BEFORE THE STATE TAX COMMISSION OF UTAH
v. ) INFORMAL DECISION
AUDITING DIVISION OF THE : Appeal No. 86 0368
STATE TAX COMMISSION OF UTAH, )
STATEMENT OF CASE
An Informal Hearing was held on XXXXX. James E. Harward, Hearing Officer, heard the matter for the Utah State Tax Commission. XXXXX of XXXXX, represented Petitioner. XXXXX, Assistant Attorney General, represented Respondent. XXXXX, Secretary of XXXXX, appeared on behalf of Petitioner, and XXXXX, XXXXX, and XXXXX appeared on behalf of Respondent.
Petitioner challenges Respondent's deficiency assessment applied against Petitioner's delivery of structural steel to Utah. Respondent asserts that pursuant to Utah Code Ann. § 59-16-3 (Supp. 1985), Petitioner is liable for use tax on the storage of the structural steel in Utah.
In XXXXX, Petitioner entered into a contract with XXXXX, the prime contractor for the construction of a 35 story office building in Salt Lake City, Utah. Under the contract, Petitioner was to provide structural steel for construction of the building and to perform all labor and supervision in erecting the steel. Specifically, the contract between the parties provided that Petitioner was to "furnish all labor and supervision, furnish, supply and install all equipment, material, supplies, tools, scaffolding, hoisting, transportation, unloading and handling, [and] do all things required to complete the work described above on the project . . . ." Petitioner's Memorandum of Points and Authorities, Exhibit C. Prior to the contract with XXXXX, Petitioner entered into an agreement with XXXXX which provided that Petitioner would purchase about 5,272 short tons of steel for a total contract amount of $$$$$. The steel from XXXXX to Petitioner arrived at XXXXX, California in four shipments over a period of about three months in the late summer and fall of XXXXX. The four shipments of steel subsequently arrived in Utah on XXXXX, XXXXX, XXXXX, and XXXXX. Petitioner paid for the steel by an irrevocable letter of credit in favor of XXXXX. Petitioner stated in its Memorandum of Points and Authorities, "Once the steel arrived in XXXXX, XXXXX could not return it; payment to XXXXX was made immediately pursuant to the irrevocable letter of credit."
After XXXXX failed to pay Petitioner for the first shipment of steel, Petitioner and XXXXX met with representatives of XXXXX (the owner of the project) regarding payment for the first and second shipments of steel. XXXXX acknowledged liability for payment of the amounts due for the first and second shipments. On XXXXX, Petitioner had not received payment for the first and second shipments of steel and consequently filed a lawsuit in the United States District Court for the District of Utah claiming breach of contract. Subsequently Petitioner continued negotiations with XXXXX for payment of the two shipments of steel and shipped the third shipment of steel to Utah. The fourth shipment of steel arrived in XXXXX, California, and XXXXX telexed instructions to Petitioner to deliver the fourth shipment of steel to Utah. In response to XXXXX's telex, Petitioner sent a telegram to XXXXX stating that Petitioner would not accept delivery of the final shipment of steel and would not be responsible for storing and shipping charges. The telegram also stated that if XXXXX abandoned the steel or refused to accept delivery by XXXXX, Petitioner would take bids for selling the steel for scrap.
In XXXXX, Petitioner refused to deliver the fourth shipment of steel to Utah and negotiated for the sale of the steel for scrap in XXXXX, California. By early XXXXX, Petitioner understood that the future of the XXXXX project was in jeopardy and that Petitioner would be forced to find another purchaser for the steel. Because the most profitable way to sell all the steel was as a package for a complete building, Petitioner decided to resell all the steel as a package.
The steel is currently being stored in XXXXX, Utah. Petitioner has advertised this steel for sale as a frame for building and continues to negotiate with potential purchasers. As of XXXXX, the best offer for the purchase of the steel was $$$$$. Petitioner intended to sell the steel for scrap if a sale could not be consummated by XXXXX, and estimated that the scrap sales price would be about $$$$$.
The parties concede that the sales price upon which the use tax is based cannot exceed $$$$$ and that interest on any deficiency should be calculated pursuant to Utah Code Ann. § 59-16-7 and 59-16-9 (Supp. 1986).
