BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, ) FINDINGS OF FACT,
) CONCLUSIONS OF LAW
v. ) AND FINAL DECISION
) Appeal No. 88‑0510
AUDITING DIVISION OF THE )
UTAH STATE TAX COMMISSION, ) Account No. XXXXX
STATEMENT OF CASE
This matter came before the Utah State Tax Commission pursuant to the Utah Administrative Procedures Act for a formal hearing on XXXXX before Joseph G. Linford, Presiding Officer. Petitioner was represented by XXXXX, Attorney. Respondent was represented by XXXXX, Assistant Attorney General, and XXXXX of the Auditing Division of the Utah State Tax Commission.
After reviewing the evidence and arguments of the parties in the record and the recommendation of the presiding officer, 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. Petitioner, XXXXX, is an XXXXX company which drilled two exploratory wells in XXXXX during the audit period in question using electricity as the power source to operate the drilling equipment. XXXXX was struck on both of these wells.
CONCLUSIONS OF LAW
1. Petitioner contends that the electricity used in drilling the wells is not subject to the sales and use tax because the drilling is essentially a production activity and not a commercial activity or use which would be subject to the tax.
2. Utah Code Ann. ' 59‑12‑102 defines "commercial consumption" as use which is connected with trade or commerce. The statute then lists several examples of what such commercial consumption may include.
3. Utah Code Ann. ' 59‑12‑103(1)(c) provides that the tax shall be levied for the amount paid or charged for "gas, electricity, heat, coal, fuel oil, or other fuels sold or furnished for commercial consumption."
4. Utah Administrative Rule R865‑19‑35S(B)(D) gives essentially the same definition of commercial consumption included in ' 59‑12‑102, that is, that commercial consumption is the use connected with trade or commerce, and then the rule lists other items which such commercial consumption may include. The rule also states that the examples set forth therein are not limited and should not be construed to be exhaustive but merely illustrative. Such could also be said of the examples provided in ' 59‑12‑102.
5. The Tax Commission finds that the electricity used in drilling the XXXXX wells in question is taxable in that the drilling of those wells was not a production activity but rather commercial consumption. Production begins at the point when XXXXX actually begins to be produced from the wells. A well which does not strike XXXXX does not produce and is not part of the XXXXX production process. Even where XXXXX is eventually found, however, nothing is produced from the well until the XXXXX is struck. Therefore, the drilling of wells, though necessary to the actual production of XXXXX, is not a part of that production. It is better characterized as exploration rather than production. It is therefore clear under the terms of the above statutes and rules that the electricity used in drilling the wells was used in commercial consumption in that it is connected with trade or commerce.
6. The Utah Supreme Court case of Union Pacific Railroad Company v. Utah State Tax Commission, 426 P.2d 231, 19 Utah 2d 92, affirmed on reconsideration 429 P.2d 983 (1967) involved the use of fuel in locomotive engines. In passing on the taxability of the locomotive fuel as a commercial use of that fuel, the Court held that the fuel was used in a commercial use and stated:
We hold the legislature intended to exclude from tax the fuel oil which industrial concerns use in the business of fabricating merchandise which, when completed, would be subject to a sales tax.... In affirming that case on reconsideration the Court in Union Pacific Railroad Company v. State Tax Commission, 429 P.2d 983 (Utah 1967) stated that the "terms 'commerce' and 'commercial' are very broad indeed". Under this case, since the electricity used in drilling oil wells does not produce oil, then that electricity is subject to the tax because it is not producing anything which, when completed, would be subject to a sales tax. As soon as oil begins to be produced from the well, then the exploration process stops and the production process begins. At that point the production of oil begins, and electricity used in that production process is not taxable until production is complete under the rationale used by the Court. Also, as the Court stated, the terms commerce and commercial are very broad indeed and the examples set forth in the statutes and regulations do not constitute an exhaustive listing of commercial consumptions or uses. Such a commercial consumption or use does include the electricity used to drill the wells in question in this case.
DECISION AND ORDER
Based upon the foregoing, it is the decision and order of the State Tax Commission that Petitioner's request be denied and the determination of the Auditing Division be sustained.
DATED this 22 day of June, 1990.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco G. Blaine Davis
NOTICE: You have 30 days after the date on the Mailing Certificate to request a Formal Hearing.