Mt. Olympus Waters, Inc. v. Utah State Tax Commission

Citations: 877 P.2d 1271; 243 Utah Adv. Rep. 10; 1994 Utah App. LEXIS 99; 1994 WL 360987Docket: No. 940202-CA

Court: Court of Appeals of Utah; July 6, 1994; Utah; State Appellate Court

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Petitioner Mount Olympus Waters, Inc. appeals a decision from the Utah State Tax Commission regarding additional sales tax liability assessed by the Commission's Auditing Division for the period from January 1988 to December 1990, amounting to $49,324.26. The Commission affirmed the Division's findings that Mount Olympus is the ultimate consumer of the reusable five-gallon bottles it purchases, rendering those purchases taxable. Additionally, the Commission ruled that deposits collected from customers for these bottles are also subject to sales tax, and that Mount Olympus’s machinery and equipment do not qualify for a manufacturing exemption since they are not used in a manufacturing facility.

Mount Olympus contends the Commission erred by relying on Utah Administrative Rule R865-19-48S, claiming it invalidly interprets the container exemption outlined in section 59-12-104(24) of the Utah Code. This section stipulates specific exemptions from sales tax, including containers. The applicable standard of review grants the Commission deference on factual findings but not on legal conclusions, which are reviewed for correctness. The court has not found any explicit statutory discretion granted to the Commission regarding the interpretation of the exemption in question.

Rule R865-19-48S stipulates that sales of containers, labels, bags, and shipping cases are taxable when sold to the final user or to manufacturers, processors, wholesalers, or retailers for use as returnable containers. Examples of taxable returnable containers include water bottles, drums, beer kegs, dairy product containers, and gas cylinders. If a retailer sells products in containers and charges a deposit, that charge is also taxable, but can be credited if refunded to the customer.

For Rule R865-19-48S to be valid, it must align with section 59-12-104(24) of the governing statute. Administrative rules must remain consistent with their statutes, and any rule inconsistent with the statute is invalid. Legislative authority is required to alter statutory language, and an interpretation that contradicts the statute effectively amends it.

The interpretation of section 59-12-104(24) is guided by the common meanings of its terms, with the word "any" indicating an indefinite number and not limited to non-reusable containers. The statute's exemption applies to all containers, including both reusable and non-reusable types. Consequently, Rule R865-19-48S improperly restricts the exemption to non-reusable containers. Although the Commission argues legislative intent supports the limitation to containers consumed by purchasers, courts must adhere to plain statutory language and cannot speculate on legislative intent when the language is clear. The courts are bound to interpret the law as it is written, without expanding its provisions.

Clear and unambiguous language in statutes must be interpreted as stated, leaving no room for construction. The Commission's claim to look beyond the plain meaning of section 59-12-104(24) due to its alleged inoperability is rejected; the statute is deemed operative and unambiguous, exempting manufacturers from sales tax on 'any container' without specifying nonreusable containers. Consequently, Rule R865-19-48S, which restricts this exemption, is invalid, and the Commission's assessment of sales tax on Mount Olympus's purchases of five-gallon water containers is reversed.

Regarding the machinery and equipment exemption under section 59-12-104(15), Mount Olympus contends it qualifies for a sales tax exemption due to its claimed status as a manufacturing facility. The Commission determined that Mount Olympus does not meet the statutory definition of a manufacturing facility. The review of this determination is based on correctness, as the statute does not grant discretion to the Commission, while factual findings are evaluated for substantial evidence. Section 59-12-104(15) provides tax exemptions for machinery and equipment used in manufacturing operations, with manufacturing facilities defined by specific SIC Codes. Mount Olympus argues its activities fall under SIC Classification 2086, which includes 'water, pasteurized: bottled or canned.' However, the Commission found that Mount Olympus does not pasteurize its water as defined technically, thereby concluding it does not fit within the classification. This conclusion is affirmed, stating that Mount Olympus does not pasteurize its water.

Pasteurization is defined as a method, originally devised by Pasteur, for partially sterilizing a substance, such as milk or wine, at a controlled temperature and duration to eliminate pathogens while preserving chemical composition. Expert testimony corroborates this definition, with Mount Olympus’s analytical chemist describing the pasteurization of water as disinfection through heat at 160 degrees Fahrenheit for thirty minutes. He contrasted this with "cold pasteurization," which he defined as low-level filtration of water.

The court rejects Mount Olympus’s broad interpretation of "pasteurization," citing several reasons. Allowing any disinfecting process to be labeled as pasteurization would introduce ambiguity and complicate legal determinations. The SIC Manual specifies that only facilities manufacturing pasteurized water fall under Classification 2086, which the Utah Legislature has incorporated into section 59-12-104(15). The court emphasizes that it cannot reinterpret legislative classifications and that tax exemptions must be construed narrowly, referencing Parson Asphalt Prod. Inc. v. State Tax Comm’n to support this.

To qualify for a sales tax exemption on machinery and equipment, an establishment must be classified under Classifications 2000 to 3999 of the SIC Manual. Mount Olympus does not meet the criteria of Classification 2086 since it does not pasteurize water, thus failing to be categorized as a manufacturing facility. Consequently, the Commission's determination regarding the machinery and equipment sales tax is affirmed, while the assessment on reusable five-gallon water containers is reversed.

Additionally, the court notes that section 59-1-610 governs the review of Commission proceedings and applies retroactively, despite the case being filed before its effective date, as established in prior rulings.

The 1994 Utah Legislature amended section 59-12-104(24), removing previous language and establishing new exemptions from related taxes. The amended provision now exempts sales of non-returnable containers, labels, bags, shipping cases, and casings sold to manufacturers, processors, wholesalers, or retailers for packaging tangible personal property intended for sale. Specifically, Mount Olympus purchased machinery that includes a 9-Valve Filler, Bliss Matic, Ozone Generator, and In-Line Screw Capper. According to Standard Industrial Classification Manual 2086, establishments producing bottled and canned soft drinks and carbonated waters are classified under this category, while those manufacturing fruit and vegetable juices, fruit syrups, cider, and natural spring waters are classified differently. The classification also identifies products that qualify as "bottled and canned soft drinks and carbonated waters," such as pasteurized water, whether bottled or canned.