Utah Code Ann. § 59-16-3 (Supp. 1985) imposes a use tax on "[t]he storage, use or other consumption in this state of tangible personal property purchased for storage, use or other consumption in this state." The court in Southern Pacific Co. v. Utah State Tax Comm'n, 150 P.2d 110 (Utah 1944) stated that "[t]he expression 'purchased for storage, use or consumption in this state' evidently was used to make the levy mesh with the provision which exempted property stored in this state but purchased for resale or use in another state. The section clearly means purchased for storage, use or other consumption and stored, used or otherwise consumed in this state . . . ." Id. at 112. Petitioner urges that Southern Pacific "indicates" that two elements, an act and an intent, are required in order to levy the use tax. The act is the storage, use, or consumption in this state of tangible personal property. The intent element, Petitioner argues, requires the taxpayer to have sent tangible personal property to the state with the intent to store, use, or otherwise consume the property within this state. However, as Respondent argues, the court in Southern Pacific did not specifically address the taxpayer's intent. The petitioner in Southern Pacific argued that the use tax assessment in that case was not within the intent of the act. The court responded: "We think the contention that the imposition of the tax on the transaction in question is not within the intendment of [the act] must be rejected, and that, if otherwise valid, the levy is authorized thereby." 150 P.2d at 112 (emphasis added). If the court in Southern Pacific addressed taxpayer intent at all, it addressed that intent with respect to the phrase "purchased for," and not with respect to the underlying act of the taxpayer in shipping tangible personal property to the state. The steel in the present case was purchased for storage, use or consumption in Utah. Its use in the construction of a building is consumption within the statute. Moreover, Petitioner's intended use of the steel along with Petitioner's duties under the XXXXX contract made Petitioner an end-user and thus subject to liability for the use tax.
Petitioner argues that the use tax is not intended to tax transactions that do not take place or that fail. As support for its argument, Petitioner points out that under Utah Code Ann. § 59-16-7(4) (Supp. 1985) credit is allowed for taxes paid on that part of accounts determined to be worthless and actually charged off for income tax purposes. Petitioner also states that if the steel had been resold, it would have been exempt under Section 59-16-4(b) (Supp. 1985). Petitioner is mistaken in asserting, however, that the taxable transaction is the transaction between Petitioner and XXXXX in Utah. The taxable transaction, to which the use tax applies, is the transaction between Petitioner and XXXXX. It is irrelevant that the contract between Petitioner and XXXXX failed because it is not the transaction Respondent seeks to tax.
Petitioner also contends that, assuming that a use tax is applicable, Respondent incorrectly assessed the use tax on the price of the steel under the contract between XXXXX and Petitioner. Petitioner urges that the applicable sales price should be the value of the transaction between Petitioner and XXXXX; since that transaction failed, the proper sales price, if a use tax is due under the Utah statute, is the resale price of the steel. However, the transaction sought to be taxed is the transaction between XXXXX and Petitioner, and not the transaction between Petitioner and XXXXX. Therefore, the proper basis of the use tax is the contract price between XXXXX and Petitioner.
Utah Code Ann. § 59-16-4(b) (Supp. 1985) exempts property stored in the State of Utah for resale. Section 4 of chapter 16 contains all the exemptions to Use Tax Act. Exemptions to taxation are to be strictly construed. Subsection 4(b) does not define storage for resale to mean storage for resale in the regular course of the seller's business. However, Section 2 of chapter 16, containing definitions of terms used in the Use Tax Act, defines storage to mean "any keeping or retention in this state for any purpose except sale in the regular course of business of tangible personal property purchased from a retailer." Utah Code Ann. § 59-16-2(a) (Supp. 1985) (emphasis added). In order to make sections 59-16-2(a) and 59-16-4(b) mesh with each other, "stored... for resale" in the latter provision must mean resale in the regular course. This construction of the two provisions is consistent with not taxing wholesale sales. Because a sales (or use) tax will be collected at the retail level, the transaction between wholesaler and retailer is not taxable. Nevertheless, wholesalers may be required to collect a sales tax (or their vendees to pay a use tax) if the wholesaler is selling the property to one who will not resell the property in the regular course of business. In other words, if the wholesaler sells to an end-user, the transaction is taxable.
XXXXX obviously intended to be the end user of the steel when it was purchased and Petitioner does not dispute this. Petitioner claims, however, that because it is now storing the property for resale, it is exempt from the tax. The Commission finds, however, that absent a showing that XXXXX is the business of reselling steel, its hopes to sell the steel for scrap are not enough to bring it within the exemption. The steel is merely being stored within the meaning of the Use Tax Act. If Petitioner does procure a buyer for the steel, that transaction will obviously be entitled to credit for the use tax paid.
DECISION AND ORDER
Based on the foregoing, it is the Decision and Order of the Utah State Tax Commission to sustain Respondent's deficiency assessment. The use tax is therefore ordered to be assessed on the contract price of the transaction between Petitioner and XXXXX. Interest is ordered to be calculated pursuant to Utah Code Ann. § 59-16-7 and 59-16-9 (Supp. 1985) and to be continued until the amounts due under the deficiency assessment are paid.
DATED this 50 day of October, 1987.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis