SALES

86‑0650

Signed 3/8/92

 

 

 

                   BEFORE THE UTAH STATE TAX COMMISSION

                   _____________________________________

 

XXXXX,                            )

                                  :

          Petitioner,             )    FINDINGS OF FACT,

                                  :    CONCLUSIONS OF LAW,

v.                                )    AND FINAL DECISION

                                  :

AUDITING DIVISION OF THE          )    Appeal No. 86‑0650

UTAH STATE TAX COMMISSION,        :

                                  )

          Respondent.             :

                   _____________________________________

 

                             STATEMENT OF CASE

          This matter came before the Utah State Tax Commission for a formal hearing on June 13, 1991.  Roger O. Tew, Commissioner, served as the Presiding Officer.  In addition, R. H. Hansen, Chairman, Joe B. Pacheco, Commissioner, G. Blaine Davis, Commissioner, and Paul F. Iwasaki, Administrative Law Judge, heard the matter for and on behalf of the Commission.  Present and representing the Petitioner were XXXXX, and XXXXX, Attorneys at Law, of XXXXX, XXXXX, XXXXX of XXXXX, and XXXXX, XXXXX of XXXXX.  Present and representing the Respondent was XXXXX, Assistant Utah Attorney General.

          Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

                             FINDINGS OF FACT

          1.  The tax in question is sales and use tax.

          2.  The period in question is XXXXX to XXXXX.

          3.  Between   XXXXX   and   XXXXX, Petitioner was the general contractor for two projects on the campus of XXXXX in XXXXX, Utah.  Those two projects were the expansion of the XXXXX and the construction of the XXXXX.

          4.  XXXXX (the owner) is a XXXXX owned and operated by XXXXX (XXXXX).

          5.  Prior to entering into contracts, XXXXX solicited potential bidders through its prequalification process, and requested that they submit furnish and install bids for each of the projects.  Each of the submitted bids was required to contain a list of the materials to be used and the name of the supplier whose bid had been included in the final submitted bid.

          6.  XXXXX reserved the right to accept or reject any subcontractor or supplier listed by the general contractor in its bid and accept the next lowest subcontractor or supplier in the bid by paying the additional charges for the next lowest subcontractor or supplier.

          7.  XXXXX also reserved the right to purchase certain materials and furnish them to the general contractor by compliance with Section 75 of the contract conditions, which provided that if XXXXX wanted to purchase a portion of the materials it would be handled as follows:

          a.  The owner and the contractor were required to mutually agree which materials the owner would purchase.

          b.  The cost of such materials, together with the amount the contractor would have paid as sales tax, would be deducted from the contract sum.

          c.  Upon agreement between the owner and the contractor as to which materials the owner was to purchase, the contractor was required to furnish to the owner all necessary information, including source of supply, to enable the owner to properly purchase such materials.

          d.  Contractor was required to hold the owner harmless from any failure of the supplies or materials so purchased if such failure resulted in any loss, claim, defect, discrepancy, delay in delivery or any other problem relating to the materials, except where the failure was directly caused by acts or omissions of the owner.

          e.  All bonds and insurance, required by the contract, had to remain in full force.  There was no reduction in amount of coverage or any deduction for premiums for said bonds and insurance.

          f.  Materials ordered by the owner were not paid for until written approval had been given by the contractor.

          g.  The above conditions did not abrogate the contractor's responsibility to comply fully in the execution of the work as required by the contract.

          8.  Sections 22 and 75 of the contract conditions specifically permitted XXXXX to purchase materials and deduct the cost of such materials, plus the sales tax, by change orders from the contracts.  However, even though the parties conducted their business as though the change orders were made, some of the change orders were never made by the parties.  Thus, the parties were sometimes acting contrary to the contract, but the testimony represented that this was agreeable to both parties.

          9.  The contract provided that the general contractor was not the agent of XXXXX, but XXXXX could appoint the general contractor as the agent for XXXXX for such purposes as were decided by XXXXX and were agreeable to the general contractor.  However, there is no evidence that XXXXX ever appointed the general contractor as its agent for any purpose.

          10.  The contract required XXXXX to appoint an "Owners Representative," to have supervisory responsibilities for the project.  XXXXX, Director of XXXXX's XXXXX was designated as the owners representative.  XXXXX was not on the projects on a day‑to‑day basis, but was represented by the manager of the XXXXX of the XXXXX, XXXXX, and one or more XXXXX with the XXXXX.

          11.  The term "Owners Representative" was interpreted by XXXXX and Petitioner to mean XXXXX, or the manager of the XXXXX of the XXXXX, or any of the construction inspectors when they were on the job site.  Pursuant to the contract, the owners representative had numerous responsibilities, including:

          a.  General supervision and direction of the work.  He was the agent of the owner on the site.

          b.  Enforcing the performance of the contract, but not permitting any changes in the conditions of the contract.

          c.  Giving all instructions, directions, or other information to the contractor or his authorized agent.

          d.  The authority to stop the work whenever such stoppage was necessary to insure the proper execution of the contract.  This included the stoppage of any work that was being improperly performed or using unacceptable materials, and he could demand that any incompetent workman be taken off the job and another person substituted.

          e.  To serve as interpreter of the conditions of the contract subject to the review of his decision or interpretations by the architect.

          f.  To serve as judge of the performance of the contract with power to enforce faithful performance subject to a review of his decision or interpretation by the architect.

          g.  To approve or reject the construction superintendent hired by the general contractor.

          h.  To approve the monthly progress estimate which was used as a basis for monthly progress payments to subcontractors.

          i.  Inspect and accept the finished project.

          j.  To approve or reject any proposed changes in the plans and specifications.

          k.  To withhold payment from the general contractor upon certain conditions.

          12.  The Manager of XXXXX, XXXXX, had the responsibility to coordinate, inspect and supervise all construction projects on the XXXXX on behalf of the Director of XXXXX, XXXXX.  XXXXX supervised a staff of inspectors who supervised on a daily basis all construction projects on the XXXXX.  XXXXX was the inspector of both of the projects at issue in this proceeding.

          13.  The general contractor and subcontractors were responsible to furnish all materials provided in the specifications, other than those which XXXXX opted to purchase through change orders.  The General contractor and subcontractors were required to pay sales taxes on all materials with the exception of those purchased by XXXXX pursuant to change order.

          14.  XXXXX excluded some materials for the projects from the contract. Petitioner was not required by the contract to purchase these materials.  XXXXX purchased these materials directly, without using change orders or deducting the price of the materials and sales tax from the contract amounts.  XXXXX did not pay sales tax on these items.

          15.  As to materials purchased for the projects by XXXXX, which Petitioner was required by the original contract to purchase, the following steps generally were taken by XXXXX, with the assistance of the general contractor:

          a.  XXXXX developed and printed a special purchase order form, called a "Z" purchase order.

          b.  XXXXX delegated the responsibility for preparing Z purchase orders to the general contractor, who in turn sometimes delegated that responsibility to the subcontractor.  The Z purchase order identified the item(s) for purchase, quantity, supplier (from the bid documents) and other data.  Each Z purchase order also showed that XXXXX was the ordering and purchasing party and that the materials should be delivered to the construction project on the XXXXX.  In the case of steel for the XXXXX, the Z purchase orders reflected that invoices should be sent to XXXXX, in care of the subcontractor, XXXXX, and that the steel should be delivered to XXXXX's yard in XXXXX, in the name of the XXXXX, in order to perform fabrication on the steel prior to delivery to the XXXXX.

          c.  After being filled in by the general contractor and/or subcontractor, the Z purchase order was reviewed by XXXXX officials and logged in on a master list.

