BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
Petitioner, : ORDER
v. :
AUDITING
DIVISION OF THE : Appeal No. 88-1681
UTAH STATE TAX COMMISSION, :
:
Respondent. :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission pursuant to oral arguments on
the Petitioner's Motion for Summary Judgment, which was held on XXXXX. Paul F. Iwasaki, Presiding Officer; G. Blaine
Davis, Commissioner; and Joe B. Pacheco, Commissioner, heard the matter for and
on behalf of the Commission. Present
and representing the Petitioner were XXXXX and XXXXX, attorneys at law. Present and representing the Respondent was
XXXXX, Assistant Attorney General.
Based
upon the Memoranda submitted and oral arguments of the parties, the Tax
Commission hereby makes its:
FINDINGS OF FACT
1. The tax in question is sales tax.
2. The audit period in question is XXXXX
through XXXXX.
3. The Petitioner is a XXXXX Corporation which
principal place of business is in XXXXX.
4. XXXXX is a XXXXX Corporation whose principal
place of business is located in XXXXX.
5. On or about XXXXX, XXXXX constructed a XXXXX
in XXXXX, Utah. Construction of the XXXXX
was substantially complete by XXXXX.
6. On XXXXX, XXXXX entered into an agreement
with the Petitioner whereby XXXXX sold the tax benefits, the right to claim
depreciation deductions and investment tax credits, attributable to the
"qualified property" that was part of the XXXXX to the Petitioner in
a safe harbor lease transaction pursuant to the requirements of Section 168 of
the Internal Revenue Code.
7. Pursuant to Section 168, the transaction was
cast in the form of a sale of the property to Petitioner and a lease back of
the same property to XXXXX to XXXXX.
8. The agreement was structured so no
principal, interest or rent payments would ever be made. Pursuant to the agreement, each installment
payment on the loan was contingent upon and payable from and solely from the
basic rent paid under the lease.
Because the loan and rent payments were contingent upon each other and
were not binding obligations upon each party other than for income tax
reporting purposes, no rent or loan payments were ever exchanged.
9. Pursuant to the agreement, XXXXX retained
title to and benefits and burdens of ownership of the property. At no time did XXXXX transfer any title or
possession of the property to the Petitioner.
At no time did XXXXX transfer any
right to possession, operation, or use of the property to the
Petitioner.
10. At no time did the Petitioner transfer any
title, possession or right to possession, operation or use of the property to
XXXXX.
11. On XXXXX, the Division issued an amended
statutory notice of deficiency.
CONCLUSIONS OF LAW
There
is levied a sales and use tax on the purchaser for the amount paid or charged
for leases and rentals of tangible personal property if the property site is in
the state, if the lessee took possession in this state, or if the property is
stored, used, or otherwise consumed in this state. (Utah Code Ann.
§59-12-103(k), formerly Utah Code Ann. §59-15-4(h).)
When
a lessee has a right to possession, operation, or use of tangible personal
property, the tax applies to the amount paid pursuant to the lease agreement
regardless of the duration of the agreement.
(Utah State Tax Commission Administrative Rule R86519-32S.)
DECISION AND ORDER
In
the present case, the issue before the Commission is whether a "safe harbor
lease" pursuant to §168 of the Internal Revenue Code constitutes a taxable
transaction for purposes of the sales tax statutes.
The
Commission notes at the outset that a "safe harbor lease" such as the
one in question is not a true lease within the traditional meaning of the term.
Websters II New Riverside Dictionary defines "lease" as
"a contract granting occupation or use of property during a certain period
in exchange for a specified rent." That definition is in accord with
Black's Law Dictionary which defines "lease" as "When used with
reference to tangible personal property, the word 'lease' means a contract by
which one owning such a property grants to another the right to possess, use,
and enjoy it for a specified period of time in exchange for periodic payments
of a stipulated price, referred to as rent."
Indeed,
even Utah State Tax Commission Administrative RuleR865-19S-32(b) (Rule 32S)
contemplates such a traditional notion of leases when sales tax on leases
apply. Rule 32S states, "when a
lessee has a right to possession, operation, or use of tangible personal
property, the tax applies to the amount paid pursuant to the lease agreement,
regardless of the duration of the agreement."
In
the present case, the "lease" in question transfers none of the
typical rights of possession or use as in a traditional lease. The only transfer that occurs is the
transference of intangible tax benefits as provided for by the Internal Revenue
Code. In essence, a legal fiction is
created whereby the Petitioner becomes a "lessor" of property it has
no right to use or possess and XXXXX becomes the "lessee." This legal fiction, however, is recognized
only for income tax purposes so that the parties may take advantage of the tax
benefits of the statutory scheme.
It
should be noted that aside from the tax benefit, no consideration beyond the
amount paid by the Petitioner to purchase the tax benefits is exchanged. That is, under the terms of the contract,
loan payments on the mortgage and rent payments under the lease were contingent
upon each other and were structured so no rent or loan payments were ever
exchanged.
The
Respondent argued that the Petitioner should be estopped from having its motion
granted. In support of that argument,
the Respondent made reference to a letter, dated XXXXX, written by then Tax
Commission Vice Chairman XXXXX wherein it was stated, "Utah has taken the
position that the lease payments will be taxable for sales tax
purposes." That letter was in
response to a XXXXX inquiry into Utah's treatment of safe harbor lease
transactions.
Based
upon that letter, the Respondent argues that the Petitioner was on notice of
the Tax Commission's policy regarding such transactions.
The
Commission does not accept the Respondent's argument for two reasons: (1) The
transaction entered into by the Petitioner preceded the letter in question by
several months. Therefore, the
Petitioner could not have known about such "policy" when it entered
into the transaction. Additionally,
there was no showing that XXXXX even published or otherwise made known the
contents of the letter; and (2) Nothing is known about the circumstances or
discussion process that went into its drafting. Without such information the Commission is not prepared to find
that the letter was intended to be more than a general response to a general
question and that it was intended to establish Tax Commission policy for any
and all situations involving safe harbor leases.
Based
upon the foregoing, the Tax Commission finds that under the facts of the
present case, the lease agreement entered into by the Petitioner and XXXXX
constitutes a safe harbor lease under the provisions of Section 168(f) of the
Internal Revenue Code and as such is not subject to Utah sales and use tax. This finding is based upon the fact that no
right to use, possess, or enjoy the tangible personal property in question was
transferred from one party to another.
Therefore, no taxable transaction occurred.
The
Petitioner's Motion for Summary Judgment with respect to the issue of whether
the lease in question constitutes a taxable transaction for sales tax purposes
is granted. The Auditing Division is
ordered to amend its audit in accordance with this decision. It is so ordered.
DATED
this 13 day of February, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco G.
Blaine Davis
Commissioner Commissioner