Does a leased color photocopier installed behind a drugstore's photo counter qualify for Utah's manufacturing machinery and equipment sales tax exemption?

Plain-English summary

A retail drugstore chain leased a Xerox 5750 Color Copier under a "true lease" (title staying with the lessor) to install behind its camera/photo counters. The machine wasn't customer-accessible — store employees took customer orders, ran the copies, and rang up sales at the photo counter register. Because the copier does things like reverse image, color conversion, and photo retouching — arguably "manufacturing" a copy from source material — the drugstore asked whether the lease qualified for Utah's manufacturing machinery and equipment sales tax exemption, along with follow-up questions about the taxability of its paper/toner supplies and the copies it sells to customers.

The Commission ruled against the exemption. Utah Code § 59-12-104(14) exempts qualifying machinery and equipment used in the manufacturing process in a manufacturing facility, and § 59-12-102(12) defines "manufacturing facility" by reference to SIC Codes 2000-3999. The drugstore's retail operation falls under SIC Code 5912 (retail drugstores), and photocopying/duplicating services themselves are separately classified under SIC Code 7334 — neither code falls within the 2000-3999 manufacturing range. Because the exemption is tied to the establishment's SIC classification, not just to whether the equipment technically transforms an input into an output, the copier doesn't qualify, and the full lease payment is subject to Utah sales and use tax.

On the follow-up questions, the answers split more favorably: the paper and toner the copier consumes are exempt from tax when purchased, because § 59-12-104(25) exempts property that becomes an ingredient or component of a product sold to the customer — the paper and toner are "incorporated" into the taxable final copies. (If the store instead used tax-free paper/toner to make copies for its own internal use rather than selling them, it would owe use tax on that consumption.) The copies themselves, when sold to customers, are ordinary taxable retail sales of tangible personal property under § 59-12-103(1). Supplies used merely to clean or maintain the copier, by contrast, are consumed by the store itself and are taxable at purchase.

What this means for you

Retail businesses leasing equipment that "produces" a resold item

The manufacturing exemption isn't about whether your equipment technically transforms raw materials into a finished product — it's about whether your establishment is classified as a manufacturing facility under SIC Codes 2000-3999. A retail store using production-like equipment (copiers, printers, engravers) generally won't qualify just because the equipment performs a manufacturing-like process.

Businesses selling copies, prints, or similar reproduced products

While your equipment lease is fully taxable if you're not a manufacturing facility, your consumable supplies (paper, toner, ink) that get incorporated into what you sell to customers are exempt as resale purchases — track this distinction separately from your equipment costs. Cleaning and maintenance supplies, though, are taxable since you consume those yourself.

Accountants and tax professionals reviewing equipment lease tax positions

Check the SIC classification of the specific establishment where equipment is installed, not just the general nature of the equipment or the parent company's business. A subsidiary or department operating within a retail-classified location won't get manufacturing treatment even if its function resembles manufacturing.

Common questions

Q: Why doesn't a photocopier that reproduces, retouches, and converts images count as "manufacturing" equipment?
A: Because the exemption requires the equipment to be used in an establishment classified under SIC Codes 2000-3999. A retail store (SIC 5912) and even photocopying services generally (SIC 7334) fall outside that range, regardless of what the machine itself does.

Q: Are the paper and toner used to make copies taxable?
A: Not at purchase, if they're incorporated into copies sold to customers — that's an exempt resale purchase. If the store instead uses that paper/toner for copies made for its own internal use, it owes use tax on that consumption.

Q: Are the copies themselves taxable when sold to customers?
A: Yes — they're ordinary taxable retail sales of tangible personal property.

Q: Can I rely on this ruling for my own equipment lease?
A: No — it binds the Commission only for the taxpayer and facts described. Confirm your own establishment's SIC classification and equipment use with the Commission or a Utah tax professional.

Citations and references

Statutes cited:

• Utah Code Ann. § 59-12-103(1)(k) (sales tax on leases of tangible personal property)
• Utah Code Ann. § 59-12-104(14) (manufacturing machinery and equipment exemption)
• Utah Code Ann. § 59-12-102(12) (defines "manufacturing facility" via SIC Codes 2000-3999)
• Utah Code Ann. § 59-12-104(25) (resale exemption for property incorporated into a sold product)
• Utah Code Ann. § 59-12-103(1) (sales tax on retail sales of tangible personal property)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/99-031.pdf

Original ruling text

99-031

Response September 13, 1999

REQUEST LETTER

May 7,1999

COMPANY (#####) hereinafter referred to as Lessee is
investigating the Sales and Use Tax treatment of a lease transaction involving
tangible personal property that will have a taxable situs in your state.