          d.  XXXXX seldom objected to the manner in which the general contractor completed Z purchase orders or the suppliers listed in bid documents, due to communication between XXXXX and the general contractor, the information provided by XXXXX and the general contractor at the bid stage, and the trust XXXXX and the general contractor have developed over many years.

          e.  After being reviewed by the XXXXX, the Z purchase order was then sent to the XXXXX, which in turn submitted it to the supplier for processing.

          f.  Generally, materials were shipped to the XXXXX construction sites, where they were received and inspected for quantity and quality by the general contractor and/or subcontractors.  In most cases, XXXXX personnel also inspected the materials at the same time.  In some cases, such as with the XXXXX‑purchased steel on the XXXXX, the materials were first delivered to a location other than to the XXXXX and were inspected by XXXXX personnel there.

          g.  Steel for the XXXXX was delivered to the yard of XXXXX, the steel subcontractor, for further fabrication.  XXXXX arranged for XXXXX and its XXXXX to test the manufactured steel and provide written reports to XXXXX as to the test results.  XXXXX also hired XXXXX, a professional consulting firm, to analyze and test the steel at XXXXX's expense over a period of many months.  The consultants checked, both manually and through ultrasonic and x‑ray devices, welds, fabrication, length, thickness, compliance with drawings, painting and bolt torque.  During peak periods of steel delivery, the consultants had teams working 24 hours per day.  The consultant rejected some of the fabricated steel, and XXXXX then required the manufacturer, its agents and/or the subcontractor to remedy all defects or problems discovered with the steel.

          h.  The contract did require the general contractor to be responsible to resolve problems with the suppliers of materials purchased through Z purchase orders, such as delays, damage in transit, and poor handling, but XXXXX did take care of most of the problems that occurred.

          i.  The general contractor inspected and accounted for the materials at the construction site to ensure that materials were not wasted and that completion of the overall project was not delayed.

          j.  Once materials were received, a bill was delivered to XXXXX.  Upon receiving word from XXXXX or XXXXX and from the general contractor that the correct quantity and quality of materials had been received, the XXXXX paid the bill with a XXXXX check.

          k.  If XXXXX overpaid a vendor (e.g., due to an accounting error), it was XXXXX's responsibility to correct the error and obtain a refund.  XXXXX did not receive a credit against the contract bid for the overpayment.

          l.  Because of their significant buying power, the XXXXX and/or XXXXX were able to obtain discounts upon purchasing certain supplies and materials.  Any price discounts given to XXXXX when purchasing materials were kept by XXXXX and not passed on to the general contractor.

          16.  The cost (as reflected in the bid) of the materials purchased through Z purchase orders, in addition to the amount of sales tax attributable thereto, was to be deducted from the contract bid by change orders.  However, while the parties executed some change orders, such change orders were not executed for all materials purchased by XXXXX.  XXXXX and Petitioner both testified that they did not feel that change orders were always necessary because of their long history of dealing with each other.

          17.  On materials purchased through Z purchase orders, XXXXX paid 100% of the purchase price of materials, once the materials were inspected and found to be in order.  However, XXXXX paid only 90% of the purchase price of materials purchased by the general contractor, holding back a 10% retainage.  This retainage largely comprised the general contractor's profit and provided a safety net for XXXXX that the general contractor would fully perform on the contract.  With respect to materials paid for by XXXXX, the 10% retainage was not available to XXXXX.

          18.  XXXXX sent release forms to suppliers who sold materials to XXXXX, to ensure that no further claim would be made against Z purchase orders.

          19.  If a subcontractor failed to pay a supplier, the general contractor bore the risk of liens on the project through the 10% contract retainage.  The general contractor did not bear this risk with respect to the materials purchased and paid for by XXXXX.

          20.  XXXXX relied upon the general contractor to ensure that XXXXX‑purchased materials were not lost, misplaced or damaged after arrival at the construction sites and prior to installation by the general contractor or subcontractors.  XXXXX also took an active part in providing security for XXXXX‑purchased materials by providing general security for the construction sites through its Security Police officials, and also provided fencing materials to the general contractor, which were installed around all construction materials and equipment located at the Projects.

