BEFORE THE STATE TAX COMMISSION OF UTAH
v. ) INFORMAL DECISION
AUDITING DIVISION OF THE : Appeal No. 86 0140
STATE TAX COMMISSION OF UTAH, )
STATEMENT OF CASE
This matter came before the Utah State Tax Commission on XXXXX. James E. Harward, Hearing Officer, heard the matter for the Tax Commission. XXXXX, Assistant Attorney General, appeared representing the Respondent. XXXXX appeared representing the Petitioner.
A XXXXX airplane was purchased in XXXXX from XXXXX of XXXXX, Utah, by the Petitioner. The sole purpose of the purchase of the airplane was the lease of the airplane from the Petitioner to XXXXX. After the purchase of the airplane to XXXXX of XXXXX, Utah, delivery of the airplane was taken in Kansas with a trip to Colorado and then returning to Utah.
The Petitioner argues that the transaction is; (1) an isolated sale which is exempt from taxation under Utah Code Ann. § 59-15-2, and that it is exempt from taxation due to the interstate commerce clause; (3) that the airplane was used almost exclusively in California, and therefore, only a portion should be apportioned to Utah; and (4) the penalty should not be assessed because the taxpayer partnership consists of doctors who relied upon advice of attorneys and accountants and could not be construed to be negligent.
DECISION AND ORDER
The Tax Commission, after reviewing the case law which was submitted by the Petitioner in a previous hearing, and which has been made a part of this record finds that (1) the exemption of Utah Code Ann. § 59-15-2 does not apply to these facts. The sole purpose of the creation of the partnership was for the purchase of the airplane for lease purposes. Simply because it was done only on a one time basis does not make it an isolated sale for tax purposes. The case cited by the Petitioner, L. A. Young Sons Construction Company v. The State Tax Commission (457 P.2d 973, Utah 1969) is distinguishable on its facts. The seller was an out of state corporation who is engaged in the business of constructing highways, roads, bridges, and like projects, and who is not engaged in the business of selling construction equipment or in retail sales. Therefore, the sale of construction equipment to L.A. Young Sons Construction Company was deemed to be an isolated or occasional sale. In the case at hand, the Petitioner purchased the airplane from a local resident business which is in the business of selling the airplanes. Therefore, the ruling in L.A. Young Sons Construction Company is not controlling. The Tax Commission finds that the subject transaction is not an isolated sale under Utah Code Ann. § 59-15-2.
2. Interstate Commerce Clause. The Petitioner cited numerous cases whereby the courts have concluded that an airplane has been placed in interstate commerce prior to becoming a taxable event in a state. These cases turn upon a sale of an airplane by an out of state company to a company doing business in the state. When the airplane is placed in interstate commerce after purchase of the airplane from the out of state company, then the courts have concluded that there is no taxable moment upon which the state can impose a tax. See King v. L. & L. Marine Service Inc., (647 SW2d 524, Mo. 1983) W. R. Grayson Company v. Comptroller, (258 A.2d 740, Md. 1969) and Union Pacific Railroad v. Utah State Tax Commission (110 Utah 99, 169 P.2d 804, 1946).
The Tax Commission has reviewed the cases cited by the Petitioner and also the Great American Airways v. Nevada State Tax Commission, 705 P.2d 654 (Nev. 1985) case. The Nevada Supreme Court looked at a four prong test to determine whether or not a transaction was taxable or exempt from taxation because of the interstate commerce clause. That four prong test is 1) there must be a substantial nexus with the State, 2) the tax be fairly apportioned, 3) the tax does not discriminate against interstate commerce, and 4) it be fairly related to the services of the State. (Great American Airways, 709 P.2d at 656.)
In applying the four prong test to the facts before the Commission, the Commission finds that there is substantial nexus with the State. That nexus is that both the seller and the purchaser are residents of the State of Utah. The only transaction which occurred outside the State of Utah was the delivery of the airplane in Kansas. The Commission finds that there has been no evidence of apportionment or payment of tax in any other state. Therefore, the apportionment aspect of the test has been met. This transaction in being taxed, does not tax this event anymore or any less, and therefore, finds that there has been no discrimination against interstate commerce. This event is not taxed any more than had it been purchased in the state which can be argued that it is because both the seller and the purchaser are residents of the State of Utah. Since both seller and buyer are residents of the State of Utah, the fourth prong, that the matter be fairly related to the services of the state is properly met in that both are residents of the State of Utah. Based upon this analysis and a review of the XXXXX case and in relation to the other case as cited by the Petitioner and Respondent, the Commission concludes that the transaction is taxable and not exempt because of the interstate commerce clause. In making this conclusion, the Tax Commission relies upon the residency of both the seller and the buyer in the terms of the lease which indicates that the aircraft is to be permanently based in XXXXX, Utah, and that no taxes have been paid in other states or apportioned in other states.
The Commission does not accept the argument that since the airplane was used almost exclusively in California that only a percentage of the taxes be paid in relation to the proportion of the use in Utah. The court in the XXXXX disposed of that argument stating that it would "not only be administratively complicated for both the state and the taxpayer, but also misconceives the function of the use tax, namely, to prevent evasion of the state sales tax." Great American Airways, Id. at 657.
The penalty assessed against the Petitioner was properly assessed. The argument that the Petitioners relied upon the advice of attorneys and accountants does not persuade the Commission to waive the penalty associated with this audit, and therefore, affirms the same. Therefore, it is the order of the Utah State Tax Commission that the taxes, penalty, and interest be affirmed.
DATED this 1 day of September, 1987.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis