inventory for resale.

The tax rates in XXXXX County vary
from year to year and from area to area.
The 1997 tax rates for unincorporated XXXXX County ranged from .008895
to .01. The tax rates for incorporated
areas ran from .010260 to .011500.

2. Unless otherwise exempt, sales and use
   tax applies to sales, use or consumption of tangible personal property in this
   state, as well as to charges for various services. Because we do not have specific details about the types of sales
   or purchases that your client makes, we cannot give you specific advice as to
   the kinds of exemptions that may apply.
   However, from your general description, it appears that your client may
   be a manufacturer. On that basis, we
   offer the following guidelines.

a. Purchases
or leases of manufacturing equipment by a qualified manufacturer are exempt
from sales tax. To qualify, the
company's operations must constitute a
new or expanding business and must be an establishment described in SIC Code
2000-3999 of the 1987 Standard Industrial Classification Manual. The machinery or equipment purchased must be
used in the manufacturing process which produces tangible personal property,
and must have an economic life of three or more years.

b. Replacement
parts are eligible for exemption as follows:

1. For
   purchases between July 1, 1997 and June 30, 1998, 60% of the sale or lease is
   exempt.

2. For
   purchases after July 1, 1998, 100% of the sale or lease is exempt.

Replacement parts must also be used
in the manufacturing process, must have an economic life of three or more
years, and must be used to replace or adapt an existing machine to extend the
normal estimated useful life of the machine.
Routine repair and maintenance does not qualify for exemption.

c. Raw
materials that are purchased and used primarily as an ingredient or component
part of the finished product may be purchased tax free for resale. Materials purchased and consumed by the
manufacturer in the manufacturing process are taxable to the manufacturer, even
if they become an incidental part of the finished product.

d. Items
purchased from out-of-state vendors and shipped into Utah are subject to use
tax in the same manner that the sales tax applies to in-state purchases. Therefore, if your client purchases exempt
manufacturing equipment and machinery from out-of-state, it is exempt from use
tax under the guidelines expressed in 2.a. and 2.b. above. Raw materials purchased from outside of Utah
are exempt from use tax under the guidelines expressed in 2.c.

e. Utah
does not charge manufactured or finished goods tax.

3. S corporations are taxed for state
   purposes in the same manner as taxed for federal purposes. That is, if a corporation obtains a valid
   Sub Chapter "S" election from the IRS, it will be treated as a Utah
   Small Business Corporation for tax purposes in Utah.

a. For
Utah resident shareholders, taxable income, expenses, losses and credits pass
through to the shareholders as provided in Subtitle A, Chapter 1S, Part 2 of
the Internal Revenue Code.

b. Nonresident
shareholders are liable for that portion of the corporation's Utah taxable
income that is derived from Utah sources.
However, the corporation shall make a 5.95 percent payment on behalf of
any nonresident shareholders. The individual nonresident shareholder may
then file a Utah nonresident return to claim a credit for the amount paid by
the corporation on that shareholder's behalf.

c. A
nonresident individual shareholder who has no other Utah source income may
forego the credit described in 3.b. above and elect not to file a Utah
return. However, if the shareholder
intends to claim the credit, it must use the Utah return to do so.

I
hope this information is helpful.
Again, if you need a more detailed response, we are happy to work with
you further.

For
the Commission,

Joe
B. Pacheco,

Commissioner