          21.  XXXXX was required to and did provide a Builder's Risk Insurance Policy for each of the projects.  That coverage was furnished and paid for by the XXXXX.  This insurance policy covered the materials for all physical losses and damage from the time of arrival at the construction sites through installation of the materials.

          22.  The risk of damage or loss of materials purchased by XXXXX was the responsibility of XXXXX or its insurer, until delivery was made to the job sites. The risk of loss for materials purchased by XXXXX after the materials arrived at the job sites was covered by the Builder's Risk Insurance Policy.  XXXXX further relied upon the Petitioner to prevent loss, damage or theft of XXXXX‑purchased materials.

          23.  Suppliers looked to XXXXX for payment, and it was XXXXX who paid them, promptly and in full, assuming the suppliers delivered the materials as and when requested.

          24.  Warranty Certificates provided by vendors were made in the name of XXXXX and not in the name of the general contractor or subcontractors.

          25.  There have been no claims made against suppliers of materials pursuant to warranties on those materials because there have been no failures of the materials.  XXXXX was the owner of surplus materials which remained following completion of the projects.  XXXXX takes possession and uses excess materials it has purchased after all construction projects on its XXXXX.  No materials purchased by XXXXX for the projects were retained by the general contractor or subcontractors following completion of the projects.

                            CONCLUSIONS OF LAW

          1.  Sales made to the state, its institutions, and its political subdivisions are exempt from sales and use taxes.  (Utah Code Ann. ? 59‑12‑104(2).)

          2.  Sales made to or by religious or charitable institutions in the conduct of their regular religious or charitable functions and activities are exempt from sales and use taxes.  (Utah Code Ann.  ? 59‑12‑104(8).)

          3.  Sales of tangible personal property to real property contractors and repairmen of real property are subject to sales and use taxes.  (Rule R865‑19‑58S).

          4.  The person who converts personal property into real property is the consumer of the personal property since he or she is the last person to own it as personal property.  (Rule R865‑19‑58S).   Utah Concrete Products Corp. v. State Tax Commission, 802 P.2d 408 (Utah 1942); Olson Construction Company v. State Tax Commission, 12 Utah 2d 42, 361 P.2d 1112 (Utah 1961); and Tummurru Trades, Inc. v. Utah State Tax Commission, 802 P.2d 715 (Utah 1990).

          5.  The contractor or repairman is the consumer of tangible personal property used to improve, alter or repair real property.  (Rule R865‑19‑58S).

          6.  Sales of materials and supplies to contractors and subcontractors are taxable transactions as sales to final consumers, even if the contract is performed for a religious institution, charitable organization, or governmental instrumentality.  (Rule R865‑19‑58S).

          7.  Sales of materials to religious institutions, charitable organizations, and governmental instrumentalities are exempt only if sold as tangible personal property and the direct or indirect seller does not install the material as an improvement to realty or use it to repair real property. (Rule R865‑19‑58S).

          8.  The contractor must accrue and report tax on all merchandise bought tax‑free and used in performing contracts to improve or repair real property.  (Rule R865‑19‑58S).

          9.  Rule R865‑19‑58S is the primary rule governing the sale of materials and supplies sold to owners, contractors and repairmen of real property, and it sets forth the requirements for the taxation of the sale or acquisition of tangible personal property which is to be used to improve, alter or repair real property.  That rule provides in relevant part:

 

          A.  Sale of tangible personal property to real property contractors and repairmen of real property is generally subject to tax.

 

          1.  The person who converts the personal property into real property is the consumer of the personal property since he is the last one to own it as personal property.

 

          2.  The contractor or repairman is the consumer of tangible personal property used to improve, alter or repair real property; regardless of the type of contract entered into‑‑whether it is a lump sum, time and material, or a cost‑plus contract.