We hereby request a ruling to clarify the application
to your state sales and use tax law with respect to the transaction and
equipment described below.

The equipment in question, Xerox 5750 Color Copier
machine, was originally purchased by the Lessor for subsequent lease or rental.
The Lessee may enter into a "True Lease"
agreement with the Lessor, length of term still to be determined. Title to the
property will remain with the lessor, the owner of the property for Federal
Income Tax purposes.

The Xerox 5750 Color Copier machine will be installed
on site in our retail store locations.
The installation will be behind our camera/photo counter and not
accessible to our customers. COMPANY's employees will accept the customers' orders and
process the orders of making the copies. Once orders are complete, sales will
be registered at our camera/photo counter cash registers.

The machine has the following capabilities:

1) Color
and Black & White heavy weight paper for posters, Reprint Covers and etc.

2) Reverse
Image

3) Change
the color Black to any color, color conversions (i.e. Orange to Green)

4) Delete
information

5) Sizes
available are from Postcard Size to 11 X 17 inches

6) Photo
Retouching

The Lessee's primary business is operation of retail
drug stores, but we believe that a Sales & Use Tax exemption may qualify
based on the type and/or process use of the equipment under Manufacturing,
Industrial Processing or Printing statues or other provisions existing in your
state.

We respectively request your review of the facts
presented and situations within this letter. We also request a ruling as to the
taxability of supplies used in the producing copies such as toner, paper and
etc., and the taxability of the final product sold to our customers. Also
we would appreciate you furnish us
authority for your response (statute, regulations, rulings, opinions and etc.).
We certainly appreciate your assistance in this matter. If you have any questions
or need any additional information, please call me at (847)914-5409. The
response should be mailed to the undersigned at:

COMPANY

ADDRESS

Sincerely,

COMPANY

NAME

RESPONSE
LETTER

September 13, 1999

NAME

COMPANY

ADDRESS

RE: Lease
of a Xerox 5750 Color Copier

Dear NAME,

We have received your request for an advisory opinion
concerning the lease of a Xerox 5750 Color Copier ("Color Copier")
by COMPANY. You have specifically
asked if Utah law provides any sales and use tax exemption that could apply to
this lease transaction. You have also
asked whether supplies used to produce copies, such as toner and paper, are
subject to taxation and whether the final product sold to the customer is
taxable.

Lease of the Copier.
Generally, sales tax is due on the lease of tangible personal
property. Utah Code Ann. Section 59-12-103(1)(k).
Accordingly, sales tax is due on the lease of the copier. Utah law provides a sales and use tax
exemption for the purchase or lease of machinery and equipment used in the
manufacturing process in a manufacturing facility in Utah if the machinery and
equipment has an economic life of three or more years and is used to
manufacture an item sold as tangible personal property. Utah Code Ann. Section 59-12-104(14).
All these requirements must be met before the purchase or lease
qualifies for the sales and use tax exemption.

For purposes of Subsection 59-12-104(14), Utah Code
Ann. Section 59-12-102(12) defines "manufacturing facility" as "an establishment described in SIC Codes 2000 to 3999
of the 1987 Standard Industrial Classification Manual of the federal Executive
Office of the President, Office of Management and Budget." Photocopying
and duplicating services are classified as SIC Code 7334 and include
establishments primarily engaged in reproducing text, drawings, plans, maps, or
other copy, by blueprinting, photocopying, mimeographing, or other methods of
duplication. Moreover, this copier will be used in a retail establishment,
classified under SIC Code 5912. Because
the Color Copier is not used in an establishment described in SIC codes 2000 to
3999, it is not used in an establishment that qualifies as a manufacturing
facility. As a result, the Color Copier
does not qualify for the manufacturing machinery and equipment sales and use
tax exemption. Accordingly, the lease
payments are subject to Utah sales and use tax.

Sales of copies to your customers are taxable. Sales of copies or other final products to
your customers are taxable transactions, because they are retail sales of
tangible personal property. Utah Code
Ann. Section 59-12-103(1).
Your purchases of paper and toner are exempt. Utah Code Ann. Section 59-12-104(25)
exempts from taxation "property purchased for resale in the state, in the
regular course of business, either in its original form or as an ingredient or
component part of a manufactured or compounded product." The paper and
toner used by the Color Copier are incorporated into the taxable final copies
sold to the customer. Accordingly, your
store may purchase these items tax-free if they are incorporated into the final
products. Should the store purchase
these items tax-free, then consume them itself (e.g., for making copies for the
store's own use), the store would owe use tax on the
purchase price of these supplies. Other
items, such as supplies to clean the Color Copier, are considered to be
consumed by the store and, thus, are subject to sales tax.

Please contact us if you have any other questions.

For the Commission,

R. Bruce Johnson

Commissioner