BEFORE THE UTAH STATE TAX COMMISSION
) Appeal No. 00-0525
v. ) Account No. #####
AUDITING DIVISION OF ) Tax Type: Sales Tax
THE UTAH STATE TAX )
COMMISSION, ) Judge: Davis
G. Blaine Davis, Administrative Law Judge
For Petitioner: PETITIONER REP, of the law firm COMPANY A
For Respondent: Mr. Gale Francis, Assistant Attorney General
Ms. Anna Anderson, from the Auditing Division
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission on April 30, 2001 for a Status Conference, and was therein converted to an Initial Hearing pursuant to the provisions of Utah Code Ann. §59-1-502.5. The parties agreed to submit post-hearings briefs and to have the matter decided without oral arguments based on the information submitted in the briefs. Respondent submitted its brief on June 19, 2001. Petitioner submitted its brief on August 14, 2001.
1. Petitioner, PETITIONER (“PETITIONER”) is appealing the Statutory Notice of Deficiency issued by the Auditing Division on March 1, 2000. The audit period is July 1, 1994 through June 30, 1997. Petitioner agrees it owes $$$$$ (plus interest), but it argues that $$$$$ (plus interest) was wrongfully assessed as use tax on point of sale advertising materials (“POS”).
2. Petitioner is engaged in the business of producing and selling malt beverage products. Its products are sold to distributors who in turn sell to retail stores, taverns and restaurants.
3. Until January 1, 1997, Petitioner promoted its product, by providing POS advertising materials to distributors free of charge. The distributors would order the products from PETITIONER, and PETITIONER would then purchase the items requested from suppliers around the country. PETITIONER paid for the products and arranged for shipment directly from the suppliers to the distributors.
4. Petitioner contends that once it purchases the POS products, all control and power over the property transfers to the distributor. Under Utah Code Ann. 59-12-103 (l) tax is imposed upon a purchaser when:
1. amounts paid or charged for tangible personal property if within this state the tangible personal property is:
ii. used; or
It is undisputed that PETITIONER does not store or consume the POS products in Utah. The question is whether PETITIONER’s purchases constitute “use” under Utah Law. In Utah Code Ann. 59-12-102 (35) (a):
“Use” means the exercise of any right or power over tangible personal property under Subsection 59-12-103 (l), incident to the ownership or the leasing of that property, item or service.
PETITIONER contends that all rights and powers are given to the distributors once the products are ordered, so there is no basis to charge use tax on the POS products.
5. Respondent, Auditing Division of the Utah State Tax Commission (“Auditing”), contends that the POS materials are under the control of PETITIONER until they are physically delivered to the distributor. PETITIONER has dominion over the POS until the actual ownership interest passes. In Miller Brewing Company v. Korshak, 219 N.E. 2d 494 (Ill. 1966), the court reviewed a nearly identical set of facts. The court found that:
The plaintiff caused the items to be brought into being, paid for their
manufacture and exercised complete power of disposition over them.
. . . the dominion exercised over them by the plaintiff is
sufficient to establish the plaintiff as their owner for the realistic
purposes of a taxing statute.
Id. At 496. Accordingly, the Auditing Division contends that PETITIONER has exercised control over the items by shipping the items to Utah. PETITIONER is supplying the goods for the purpose of promoting and advertising its own products.
6. Utah Admin. Code Rule R865-19S-68 (A) (Rule 68), provides, “(D) donors of articles of tangible personal property, which are given away as premiums or otherwise, are regarded as users or consumers thereof and the sale to them is a taxable sale.” PETITIONER contends that Rule 68 addresses not simply whether it is the user or consumer in Utah, but rather whether the use occurred in Utah.
7. The Auditing Division on the other hand, views Rule 68 as stating that donation of the property to the distributors does not take place until the actual physical delivery to the distributors. Therefore, the title to the property, Respondent claims, does not pass from PETITIONER until it is actually in the state of Utah. Under this assumption, the POS property is a taxable transaction in the state of Utah.
8. Petitioner contends that the POS products are sent to Utah and the distributors have all control over the placement of the items. Petitioner maintains that the distributors are in absolute control of the POS products and they are under no obligation to account to PETITIONER for the distribution of the items. Petitioner cites several sources regarding an agency relationship and finds that the distributor has “no ‘power to bring about or alter business relationships between the [alleged] principal [PETITIONER] and third persons [the retailers]’, and therefore the distributor cannot be viewed as PETITIONER’s agent.”
9. Respondent counters this argument that “PETITIONER’s distributors are constructive agents of PETITIONER” because the distributors are placing POS materials promoting PETITIONER’s products and encouraging higher sales of the products in establishments where the products are sold. The distributors represent the best interests of the Petitioner in promoting its products. Therefore, the relationship with the distributor is a beneficial one that results in the increased consumption by potential customers. PETITIONER’s assertion that there is no control over the distributor of a PETITIONER licensed product is not credible. PETITIONER has a vested interest in ensuring its product is used and placed in a proper manner to maximize profit. If the distributors do not act in a manner that is in the best interest of PETITIONER, another agent that will promote the product will replace them.
10. Under Utah Admin. Code Rule R865-21U-16 (A) (Rule 16), tangible personal property purchased in interstate or foreign commerce is not exempt from Utah tax if the property is stored, used, or otherwise consumed within this state. Respondent argues that the POS property is purchased in interstate commerce, but it is used in the state of state of Utah. Accordingly, the POS items would be subject to Utah tax.
For the Petitioner to prevail, it must prove that the POS items were not stored, used or consumed in the state of Utah. Under Utah Code Ann. 59-12-103 (l) tax is imposed upon a purchaser when: 1. amounts paid or charged for tangible personal property if within this state the tangible personal property is: i. stored; ii. used; or iii. consumed. The definition of use is set forth in Utah Code Ann. 59-12-102 (35) (a): “Use” means the exercise of any right or power over tangible personal property under Subsection 59-12-103 (l), incident to the ownership or the leasing of that property, item or service.
DECISION AND ORDER
Based upon the foregoing, the Tax Commission determines that the Petitioner used the POS advertising materials, which it purchased and shipped into the state of Utah when it donated them to distributors in this state. Petitioner is legally required to pay use tax on these materials. The audit of Respondent is sustained, and the Petition for Redetermination is 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 15th day of January 2002.
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 15th day of January 2002.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson
 For purposes of references in this brief, all Utah Code Citations are quoted from the 2001 edition of the Code.