 

          3.  The sale of real property is not subject to the tax nor is the                         labor performed on real property.  For example, the sale of a completed home or building is not subject to the tax, but sales of materials and supplies to contractors and subcontractors are taxable ransactions as sales to final consumers.  This is true whether the contract is performed for an individual, a religious institution, or a governmental instrumentality.

 

          4.  Sales of materials to religious or charitable institutions and                         government agencies are exempt only if sold as tangible personal property and the seller does not install the material as an improvement to realty or use it to repair real property.

 

          10.  Sales of materials from a vendor to a contractor or other person or entity for use in the construction, improvement, alteration or repair of real property for a governmental entity, religious institution or charitable organization is not exempt from sales and use tax.  The incidents of the tax have been imposed on the contractor and not on the exempt entity.  To be exempt, the sale must be from the vendor directly to the governmental entity, religious institution or charitable organization for the use of, and consumption by, the exempt entity.

          11.  The fact that the burden of the tax may be passed by the contractor on to the exempt entity in the form of higher prices and is thus paid indirectly by the exempt entity does not result in tax exemption for the transaction.  (Rule R865‑19‑58S), Utah Concrete Products Corp. v. State Tax Commission, 101 Utah 513, 125 P.2d 408 (1942), and Ford J. Twaits Co. v. Utah State Tax Commission, 106 Utah 343, 148 P.2d 343 (1944), Olsen Construction Company v. State Tax Commission, 12 U.2d 42, 361 P.2d 1112 (1961).

          12.  Parties seeking exemptions from the imposition of that tax bear the burden of proving that they qualify and are legally entitled to the exemption.  Parson Asphalt Products v. Utah State Tax Commission, 617 P.2d 397 (1980).

          13.  In order for the sale to the exempt entity to be exempt from sales and use tax it must be a bona fide sale to the exempt entity acting either in the capacity as the final consumer of tangible personal property or the entity which converts the tangible personal property to real property.  The sale is such a bona fide sale to an exempt entity only if either:

          a.  The sale of materials or supplies is to the exempt entity and the exempt entity has its own employees attach the materials and/or supplies to the realty, or

          b.  The sale of materials and supplies is to the exempt entity, and the exempt entity separately hires a contractor to attach the materials and/or supplies to the realty on a labor only or install only contract, or

          c.  The sale of materials and supplies is to an exempt entity which acts as the prime contractor by converting the tangible personal           property to real property.

          14.  The sale of tangible personal property is not exempt from sales and use tax if the exempt entity is simply acting as the purchasing agent for the general contractor.  It is not merely whether the exempt entity engages in the mechanics of a purchase, but rather the legal status of the exempt entity at the time the purchase is made, i.e., is it purchasing the property as the final consumer of the tangible personal property.  If the exempt entity makes the purchase for itself and its own use, consumption, or conversion to real property, the purchase is exempt from sales and use tax.  On the other hand, if the exempt entity makes the purchase for another person or entity, or for use, consumption, or conversion to real property by another person or entity, the purchase is not exempt from sales and use tax because the exempt entity has only acted in the capacity of a purchasing agent for the final consumer, which is the contractor.

          15.  If the exempt entity enters into a furnish and install contract with a general or subcontractor which requires the general or subcontractor to furnish and install the materials and supplies, then the exempt entity is not acting as the prime contractor as to the materials and supplies required by contract to be provided by the general or subcontractor.

          16.  When the general or subcontractor is required by contract to provide materials and supplies and install them on real property, then the contractor is the consumer of that tangible personal property and is liable for the sales and use tax, even if an exempt entity goes through the mechanics of a purchase by issuing a purchase order and a check for payment.  The contract is the controlling document, and determines who is the final consumer of tangible personal property, and thus the contract determines upon which party the incidence of taxation falls.  Actions taken in noncompliance with the contract may be accepted without objection by the contractor and the exempt entity, but unless the contract is modified or changed by change order to show the consent of the contractor and the exempt entity to the modifications, the actions that are not in compliance with the contract do not shift or change the incidents of taxation.  The written terms of the agreement will govern the taxability of the transaction and not the actions of the parties.  This is especially so because written documents can be audited by State Tax Commission auditors, but actions, based on only after the fact statements, allegations or representations are impossible to audit.

          17.  For the exempt organization to be acting as the prime contractor, the exempt organization, by and through its own employees or agents must:

          a.  Exercise direct supervision over the construction project.

          b.  Issue purchase orders to the vendors for all materials and supplies for which sales tax is not paid.

          c.  Make direct payment to the vendors for all materials and supplies for which sales tax is not paid.

          d. Have provisions in any furnish and install contracts to permit changes through change orders to make that portion of the contract a labor only or install only contract, and those contractual provisions must be fully implemented and followed during the construction process.

          18.  For the exempt organizations to act as the prime contractor exercising direct supervision over the construction project it is not necessary to act as the general contractor over the entire project.  Instead, the exempt organization must exercise sufficient direct supervision over the purchased materials that there is a change in the legal status of which entity is responsible for those materials.  Therefore, the exempt organization may be the prime contractor by exercising sufficient direct supervision over the purchased materials to be the prime contractor for a portion of the total contract.  The prime contractor or direct supervision requirement may apply to relationships within the full general contract.

          19.  To be the prime contractor and exercise sufficient direct supervision, the exempt organization must assume the "burdens of risk" or the "incidents of risk."  This requires evidence that the exempt organization has done more than just act as a "purchasing agent" for the general contractor.  If a general contractor issues a purchase order on forms of the exempt entity and then later issues authorization for payment by check to the exempt entity, that action would be considered as the creation of a "paper trail" and the direct supervision test has not been met.

          20.  If the exempt organization and a general contractor enter into a furnish and install contract, the general contractor is contractually required to provide and install those materials.  When the contractor provides and installs those materials the contractor is the final consumer of those

materials and is required to pay sales or use tax on those materials (Rule R865‑19‑58S).  For the exempt organization to purchase those materials and avoid sales or use tax, the furnish and install contract must contain a provision permitting change orders so the exempt organization may make such purchases, and the parties must then actually execute such change orders in advance of the purchases.  The exempt organization, by its own employees or agents, must then issue purchase orders and vouchers or checks for payment, and must exercise direct supervision over the purchased materials.  As evidence regarding whether or not the exempt organization exercised direct supervision over the purchased materials, all of the relevant factors should be reviewed, including:

          a.  Who assumed the burdens or incidents of risk?

          b.  Who carried the risk of loss in the event of damage or destruction of the materials?

          c.  Who, if anyone, carried and paid for insurance on the materials after delivery and prior to installation or attachment to the real property?

          d.  Who physically inspected and counted the materials upon receipt?

          e.  If there was a shortage in materials upon receipt, who was required to pay for additional materials?

          f.  If there was an overage in materials upon receipt, who retained the surplus materials?

          g.  If the materials did not meet specifications or quality standards, who had the right and authority to reject those materials?

          h.  If materials were rejected for failure to meet quality standards or specifications, and it had resulted in a shutdown of the job, who would have been responsible for the shutdown expenses?

          i.  Who was responsible for enforcing any warranties on the materials?

          j.  To whom did recourse go if the materials were faulty or defective?

          k.  If materials failed after installation, who was responsible for any resulting damages including personal injuries?

          l.  To whom did the title pass for the purchased materials?

          m.  Were the bills submitted by the vendor directly to the exempt organization?

          n.  Did the vendors look only to the exempt organization for payment of the bill?

          o.  Did the general contractor or the subcontractor have to approve the bills before they were paid by the exempt organization?

          p.  To whom were the materials delivered, i.e., to the contractor, the exempt organization or one of its employees or agents, or directly to the job site?

          21.  Under a furnish and install contract, the contractor is required to furnish the materials and install those materials onto real property.  Thus, the contractor is required to convert that tangible personal property into real property and the tax is imposed on that consumption of the tangible personal property by the contractor.  Therefore, to avoid sales and use tax on materials used for a furnish and install contract, the contract must be modified through the execution and implementation of change orders.  When those change orders have been executed and implemented, the modified contract must make it clear that the materials in question have been separately purchased and provided by the exempt organization and that the contractor's only duty with respect to those materials is to provide the labor to install those materials.

          22.  For the purchases of materials and supplies to be exempt from sales and use tax, the exempt entity must make the purchase and title to the purchased items must pass to the exempt entity prior to the time it is attached to real property.  The exempt entity must deal with the purchased items as its own property and treat those items the same as it would treat items it purchases for its own use and consumption.

                            DECISION AND ORDER

          Sales and Use Tax is imposed not only upon the sale of tangible personal property, but also upon "tangible personal property stored, used or consumed in this state." (U.C.A. 59‑12‑103[1]).  In the construction business, when a person uses lumber, bricks, cement, steel, nails, and other materials to construct a building or other improvements to real estate, that person has used those materials and has converted the materials into real property.  That conversion of tangible personal property into real property is deemed to be the consumption or use of the tangible personal property, which is the taxable event.

          The Utah Supreme Court has consistently held that sales and use tax is imposed upon the party that converts tangible personal property into real property.  Utah Concrete Products Corp. v. State Tax Commission, supra, Olson Construction Co. v. State Tax Commission, supra, and Tummurru Trades, Inc. v. Utah State Tax Commission, supra.  The party that makes that conversion from tangible personal property to real property has used or consumed that property, is the real property contractor, and is taxed on that property.  If that conversion to real property is performed by anyone except an exempt entity, the use and consumption of the converted materials is subject to sales and use tax. If the conversion to real property is performed by an exempt entity acting as the real property contractor, the use and consumption of the converted materials is not subject to sales and use tax.

          Therefore, the primary issue in this case is to determine whether the Petitioner or XXXXX was the real property contractor.  If a preponderance of the evidence indicates that Petitioner was the party that converted the tangible personal property into real property, then Petitioner was the real property contractor and is liable for the tax assessed by the Auditing Division.  However, if a preponderance of the evidence indicates that XXXXX was the party that converted the tangible personal property into real property then XXXXX was the real property contractor and was exempt from the sales and use tax.

          To determine which party was the real property contractor, it is necessary to review and analyze the full scope of the contract and the legal rights, duties, obligations, and relationships of the parties with respect to the materials converted into real property.  The primary evidence available to the Commission to make that determination is the contract and agreement, together with all duly executed change orders and other written documents.  Oral testimony is beneficial in interpreting the documents and gaining some insight into the conduct of the parties and, to some extent, their understanding of the requirements of the contract.  However, where any inconsistencies may exist between the written contract, including executed change orders, and either the conduct or oral testimony of any person, the written contract is normally presumed to govern or prevail.

          In this proceeding, a preponderance of the evidence shows that the legal rights, duties and obligations of XXXXX raised XXXXX to the level of the real property contractor because XXXXX assumed sufficient burdens, risks, responsibilities and incidents of ownership of the materials being converted to real property.  XXXXX created a special purchase order form to be used only to purchase tax exempt materials for use in construction projects, and XXXXX issued those purchase orders.  XXXXX paid for those purchases with its own checks.  XXXXX had its own supervisory personnel who had substantial responsibilities with respect to the materials.  They were required to inspect and approve the materials for both quantity and quality.  Those supervisors had general supervisory responsibility on the job and had the right to give instructions and directions to the contractor, and even the authority to stop work on the projects if the work was not being properly performed or if the materials being used were unacceptable.  They had authority to approve or reject the construction superintendent hired by the general contractor, and even the right to withhold payments from the general contractor under certain conditions.

