Morton International, Inc. v. Auditing Division of the Utah State Tax CommissionMorton International, Inc. v. Auditing Division of the Utah State Tax Commission
Pеtitioner Morton International, Inc. (“Morton”), seeks review of the determination of the Utah State Tax Commission (“the Commission”) that certain expenditures made in the construction of facilities used in the production of sodium azide pel
The facts underlying Morton’s claims are not in dispute. In 1987, Morton began construction of facilities used in the production of sodium azide pellets and igniter material, which are components of the crash protection airbag system used in motor vehicles. The pellets and igniter material are inserted into small'pressure vessels to form airbag inflaters. When the pellet is ignited, it generates nitrogen gas, which. rapidly inflates the airbag. Morton has manufactured sodium azide pellets for over a decade. The new facilities, however, constitute a significant expansion of this business.
The process of manufacturing sodium аzide pellets and igniter material is unique and highly specialized. The chemicals used in the process are extremely energetic, explosive, and toxic. Accordingly, the facilities were specifically designed to incorporate safety and environmental features and support specialized and massive equipment, some of which is suspended above the floor. For example, separate facilities were built for each stage of production. This was done to minimize the risk to personnel, machinery, and equipment in case of fire, explosion, or chemical contaminant reactions. There are also many environmental features that are incorporated into the buildings themselves, such as, heavy metal free areas, special conductive flooring, protective blast and blowout walls and ceilings, chemical dust collection filters, and protected double-walled piping and sumps. Many of the production areas are operated by remote control. Personnel only enter for maintenance and quality control. Due to the toxic nature of the materials, personnel are not allowed in these areas without protective clothing, including respirators.
On June 26, 1989, Morton initiated this action. By stipulation, it was agreed that the action would be treated as a request for refund and formal hearing. A hearing was held on March 7, 1990. At the hearing, Morton represented that since 1987, it had paid an excess of $325,000 in sales and use taxes with respect to the construction of its sodium azide pellet production facilities. Morton contended that it was entitled to a refund of sales and use taxes pursuant to
On July 27, 1990, Morton filed this petition for review. The general issue before this court is whether the Commission erred in concluding that the sale of certain materials used in the construction of Morton’s production facilities is not exempt from sales and use tax under
I. STANDARD OF REVIEW
A. Administrative Procedure Act
The instant case was initiated after January 1, 1988, and the Commission’s decision was reached following a formal hearing. Therefore, the applicable standard of review of the Commission’s action is set out in the Utah Administrative Procedure Act,
(1) As provided by statute, the Supreme Court or the Court of Appeals hasjurisdiction to review all final agency action resulting from formal adjudicative proceedings.
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(4) The appellate court shall grant relief only if, on the basis of the agency’s record, it determines that a person seeking judicial review has been substantially prejudiced by any of the following:
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(d) the agency has erroneously interpreted or applied the law;
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(h) the agency action is:
(i) an abuse of the discretion delegated to the agency by statute;
(ii) contrary to a rule of the agency;
(iii) contrary to the agency’s prior practice, unless the agency justifies the inconsistency by giving facts and reasons that demonstrate a fair and rational basis for the inconsistency; or
(iv) otherwise arbitrary or capricious.
The Commission maintains that
B. Prior Case Law
Prior to the adoption of the Utah Administrative Procedure Act, the Utah courts developed three levels of review in connection with agency action. First, agencies’ findings of fact were granted considerable deference and would not be disturbed on appeal if supported by substantial evidence. 7 Second, a correction-of-error standard, giving no deference to agencies’ decisions, was used to review agencies’ rulings on issues the court characterized as concerning general law. 8 Examples of issues characterized as questions of general law include rulings concerning constitutional questions, 9 rulings concerning the agency’s jurisdiction or statutory authority, 10 rulings concerning common law principles such as the interpretation of contracts and certificates, 11 and rulings concerning interpretation of statutes unrelated to the agency. 12
The correction-of-error standard was also used to review an agency’s construction of, or application of the findings of fact to, the statutes which the agency is empowered to administer — when the agency’s experience or expertise is not helpful in resolving the issue.
13
One example of such a situation is when a question of statutory interpretation turns on basic legislative intent.
14
Other examples include situations where the agency is construing ordinary statutory terms within the statutes which they administer, such as, application of limitation period under the workers’ compensation act,
15
and the proper construction of the term “deficiency of service.”
16
In fact, in any situation involving the application of the legal rules to the findings of fact, a correction-of-error standard is used if the court is as well-suited to determine the
Finally, an intermediate standard of review, granting some deference to the agency’s decisions, has been used when the agency’s experience or expertise puts the agency in a better position to resolve issues concerning the application of findings of fact to the legal rules governing the case and the interpretations of the operative provisions of the statutes the agency is empowered to administer. 18 This standard was also used when it was alleged that the agency abused the discretion granted to it by statute. 19 Under the intermediate standard of review, appellate courts did not disturb an agency’s decision if the decision was within the bounds of reasonableness. 20
In cases not involving discretiоn, it has not always been clear when the intermediate standard of review should be used. 21 In some early cases, we characterized the issues that are appropriate for the intermediate standard of review as questions of mixed fact and law 22 or, alternatively, as questions concerning the application of the law. 23 However, issues that are appropriate for the intermediate standard have also been described as questions of statutory construction, 24 questions of special law, 25 and questions of law. 26 Indeed, we have stated, “An agency’s interpretation of key provisions of the statute that it is empowered to administer is often inseparable from its application of the rules of law to the basic facts.” 27
A review of our recent cases, however, makes it clear that it is not the characterization of an issue as a mixed question of fact and law or the characterization of the issue as a question of general law that is dispositive of the determination of the appropriate level of judicial review. Rather, what has developed as the dispositive factor is whether the agency, by virtue of its experience or expertise, is in a better position than the courts to give effect to the regulatory objective to be achieved. 28 We have stated:
We do not defer to the Commission when construing statutory terms or when applying statutory terms to the facts unless the construction of the statutory language or the application of the law to the facts should be subject to the Commission’s expertise gleaned from its accumulated practical, first-hand experience with the subject matter. 29
A clear example of this principle can be seen in Savage Brothers Inc. v. Public Service Commission. 30 There, we noted that questions involving interpretations of certificates of public convenience and necessity ordinarily involve questions of general law. However, we held that when an agency has specialized knowledge that is helpful in interpreting ambiguous and technical terms of a certificate, an intermediate standard of review is appropriate. 31
In determining whether the standards of review incorporated in subsections 63-46b-16(4)(d), (4)(h)(iii), and (4)(h)(iv) differ from the standards established in our prior case law, we will address each section separately in the context of the claim raised under that section.
II. STATUTORY CONSTRUCTION
A. Section 63-£6b-16(4)(d)
Morton’s claim that it is entitled to judicial relief under
It has already been established that in some situations, the standard of review provided in
This, however, may not have a significant effect on the standard used to review agencies’ statutory interpretations and applications of their own statutes. In many cases where we would summarily grant an agency deference on the basis of its expertise, it is also appropriate to grant the agency deference on the basis of an explicit or implicit grant of discretion contained in the governing statute.
The legislature, in many instances, has explicitly granted agencies discretion in dealing with specific statutory terms. 40 Apart from such explicit grants of authority, courts have also recognized that grants of discretion may be implied from the statutory language. For example, we have held that when the operative terms of a statute are broad and generalized, these terms “bespeak a legislative intent to delegate their interpretation to the responsible agency.” 41 We have also granted an agency’s statutory interpretation deference when the statutory language suggested that the legislature had left the specific question at issue unresolved. In Salt Lake City Cory. v. Confer, 42 we held that an agency’s interpretation of statutory provisions is entitled to deference when there is more than one permissible reading of the statute and no basis in the statutory language or the legislative history to prefer one interpretation over another. 43
The approach used in
Salt Lake City Cory,
is consistent with
We do not mean to suggest that thеse are the only methods of determining whether the legislature has granted the agency discretion in dealing with an issue. However, it is clear from the wording of
B.
Morton’s first argument is that the sale of certain materials, machinery, and equipment used in the construction of its production facilities is exempt from sales and use tax under
The following sales and uses are exempt from taxes imposed by this chapter:
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(15) sales or leases of materials, machinery, equipment, and services of any person in excess of $500,000 for any tax year used in the new construction, expansion, or modernization (excluding normal operating replacements as determined by the commission) of any mine, mill, reduction works, smelter, refinery (except oil and gas refineries), synthetic fuel processing and upgrading plant, rolling mill, coal washing plant, or melting facility in Utah commencing after July 1, 1984, and ending June 30, 1989. 49
Morton argues that the sodium azide pellets are synthetic fuels and that, therefore, Morton’s facilities constitute a “synthetic fuel processing and upgrading plant” as that term is used in
The question presented is one of statutory construction or application, and absent a grant of discretion, the Commission’s decision will be reviewed under a correction-of-error standard. The statutory terms in question are of a specific nature and do not connote a general grant of discretion. Furthermore, the precise issue presented, whether facilities such as those in question can be considered synthetic fuel processing and upgrading plants, can be resolved through the use of traditional rules of statutory construction.
50
It is apparent that the Commission has not been granted any discretion in re
Morton’s interpretation of
While the analysis used in reaсhing this point ignores other relevant and well-established rules of statutory construction, it is not necessary to rely on other rules of construction to conclude that Morton’s interpretation is erroneous. This is because the rule cited for Morton’s interpretation does not support its position. First, it is apparent from the record that there is no usual and accepted meaning of the term “synthetic fuel.” Testimony at the hearing established that there is conflict within the scientific community concerning the accepted meaning of the term. Indeed, in several points in its brief, Morton claims that there is confusion concerning the accepted meaning of the term “synthetic fuel.” Though we have relied on dictionary definitions to determine the usual meaning of statutory terms, the term “synthetic fuel” is not defined in the dictionary. When it is admitted that there is no accepted meaning of the statutory term at issue, a method of construction which is based solely on оne of many possible definitions is inappropriate.
Second, even assuming that Morton’s definition is appropriate, the argument necessarily fails because Morton misapplies the rule. Morton argues that despite the confusion as to the meaning of “synthetic fuel,” the term should be defined by combining the strict dictionary definitions of “synthetic” and “fuel.” Under such a definition, any man-made material capable of burning would qualify as a synthetic fuel. Taking Morton’s analysis one step further, any facility that produces a material capable of burning would qualify as a “synthetic fuel processing and upgrading plant.” Morton attempts to avoid such a result by arguing that a requirement not found in the definition of either “synthetic” or “fuel” — the requirement that it must be economical to produce heat or energy from a man-made material — should be read into the definition of “synthetic fuel.” Morton claims that such an interpretation is justified in order to avoid absurd results. This argument, hоwever, is a misstatement of the very rule upon which Morton relies. When the use of an ordinary meaning of a statutory term results in a statute that is “confused beyond reason,” 52 the court does not resolve the confusion by modifying the ordinary meaning of the term. Rather, in such cases the method of construction urged by Morton is not employed. 53
However, other methods of construction can be used to determine the application of the phrase “synthetic fuel processing and upgrading plant” when the meaning of the phrase cannot be arrived at through use of the usual meaning of the term. One such method of statutory construction is the rule of
noscitur a sociis,
which provides that the meaning of ques
At the hearing, Dr. Wiser, a professor of fuel engineering at the University of Utah, offered a definition of “synthetic fuel processing and upgrading plant” that is consistent with the language and legislative history of
This definition, to the extent that it focuses on mined materials such as coal, tar sands, and oil shale, is consistent with the language and legislative history of
There is ample support from the wording of the statute, the statute’s legislative history, and other methods of statutory construction to conclude that the legislature, in enacting
C.
Morton argues that the shells of its production facilities, i.e., the foundations, walls, floors, and ceilings, constitute equipment. Therefore, the construction of the facilities constitutes a purchase of equipment under 59-12-104(16), which provides:
The following sales and uses are exempt from taxes imposed by the chapter:
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(16) sales or leases of machinery and equipment purchased or leased by a manufacturer for use in new or expanding operations (excluding normal operating replacements, which includes replacement machinery and equipment even though they may increase plant production or capacity, as determined by the commission) in any manufacturing facility in Utah. 57
Morton’s argument is based on the assertion that the shells of its production facilities function as equipment by preventing, localizing, and directing accidental explosions, preventing toxic exposure to workers and the environment, providing structural support for specialized pieces of machinery, and providing access to machinery. The Commission rejected this argument, determining that the facilities constitute real propеrty not subject to an exemption under
The specific issue presented on appeal, therefore, is whether the term “equipment,” as used in
There is no explicit grant of authority regarding the question of what constitutes “equipment” under
Indeed, it seems that the legislature left unresolved the more general question of whether structures having characteristics of real property as well as characteristics of equipment can qualify for an exemption under
In determining whether the Commission’s decision is reasonable, it must be noted that the Commission has promulgated a rule that expressly excludes real property and improvements to real property from the definition of equipment, as that
2. “Equipment” means any independent device separated from any machín-ery but essential to an integrated or continuous manufacturing or assembling process or any sub unit thereof....
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B. Application of Exemption:
1. The machinery and equipment exemption applies only to tangible personal property. It does not apply to real property or to tangible personal property which is purchased and becomes an improvement to real property.
Morton does not challenge the propriety of rule 865-19-85S. In fact, Morton’s argument relies heavily on the lаnguage of the rule. 62
Morton argues that because the term “equipment” is not defined in the tax code or Utah ease law, this court should look to other jurisdictions for guidance. Specifically, Morton cites cases from Wisconsin 63 and the federal bench 64 that have focused on the function that the particular structure performs in determining if the structure should be considered equipment. 65 It is argued that we should adopt this approach because it was developed under statutes that are similar to rule 865-19-85S, that is, tax statutes granting exemptions for machinery and equipment but not for building or building structures. 66 Im-pheit in Morton’s argument is the assertion that under a functional analysis, the facilities in question would qualify as equipment.
There are, however, many difficulties with Morton’s argument. It is rule 865-19-85S, not
We also note that the case law from other jurisdictions is at best conflicting in this area.
69
There are jurisdictions that have not followed a functional approach in interpreting similar statutes.
70
Furthermore, the jurisdictions that have adopted a functional approach have reached conflicting conclusions.
71
Therefore, even if we held that
Given the language of rule 865-19-85S, the discrepancies between rule 865-19-85S and the statutes Morton cites, and the conflicting case law, the Commission’s determination that the shells of Morton’s facilities do not constitute equipment is not unreasonable. Therefore, the Commission’s determination will not be disturbed.
III. SECTION 63-46b-l6(4)(h)(iii)
Morton also claims that it is entitled to relief under
Morton claims that the Commission, in determining that the shells of its production facilities are real property, took action that was contrary to its prior practice of characterizing similar structures as tangible personal property. This allegation is based on the testimony of Mr. Anderson, an auditor who had formerly worked for the tax Commission who testified that he was aware of various instances where
In approaching this issue, it is important to note the exact nature of the evidence presented at the hearing. Mr. Anderson did not testify that the Commission, in a formal or informal hearing, classified oil storage tanks and automatic storage facilities as tangible personal property. Rather, it is apparent from thе record that Mr. Anderson was referring to individual audits. 73 Indeed, he testified that the method used in determining that the tanks and storage facilities were tangible personal property was “not an official guideline.” Furthermore, the auditing division did not consistently classify such structures as equipment, but also classified such structures as real property. This inconsistency was due to the fact that there was no well-established policy regarding the classification of these structures.
Although there is limited law on point,
74
it is clear that in the absence of an official guideline or a well-established policy, the decisions of auditors do not constitute “agency practice” for the purpose of section 63 — 46b—16(4)(h)(iii).
75
To hold otherwise would be to bind the Commission by the unappealed decisions of its subordinates. It is the Commission that has been granted authority to administer the tax code.
76
Morton has provided no evidence that the Commission itself has acted contrary to the position it has taken in the instant case. Under Morton’s approach, the mere fact that there is conflict within an agency on a particular question would be sufficient to justify judicial relief under section 63 — 46b—16(4)(h)(iii). Due to the presence of a conflict, no matter how the issue is finally resolved, the decision will be inconsistent with some of the decisions of the agency’s lower level employees. In recognizing the Commission’s authority to administer the tax code,
IV. SECTION 63 — 46b—16(4)(h)(iv)
Morton’s remaining contention is that the Commission’s determination that the shells of its production facilities do not constitute equipment is not supported by the record and is therefore arbitrary and capricious. It is argued that for this reason Morton is entitled to relief under
It is argued that because Morton produced a witness who testified that in his opinion the shells of the facilities in question constituted equipment and no other witness contradicted this testimony, the Commission is not free to disagree with this opin
For the reasons stated above, we hold that the Commission did not err in determining that expenditures made in the construction of Morton’s sodium azide pellets facilities do not qualify for an exemption under
Affirmed.
Notes
.
.
See Salt Lake City Corp. v. Department of Employment Sec.,
. The comments of the Utah Administrative Law Advisory Committee state that
.
See
.
State v. Verde,
. The Utah Court of Appeals has interpreted
.
See, e.g., Savage Indus. Inc. v. Utah State Tax Comm’n,
.
See Savage Indus.,
.
See Savage Indus.,
.
See, e.g., Utah Dep’t of Admin. Serv.,
.
See Utah Dep’t of Admin. Serv.,
.
See generally Hurley,
.
See, e.g., Hurley,
.
See Hurley,
.
Dean Evans Chrysler Plymouth v. Morse,
.
Big K Corp.,
.
See, e.g., Hurley,
.
See, e.g., Savage Indus.,
.
See, e.g., Big K Corp.,
.
See, e.g., Savage Indus.,
.
See Savage Indus.,
.
See, e.g., Hurley, 767
P.2d at 527;
Logan Regional Hosp.,
. Mixed questions of fact and law have been defined as “ 'the "application" of the findings of basic fact (e.g., what happened) to the legal rules governing the case.’ ”
Gray,
.
See Chris & Dick's v. State Tax Comm’n,
.
See Utah Dep't of Admin. Serv.,
.
See Chris & Dick's,
.
Utah Dep’t of Admin. Serv.,
.
Savage Indus.,
.
Bennett,
.
. Id. at 1087.
.
. Id. at 668.
. Id. at 670.
. Id. at 670 (citing MSAPA § 5-116, commеnts, 15 U.L.A. at 128 (1981)).
. The legislative history of
. See Salt Lake City Corp. v. Department of Employment Sec.,
. As noted supra in notes 21-27 and accompanying text, in some of our earlier cases, in determining that an intermediate standard of review is appropriate, we have relied upon the characterizаtion of an issue as an application of the law as opposed to an interpretation of the law. Although in our more recent cases the focus has turned to agency expertise, the fact that the Administrative Procedure Act incorporates the terms "application of the law” and “interpretation of the law” under a single standard supports the contention that absent a grant of discretion, an agency’s interpretation or application of statutory terms should be reviewed for error.
. In fact, the legislative history of the Administrative Procedure Act suggests that the legislature intended to alter the approach the courts developed to review agency action. See Sullivan, Overview of the Utah Administrative Procedures Act, Utah A.P.A. at 4-5 (Code Co Publishers July 8, 1988).
. For example,
.
Utah Dep't of Admin. Serv.,
.
.
Id.
at 636. The United States Supreme Court has recently adopted a similar approach.
See Dole v. United Steelworkers of America,
.
See Savage Indus.,
.
See Savage Indus.
at 670;
Hurley,
.
See Salt Lake City Corp.,
. See Advisory Committee at 15; see also MSA-PA § 5-116, comments, 15 U.L.A. at 128.
.
See Salt Lake City Corp.,
.
. See infra notes 51-56 and accompanying text.
. West Jordan v. Morrison,
.
Gord,
.
See Board of Educ. of Granite School Dist.,
.
See Heathman v. Giles,
.
Clover v. Snowbird,
. Parson Asphalt Prods., Inc. v. Utah State Tax Comm’n,
.
.
See
. See Webster’s New Third International Dictionary 768 (14th ed. 1961).
. The legislative history of
.See supra notes 36-39 and accompanying text.
.Because Morton asserts that the Commission erred in interpreting
.
Pabst Brewing Co. v. City of Milwaukee,
.
Thirup v. Commissioner of Internal Revenue,
. Morton asserts that under the functional analysis the determination of whether property is equipment or real property is made using a three-step approach; first, annexation (how is the property attached?); second, adaptation (what is the function or purpose of the property?); and third, intent (did the owner intend the property to remain tangible personal property permаnently attached to real estate, or did the owner intend the property to be real property?).
.
See Thirup,
.
See generally Concerned Parents of Stepchildren,
.
See Thirup,
. The Commission cites several cases which define the term “real property.” Under these definitions, it is clear that Morton’s facilities would qualify as real property. Thus, they would not qualify for an exemption under rule 865-19-85S.
See National Lead Co. v. Borough of Sayerville,
.
See Green Circle Growers Inc. v. Lorain County Bd. of Revision,
.
Compare Thirup,
.The comments of the Utah Administrative Law Advisory Committee state that
. Although it is not clear, it appears from the record that the classification of these structures as tangible personable property occurred in audits concerning
. See supra note 72 and accompanying text.
. It may be important to note that we are not deciding whether the classification of oil storage tanks and walls, ceilings, and floors of automatic storage facilities as tangible personal property is inconsistent with the classification of shells of Morton’s facilities as real property.
.
See generally
.
.
First Natl Bank of Boston v. County Bd. of Equalization,