BEFORE THE STATE TAX
COMMISSION OF UTAH
_____________________________________
XXXXX )
XXXXX :
Petitioner, )
v. : INFORMAL DECISION
)
AUDIT DIVISION
OF THE : Appeal No. 85-0213
STATE TAX
COMMISSION OF UTAH )
Respondent. :
_____________________________________
STATEMENT OF CASE
An
Informal Hearing was held on this matter XXXXX. James E. Harward and XXXXX, Hearing Officers, heard the matter
for and in behalf of the Tax Commission.
XXXXX appeared representing XXXXX and XXXXX. Also present were XXXXX and XXXXX. The Tax Commission Audit Staff was represented by XXXXX, XXXXX
and XXXXX, Assistant Attorney General.
The
Petitioner, XXXXX operated a sole proprietorship until XXXXX. At that time, he incorporated into
XXXXX. XXXXX. is a successor in
interest of XXXXX DBA XXXXX, and therefore, both Petitioners are treated as one
taxpayer for the purposes of this hearing.
The Petitioner is in the business of providing design services to
clients. Initially, a client will come
to the Petitioner and discuss concepts or ideas for design which will fulfill
the clients needs. The Petitioner then
creates a visualization of the ideas or concepts involved. After showing the visualization to the
client and discussing it with the client, the Petitioner makes a camera ready
artboard of the concept.
The
artboard is the property of the Petitioner, and at all times remains the
property of the Petitioner. The client
is never sold or rented the artboard.
The client is charged for the taxpayer services in consulting and
producing the artboard and for the materials used by the Petitioner in
producing the artboard. The client is,
however, granted a first right of reproduction to have the artboard. The client does not have an exclusive
reproduction right, merely a first reproduction right. At no time is the client given the right to
alter or have altered or touched up in any way the artboard. The Petitioner delivers the artboard to a
third party who reproduces the artwork contained in the artboard for mass
production purposes. Such third party
would include printers, makers of color separations, etc. The artboard is then return to the
Petitioner who maintains possession of the artboard.
All
materials used by the Petitioner in the creation of the artboard are purchased
by the Petitioner, and sales tax is paid thereon. If the Petitioner bills the client for printing materials (which
is unusual), that billing includes sales tax which was paid to the
printer. Normally, however, the client
is billed separately by the printer, and pays the printer's bill separately
which printer's bill includes tax.
DISCUSSION
The
starting point for discussion on the facts and law regarding this case began
with Utah Code Ann. §59-15-4(a) which requires that there is levied and there
shall be collected and paid a tax upon every retail sale of tangible personal
property within the state of Utah. The
issue before the Commission is whether or not there has been a transfer or sale
of tangible personal property under the facts as outlined above.
Tax
Commission Regulation S-81 provides that paintings, drawings, etchings,
statues, figurines, etc., which are sold by artists are subject to sales
tax. The sales tax is to be computed on
the total sales price of the art object without consideration of the materials
used by the artist. Regulation S-81
does not deal with the sale or transfer of an intangible
right of first reproduction. Therefore,
Regulation S-81 does not apply to the facts at hand.
On
the other hand, Regulation S-65, although comparable, is not applicable to the
situation at hand. Regulation S-65(d)
provides for non-taxation of artwork produced within the office of an
advertiser or an advertising agency.
The Petitioner is neither an advertiser or an advertising agency and
therefore, Regulation S-65 does not apply.
Where
a regulation of the Tax Commission is not directly on point, the Commission is
obliged to look at a case law to determine whether or not the subject
transaction is a taxable transaction as contemplated by the Utah Code
Annotated. The first question the Tax
Commission is confronted with is whether or not there has been a transfer (or
sale) of tangible personal property which would subject it to the application
of the statute. No case law exists in
the state of Utah as it relates to these particular facts. It appears that there is no transfer of
tangible personal property. The only
transfer that is made is a transfer of the right to first reproduction of the
product created by the Petitioner.
Although the Utah Supreme Court has not dealt directly with that issue,
the Supreme Court of the State of New York has done so in, XXXXX v. XXXXX and
XXXXX Inc. 12 NE 2d 435. The court held
"the right to reproduce is not .... a use that should make this
transaction taxable as a sale of tangible personal property." The court was relying upon facts which are
substantially the same where the Petitioner paid the Respondent money for the
right to reproduce the Respondent's paintings.
No right to exhibit publicly the paintings were given, nor were the
paintings sold. The Tax Commission is
persuaded under the fact situation at hand, there has not been a transfer of
tangible personal property which would subject it to the taxing provisions of
the Utah Code.
The
nature of the transaction is one of the providing of services by the Petitioner
to his clients. The Utah Code provides
the taxation of "services" for repairs, renovations, cleaning or
washing of tangible personal property or for installation of tangible personal
property rented in connection with other tangible personal property. (Utah Code Ann. §59-15-4(e).) The Tax Commission has reviewed XXXXX v.
State Tax Commission of Utah, July XXXXX, and the holding that where
"Petitioners are rendering a professional service in which the training,
skill and artistry still predominate, the cost of material used has very little
to do with the charge made to the patients". Therefore, the mere providing of services with incidental costs
thereto, does not make the transaction taxable and subject to Utah Code Ann.
§59-15-4. The providing of service by
the Petitioner with incidental costs of artboard production is similar to the
XXXXX case. The Commission finds the
holding in XXXXX persuasive.
Therefore,
it is the Conclusion and Decision of the Utah State Tax Commission that the
Petition for Redetermination filed by the Petitioner be granted and the Notice
of Deficiency be stricken.
DATED
this 14 day of April, of 1986.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
Mark K.
Buchi R.
H. Hansen
Chairman Commissioner
ABSENT
Roger O. Tew Joe
B. Pacheco
Commissioner Commissioner