BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. : AND FINAL DECISION
AUDITING
DIVISION OF THE : Appeal No. 87-1118
UTAH STATE TAX COMMISSION, :
Respondent. :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for a formal hearing on
XXXXX. Paul F. Iwasaki, Presiding
Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was
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 tax.
2.
The period in question is XXXXX.
3.
The Petitioner manufactures water softeners which it rents and sells. In renting or selling the water softening
units, the Petitioner employs three different types of marketing strategies:
1)
The water softener is leased to the customer on a monthly rental agreement,
which usually results in a rental period of two or three years. Sales tax is imposed on the monthly lease
payment as it is received by the Petitioner, and there is no dispute between
the parties as to how these transactions are taxed.
2)
The water softener is sold to the customer on a furnish and install
contract. In this type of transaction,
the Petitioner furnishes the materials and supplies and installs them as a
water softener on the premises of the customer. The Petitioner either pays sales tax to the vendor when materials
are purchased, or, if the materials are purchased without the payment of sales
tax, the Petitioner pays use tax when the materials are attached to real
property. There is no dispute between the parties as to how these transactions
are taxed.
3)
The water softener is leased to the customer for a period of time, but prior to
the expiration of the lease, the customer purchases the water softener. It is with respect to these transactions
that a dispute between the parties has arisen as to how these transactions are
to be taxed.
4.
For those water softeners which were leased and then later sold to its
customers, the Petitioner would collect and remit sales tax on the lease
payments as they were received.
Thereafter, if and when the lease was converted to a purchase, the
Petitioner paid use tax on the cost of the materials used and not on the sales
price of the water softener.
5.
Prior to the audit period, from XXXXX, the Petitioner had been collecting sales
tax on the entire amount of the retail sales and was submitting them to the
state. The Petitioner stopped doing it
because he was told by a competitor that water softeners were considered to be
real property and should not be taxed.
As a result of this information, the Petitioner testified that he
requested a meeting with the Tax Commission and at that time was informed that
water softeners were considered to be real property and should not be
taxed. That meeting was conducted in
approximately XXXXX.
6.
Although the Petitioner met with the Tax Commission, the appropriate method in
determining sales tax on leases which were converted to sales was not
discussed.
7.
The Petitioner also testified that in XXXXX he was audited by the Tax
Commission and as a result of that audit no sales tax deficiency was
assessed. The Petitioner did not have
any documentation to support his testimony.
8.
As a result of the audit conducted for the period XXXXX the Petitioner filed a
Petition for Redetermination and an informal hearing on that Petition was held
on XXXXX.
9.
On XXXXX, the Commission issued an informal decision which, in its findings
stated:
Water softeners which
are first leased to a customer and then sold to that customer are subject to
tax on the monthly rental payments for the duration of the lease, and are
subject to sales and use tax on the residual sales price of the later sale of
the water softener to that customer.
In
the Decision and Order section of that decision, the Tax Commission also
stated, "Water softeners which are first leased and then sold to a
customer become part of the realty at the time of the sale."
10.
Based upon the apparent confusion created by the informal decision of XXXXX,
the Tax Commission, on XXXXX, held a hearing on the Respondent's Motion for
Reconsideration and Clarification of the Informal Decision.
11.
On XXXXX, the Tax Commission issued its Order which held the purchases of water
softeners by customers either during or upon the completion of a lease, as
being taxable sales by the Petitioner.
CONCLUSIONS OF LAW
Tangible
personal property which is attached to real property, but remains personal
property, is subject to sales tax on the retail selling price of the personal
property, and installation charges are exempt if separately stated. (Utah State Tax Commission Administrative
RuleR865-19S-51(E).)
DECISION AND ORDER
In
the present case, the issue which has been before the Commission on at least
two prior occasions, those being the informal hearing and the hearing on the
Motion for Reconsideration and Clarification of Informal Decision, is the
appropriate treatment to be given the taxation of those leases of water
softeners which were subsequently converted to sales of the water softeners.
Based
upon the facts as presented at all stages of these proceedings, the Tax Commission
finds that the leases of water softeners which were converted to sales are
subject to sales and use tax on the residual sales price of the later sale of
the water softener. For example, if the
sale is for $$$$$ less three lease payments of $$$$$ each, or a total of $$$$$,
then sales tax must be collected on the residual purchase price of $$$$$. This, of course, assumes that sales tax
would have already been collected on the $$$$$ of lease payments. The Commission thus affirms the Informal
Decision of XXXXX and the Order of XXXXX.
The
Commission is not persuaded by any argument of the Petitioner that it had
relied upon past representations made by former Tax Commissioners or Commission
employees, when it claimed it met with those individuals in approximately XXXXX
to ascertain the appropriate tax treatment which should be given to these types
of transactions. As testified to by the
Petitioner's witness, the taxable treatment which should be accorded to leases
which are subsequently converted to sales was not discussed with any of those
individuals. Therefore, the Petitioner could not have relied upon such advice
to his detriment.
Based
upon the foregoing, the Tax Commission affirms the Informal Decision and
subsequent Order which affirms the determination of the Auditing Division in
assessing sales tax on the sales price charged for leases of water softeners
which were subsequently converted to sales.
It is so ordered.
DATED
this 6 day of February, 1992.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner