BEFORE THE STATE TAX COMMISSION OF UTAH
v. : INFORMAL DECISION
AUDITING DIVISION OF THE : Appeal No. 87-0995
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 appeared representing himself. XXXXX represented Respondent and XXXXX also appeared on Respondent's behalf. Respondent assessed a personal penalty against Petitioner pursuant to Utah Code Ann.
§59-10-22(3) (Supp. 1983) (current version at §59-2-1321(3) (Supp. 1987)). The penalty was assessed for the nonpayment of sales tax on the sale of an aircraft owned by XXXXX, a nonprofit corporation. Petitioner testified that XXXXX was organized to have an airplane available for club members to fly. The airplane was sold in XXXXX, and the club did not collect tax because the plane was sold to a person who said he was setting up a fixed base operation in XXXXX and that the airplane would be available for rent. Petitioner understood that the sale of the aircraft would then fall into the category of a wholesale sale to a retailer who would collect sales tax on the rental receipts. The buyer of the aircraft apparently did not present an exemption to Petitioner. Petitioner, in his Petition for Redetermination, indicated that Respondent insisted that Petitioner obtain an affidavit from the buyer of the plane. Petitioner asserted that it is unreasonable for Respondent to expect him to obtain an affidavit from a buyer four years after the sale so that the buyer can then assume a tax liability of $$$$$. Respondent argued that the original audit is over and that various rights of appeal connected with the audit have expired. XXXXX said that it was Respondent's contention that Petitioner had the opportunity to petition for redetermination of the original audit, and that at this point in time Respondent expected to be able to collect the liability owed.
This appeal raises several issues due to the assessment against XXXXX himself and due to the particular facts surrounding the sale of the airplane in XXXXX.
1. Statute of Limitations. Respondent argues that Petitioner has lost his opportunity to argue against the validity of the original audit and sales tax assessment against XXXXX. Respondent's argument is that since XXXXX did not file a Petition for Redetermination after the original audit and notice of deficiency, XXXXX cannot now file a Petition for Redetermination arguing against the validity of the tax. Utah Code Ann. §59-10-22(3) (Supp. 1983) (current version at §59-2-1321(3) (Supp. 1987)) provides that [a]ny person required to collect, truthfully account for, and pay over the Utah sales, use, or withholding tax imposed by Utah law who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof shall in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, not collected, not accounted for, or not paid over. This provision authorizes Respondent to assess a personal penalty against individuals within business entities, such as corporations, who are responsible for paying the entity's taxes. The personal penalty is assessed, however, only when a responsible person within the entity willfully fails or refuses to pay any taxes due. Utah Code Ann. §59-10-22(7) provides that any person against whom a penalty has been assessed may contest the assessment by filing a petition for a hearing with the State Tax Commission. Respondent's argument, that Petitioner cannot now contest the validity of the sales tax assessment is misplaced. Petitioner, XXXXX, was not a party in the original audit. The sales tax on the sale of the airplane was not assessed against XXXXX personally, but against XXXXX. Therefore, now that the personal penalty has been assessed against XXXXX individually, he must have the opportunity to contest the validity of the underlying tax. To hold otherwise would be to deny XXXXX due process of the law.
2. Isolated or Occasional Sale. The Utah Sales Tax Act provided for "[a] tax upon every retail sale of tangible personal property made within the state of Utah . . . ." Utah Code Ann. §59-15-4(1)(a) (Supp. 1983) (current version at §59-12-103(1)(a) (Supp. 1987)). A "retail sale" is defined to mean every sale within the state of Utah by a retailer or wholesaler to a user or consumer, except sales defined as wholesale sales . . but the term "retail sale" is not intended to include isolated nor occasional sales made by persons not regularly engaged in business . . but no sale of a vehicle of type required to be registered [in Utah] shall be deemed isolated or occasional . . . Within the definition of "isolated or occasional sale," there are several sub issues. The first sub issue is whether the seller is regularly engaged in business. The second is the definition of business. The third sub issue concerns the sale of vehicles required to be registered in Utah.
a. Sale by Persons not Regularly Engaged in Business/ Definition of Business. A sale is exempt from sales tax if it is an isolated or occasional sale by a person not regularly engaged in business. XXXXX, a nonprofit corporation, created for the purpose of having available an airplane for club members to fly, does not at first appear to be a person regularly engaged in business. However, Tax Commission Rule A12-02-S38 1d (current version R865-38S-1) states that "[t]he word 'business' refers to an enterprise engaged in selling tangible personal property or taxable services notwithstanding the fact that the sales may be few or infrequent." Rule S38 goes on to state that [n]o sale of tangible personal property made by a person licensed to collect sales tax is considered to be isolated or occasional even though the tangible personal property was used by the seller in his regular business prior to the sale. However, any sale of an entire business is not deemed to be a taxable sale and no tax will apply to the sale of any assets made part of such a sale . . provided that the entire business is sold to a single buyer. XXXXX was issued a sales tax license and the club apparently collected sales tax on the rental receipts when the plane was rented to club members. Therefore, under Rule S38, XXXXX would be deemed a business. Because XXXXX was licensed to collect sales tax, the sale of the airplane would not be considered isolated or occasional even though the airplane was used by the club prior to the sale. However, because the airplane constituted the entire business, and XXXXX became defunct at the same time the airplane was sold, the sale of the airplane (constituting the sale of the entire business) would not be deemed to be a taxable sale because the entire business was sold to a single buyer. In summary, even though XXXXX would be considered under the Code and Tax Commission Rules to be a person regularly engaged in business, because the sale of the airplane constituted the sale of the entire business to a single buyer, the sale would be considered isolated or occasional and thus exempt from sales tax. The 1976 Utah Supreme Court decision in Husky Oil Co. v. State Tax Comm'n, 556 P.2d 1268 (Utah 1976), further supports a finding that the sale of the airplane by XXXXX was an isolated or occasional sale. In Husky Oil, an oil company in the business of selling oil and gas, sold a reformer to the taxpayer. The court held that despite statutory language that the term "retail sale" was not intended to include isolated or occasional sales by persons not regularly engaged in business, the legislature intended that the exemption be extended to persons that regularly engaged in the business of selling the property that was sold. The court stated that [t]he words "isolated or occasional sales" would be excessive and useless unless they had reference to sales of tangible personal property by retailers by retailers or wholesalers who do not regularly sell such property in their business. If the legislature had intended to exclude from taxes only those sales of tangible personal property by persons not regularly engaged in retail or wholesale business, then it could,--and we submit would--have eliminated "isolated and occasional" from the statute. Id. at 1271 (emphasis in original).
3. Vehicle Required to be Registered in Utah. The sale of vehicles required to be registered under the motor vehicle laws of Utah are not deemed to be isolated or occasional whether or not the sales were made by persons regularly engaged in business. Therefore, the sale of an automobile by an individual not engaged in any kind of business to another individual would nevertheless be a taxable sale. Although airplanes could be considered vehicles, they were not required to be registered in Utah until XXXXX. The XXXXX sale of the airplane was not a sale of a vehicle required to be registered in Utah.
4. Property Purchased for Lease or Rental. XXXXX argued that because the buyer of the airplane was setting up a fixed base operation in XXXXX and would be renting the airplane as part of his rental fleet, the sale would be deemed a wholesale to a retailer who would collect tax on the rental receipts of the airplane. XXXXX contends that because the sale would be deemed wholesale it was not XXXXX obligation to collect sales tax on the sale of the aircraft. Tax Commission Rule A12-02-S32 1c (current version R865-32S-1C) states that "[a]ny lessor of tangible personal property should issue an exemption certificate to his suppliers when purchasing tangible personal property which will be subject to the sales or use tax on the rental receipts. In the above category, the tax is applicable only on the rentals charged, and not on the cost of the property to the lessor." The difficulty with the XXXXX version of Rule S32 is that it indicates that the buyer of the aircraft in issue should have presented XXXXX with an exemption certificate. The rule does not state what the seller should do if an exemption certificate is not presented, but it does indicate that, as XXXXX contended, the sale of tangible personal property to a person who will lease the property is not taxable because the buyer of the rental property will collect sales tax on the rental receipts. In any event, because the sale of the airplane was an isolated or occasional sale, the Tax Commission declines to rule whether a buyer/lessor's failure to present an exemption certificate to the seller when purchasing tangible personal property for rent, then subjects the seller to liability for sales tax.
DECISION AND ORDER
Based on the foregoing, it is the Decision and Order of the Utah State Tax Commission that the XXXXX sale of the airplane by XXXXX was an exempt sale under the Utah Code and Tax Commission Rules. Therefore, there was no willful failure on XXXXX part to collect the tax and the personal penalty assessment against XXXXX cannot stand. Respondent is ordered to adjust its records to reflect that no sales tax was owing on the sale of the airplane and to reflect that XXXXX does not owe a personal penalty to the State of Utah.
DATED this 20 day of October, 1987.
BY ORDER OF THE STATE TAX COMMISSION OF UTAH
R. H. Hansen Roger Tew
Joe B. Pacheco G. Blaine Davis