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.
^^