          Once the materials were received, XXXXX participated in the storage of the materials by providing fencing and having its XXXXX security police patrol the area to help prevent theft and damage.  XXXXX sometimes negotiated reduced prices or price discounts on the materials which resulted in prices that were lower than the price which had been bid to the general contractor, and XXXXX benefitted from the reduced prices.  XXXXX did not deduct a retainage on the materials which it purchased, whereas it deducted a 10% retainage on materials provided by Petitioner.  If XXXXX overpaid any invoices, they could not deduct the overpayments from the amounts due to Petitioner, but obtained its own refunds from the suppliers.  XXXXX retained all excess materials and pursued all warranties on the materials.  XXXXX hired independent inspectors to review and assure the quality of the steel and some other materials, and they carried the insurance on the materials.  In summary, it does appear that XXXXX assumed nearly all of the burdens, risks, responsibilities and incidents of ownership of those materials.  Thus, a preponderance of the evidence indicates that XXXXX converted those materials from tangible personal property into real property.  Therefore, XXXXX was the real property contractor for those materials and pursuant to Rule R865‑19‑58S was exempt from the sales and use tax on those materials.

          In this proceeding, the primary area of concern to the Commission is the non‑adherence to the contract between the parties.  That contract between XXXXX and Petitioner required Petitioner to provide the materials and install the materials on the projects.  Change orders were permitted by the contract, and change orders were prepared and executed on some, but not all, of the materials purchased by XXXXX.  Under the rules of the Commission and the Conclusions of Law stated above, the materials on which change orders were not prepared or executed would be purchases of Petitioner and Petitioner would have consumed the materials when they were converted to real property, and therefore, Petitioner would be responsible for the tax on those materials.

          Petitioners position on that issue is that Petitioner and XXXXX had a very unique relationship, and because of their course of dealing for more than twenty years there was a unique trust and respect between them.  XXXXX has concurred with those representations of the Petitioner.  Both XXXXX and Petitioner testified that it was their intent for XXXXX to purchase the materials in question and to assume most of the risks with respect to those materials.  They further testified that even on those materials on which change orders were not prepared or executed, the conduct of the parties by XXXXX purchasing and providing the materials demonstrated their contractual intent, and mutual consent to modify the contract by their performance even though changes were not made in the written documentation.  The testimony of the parties is supported by their conduct.  XXXXX did assume the burdens, risks and responsibilities for the materials even though they were not contractually required to do so because the change orders had not been executed.

          The Commission has some reservations about those arguments, but because the conduct of the parties supports their testimony, in the absence of clarity in the rules that the written contract will prevail over the conduct or actions of the parties, the Commission is inclined to accept that position for retroactive, but not prospective, interpretation of the construction contracts for these projects.  There is other substantial evidence to indicate that XXXXX did in fact buy the materials and assumed most of the burdens, risks, responsibilities, and incidents of ownership.

          Based upon the foregoing, it is the order of the Utah State Tax Commission that the Petition for Redetermination is hereby  granted and the audit assessment made by the Auditing Division is reversed and set aside.  It is so ordered.

          DATED this 9th day of March, 1992.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

 

R. H. Hansen                      Roger O. Tew

Chairman                          Commissioner

 

B. Pacheco                        S. Blaine Willes*

Commissioner                      Commissioner

 

NOTICE: You have twenty (20) days after the date of the final order to file a request for reconsideration or thirty (30) days after the date of final order to file in Supreme Court a petition for judicial review. Utah Code Ann. ? ?63‑46b‑13(1), 63‑46b‑14(2)(a).

 

*Since the hearing on this case, Commissioner G. Blaine Davis has been replaced by S. Blaine Willes.  Commissioner Willes has been duly advised of the facts and circumstances regarding this case, and is qualified to sign this decision.

 

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