86-0232 & 86-0190 - Withholding





Petitioner, )





AUDITING DIVISION OF THE : Appeal Nos. 86 0190


: Audit Period XXXXX

Respondent. ) through XXXXX



An Informal Hearing was held on XXXXX. XXXXX, XXXXX staff attorney, represented Petitioner. XXXXX, Attorney, represented Respondent. XXXXX also appeared for Respondent. Commissioner G. Blaine Davis and Hearing Officer XXXXX heard the matter for the Utah State Tax Commission. At the outset Respondent request a dismissal of Appeal No. 86-0190 on the grounds that there were no remaining issues to be resolved. XXXXX agreed and Appeal No. 86-0190 was dismissed.

Respondent audited Petitioner's withholding tax records for July 1, XXXXX, through September 30, XXXXX, and issued a report on March 30, XXXXX, in which Respondent determined that Petitioner had failed to withhold the mineral production withholding tax during the third calendar quarter of XXXXX. Petitioner was notified of Respondent's determination by a Statutory Notice of Deficiency dated April 4, XXXXX.

Petitioner was an operator in the XXXXX and relied on instructions from the Tax Commission which used the term "Royalty" as a base on which to withhold the production tax. The third quarter of XXXXX was the first

quarter of the mineral production withholding tax. The Commission's guidelines and interpretation of the new tax were used by Petitioner to comply with the act. Subsequently, the Commission issued a letter changing some of the guidelines previously issued. In particular, the guidelines indicated that payments to working interest holders (not normally considered royalty owners) were included in the statute and therefore, operators should withhold the appropriate amount of payments to the working interest owners.

The letter that was issued by the Commission containing the new guidelines was dated September 21, XXXXX, and it indicated that the payments to the working interest holders were subject to the withholding tax effective October 1, XXXXX. Therefore, Petitioner argued that it should not be liable for

the tax owed by the working interest holders for the third quarter of XXXXX. Petitioner argued that the retroactive modification of the Commission's September 21, XXXXX, guidelines violate due process, and that it is apparent from the timing of the audit that Respondent was attempting to circumvent the three year statute of limitations by auditing Petitioner for a three year period rather than for the one quarter in question.

Respondent argued that the new guidelines were issued on September 21, XXXXX, and the quarterly returns for that period were not due until October 30th or 31st, XXXXX. Therefore, Petitioner had notice prior to filing the returns that payments to working interest holders should have had tax withheld. Respondent pointed out that the Mineral Production Withholding Tax Act clearly indicates that working interest owners are included and that the Tax Commission was not authorized to issue guidelines controverting a statutory mandate. Therefore, Petitioner was not justified in relying on the Commission's guidelines. Respondent did however recommend that penalties not be imposed. Respondent also pointed out that estoppel normally does not apply against governmental agencies.


It is the Decision and Order of the Utah State Tax Commission to grant Petitioner's Petition for Redetermination for Appeal No. 86-0232 and to dismiss Appeal No. 86-0190. Because the letter which was sent by the Respondent giving the guidelines for implementing the withholding tax stated it was effective October 1, XXXXX, and because that day also started a new quarter, it was reasonable for the Petitioner to interpret that letter to impose the withholding requirements only on payments made after October 1, XXXXX. The letter was not clear as to whether it was to apply to payments made or returns filed after October 1, XXXXX, and it would, therefore, be unreasonable to require withholding on payments which may have been distributed prior to receipt of notice of a withholding requirement.

Dated this 11 day of December, 1987.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco G. Blaine Davis

Commissioner Commissioner