88-0510
Sales
Signed 6/22/90
BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
)
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
Respondent. )
_____________________________________
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
Chairman Commissioner
Joe B. Pacheco G. Blaine Davis
Commissioner Commissioner
NOTICE: You have 30 days after the date on the
Mailing Certificate to request a Formal Hearing.
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