Corporate Franchise Tax
BEFORE THE UTAH STATE TAX COMMISSION
) Appeal No. 00-0165
v. ) Account No. #####
AUDITING DIVISION OF ) Tax Type: Corporate Franchise Tax
THE UTAH STATE TAX )
COMMISSION, ) Presiding: Davis
G. Blaine Davis, Administrative Law Judge
For Petitioner: PETITIONER REP, Director of Taxation
For Respondent: Mr. Mark Wainwright, Assistant Attorney General
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, by way of Cross-Motions for Summary Judgment filed by each of the parties.
In the operation of its business, Petitioner uses gasoline and special fuels, some of which are used "off-highway".
Petitioner paid the tax at the time it purchased the gasoline and special fuel. Based upon federal law, Petitioner was allowed to deduct the amount of gasoline and special fuel taxes used in "off-highway" use from the taxes due on its federal income tax return. Now Petitioner is seeking to deduct the off-highway gasoline and special fuels taxes from its unadjusted income, even though it has received the full amount of the taxes back by deducting them from the federal income tax.
Section 4081(a)(2)(A)(I) imposes a tax of 18.34 per gallon on gasoline other than aviation gasoline. Section 6421(a) of the Internal Revenue Code states that "except as provided in subsection (j), if gasoline is used in an off-highway business use, the Secretary shall pay . . . an amount equal to the amount determined by multiplying the number of gallons so used by the rate at which tax was imposed on such gasoline under section 4081."
Section 6421(j), which is entitled "Income Tax Credit In Lieu of Payment", allows direct payment of the tax refunds under subsection (a) only to certain governmental entities and tax exempt organizations. All other taxpayers receive the refund of the motor fuel and special fuel taxes by way of a credit against the tax as set forth by section 34.
Section 34 states that, "there shall be allowed as a credit against the tax imposed by this subtitle an amount equal to the sum of the amounts payable to the taxpayer . . . . under Section 6421 with respect to gasoline used . . . otherwise than as fuel in a highway vehicle . . . ."
Utah Code Ann. '59-7-106 states that:
In computing adjusted income, the following amounts shall be subtracted from unadjusted income:
. . . .
(6) any decrease in an expense deduction for federal income tax purposes due to claiming any other federal credit;"
Unadjusted income is defined in Section 59-7-101(27) as:
"Unadjusted income" means federal taxable income as determined on a separate return basis before intercompany eliminations as determined by the Internal Revenue Code, before the net operating loss deduction and special deductions for dividends received."
There are certain circumstances in which a taxpayer may receive a federal tax benefit for a business expenditure in one of two ways: either as a deduction or a credit. If the expenditure is deducted for federal tax purposes, the expenditure is effectively deducted for Utah State tax purposes also because state taxable income is based on federal taxable income. If, however, the taxpayer receives the benefit of the expenditure in the form of a federal credit, without a reduction of federal taxable income, the taxpayer would receive no corresponding Utah tax benefit. In both cases, however, the taxpayer has borne the economic burden of the expenditure. Utah Code Ann. '59-7-106 allows a Utah taxpayer who has claimed the expenditure as a credit for federal tax purposes to claim the same expenditure as a deduction for state tax purposes.
For example, assume a taxpayer pays $100 in foreign income taxes. Under Section 901 of the Internal Revenue Code, that taxpayer may elect to take a foreign tax expense deduction of $100, which reduces federal taxable income. The taxpayer may also elect to claim the amount as a credit, which reduces his or her federal tax obligation by $100, but does not reduce federal taxable income. In the absence of Section 59-7-106(6), a taxpayer who elected the foreign tax credit would pay more Utah tax than the taxpayer who elected the deduction, even though both taxpayers had paid $100 of foreign tax. Section 59-7-106(6) addresses this inequity.
That is not the case for the gasoline tax. Section 6421(a) provides that "the secretary shall pay (without interest) to the ultimate purchaser of such gasoline an amount equal to the amount determined by multiplying the number of gallons so used by the rate at which the tax was imposed on such gasoline under Section 4081." Accordingly, the "credit" that is at issue in this proceeding is simply a method of refunding gasoline and special fuel taxes that were overpaid. Therefore, the refund which is given to Petitioner by way of a deduction against its income tax is an actual reduction in the expense itself, not merely an alternative tax treatment of the expenditure. It is not a "credit" as that term is normally used in the Internal Revenue Code. It is simply a method of payment of a refund.
Assume a taxpayer pays $1,000 to the U.S. Treasury for gasoline taxes. Part of that amount ($900) was tax on gasoline for highway use. Federal gasoline taxes are deductible for both federal and state income tax purposes and the taxpayer will receive the full benefit of this $900 expense for both federal and state tax purposes. Part of the amount ($100) was for tax on gasoline that was not used for highway use. Section 6421 of the Internal Revenue Code essentially allows the taxpayer to treat the second amount ($100) as a payment of federal income taxes. Federal income taxes, however, are not deductible for federal or state purposes. Accordingly, taxpayer is entitled to no state deduction for this amount. If Section 59-7-106(6) were construed to allow a state deduction for the $100, the taxpayer would actually receive a state income tax deduction for the payment of federal income tax liability, a benefit to which to no other Utah taxpayer is entitled.
In this case, Petitioner paid the tax at the time it purchased the gasoline and special fuel. It has also received a refund of some of that tax by way of a credit against the federal income tax. While that refund was received by deducting it from the income tax, and was referred to as a credit, it is just a refund of the taxes which it has paid. Petitioner is receiving a full state deduction for the net tax it paid. Accordingly, we find that the "decrease in [Petitioner's] expense deduction for federal income tax purposes [was not] due to claiming any other federal credit" within the meaning of Utah Code Ann. 59-7-106(6). The decrease in the deduction was attributable to the fact that the refund effectively reduced the amount of the expenditure itself.
DECISION AND ORDER
Based upon the foregoing, it is hereby determined that Petitioner is not entitled to further reduce its unadjusted income by the amount of federal gasoline and special fuels refunds received by way of a credit against the income tax. The Petition for Redetermination is therefore denied. It is so ordered.
This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:
Utah State Tax Commission
210 North 1950 West
Salt Lake City, Utah 84134
Failure to request a Formal Hearing will preclude any further appeal rights in this matter.
DATED this 23rd day of May, 2001.
G. Blaine Davis
Administrative Law Judge
BY ORDER OF THE UTAH STATE TAX COMMISSION.
The Commission has reviewed this case and the undersigned concur in this decision.
DATED this 23rd day of May, 2001.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson