BEFORE THE STATE TAX
COMMISSION OF UTAH
_____________________________________
XXXXX
:
Petitioner, )
:
v. ) INFORMAL DECISION
:
)
AUDITING
DIVISION OF THE : Appeal No. 86 0368
STATE TAX
COMMISSION OF UTAH, )
:
Respondent. )
_____________________________________
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).
FINDINGS
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.
ABSENT
R. H. Hansen Roger
O. Tew
Chairman Joe
B. Pacheco
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commission