Kennecott Utah Copper is taking the state to court over a $9.4 million tax assessment on its new smelter and refinery.
The State Tax Commission levied the sales-and-use tax last month, saying part of Kennecott's $1 billion project didn't qualify for the so-called "manufacturing exemption."Kennecott responded last week with a lawsuit contending the equipment purchases for the new smelter and refinery were exactly the kind of expenditures the Legislature had in mind when it amended the tax law in 1996.
The high-stakes dispute stems from the mining company's construction of new facilities between 1992 and 1995. It built a new smelter in a different location and gutted and rebuilt its refinery.
According to Kennecott, state tax law exempts a manufacturer's purchases of machinery and equipment if the purchases are used in new or expanding operations.
The Tax Commission, however, concluded that Kennecott's purchases were "normal operating replacements" that did not qualify for the manufacturing exemption.
It's that point that's at issue in the 3rd District Court lawsuit, with the outcome hinging on whether the smelter and refinery are new operations.
Kennecott insists they are, describing them as "substantially different in nature, character or purpose from the old smelter and refinery operations because they use totally different processes in smelting and refining."
For example, it said while the old smelter produced high-quality copper anodes with a process that produced a high level of emission, the new smelter produces low quality copper anodes while significantly eliminating emissions.
"So different are the processes that the new process qualified for a patent under federal law, an event only granted to processes that are, by definition, 'new' or not 'obvious' modifications of prior processes," the lawsuit said.
Kennecott also pointed to the enclosed smelter converter processes that replaced the old open-air converter processes, which allows it to produce a new product: granulated matte, an intermediary product between concentrate and finished cathodes.
And the new refinery uses patented starter sheets in the electrolytic process that could not have been used in the prior refining process, the lawsuit added.
While the old smelter had a capacity for processing 550,000 tons of concentrate per year, the new smelter can handle 1.1 million tons. Cathode copper production has increased from about 150,000 tons to more than 300,000 tons, "a 100-percent expansion."
Kennecott said in its lawsuit that the Tax Commission ignored "overwhelming evidence" that showed the new smelter and refinery are not similar to the old ones and, therefore, qualify for the manufacturing exemption.