BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
)
XXXXX :
Petitioner )
: FINDINGS
OF FACT
v. ) CONCLUSIONS OF LAW
: AND FINAL
DECISION
AUDITING
DIVISION OF THE )
UTAH STATE TAX
COMMISSION : Appeal No. 89-0006
) Account No.
XXXXX
: Audit
Period: XXXXX
Respondent ) to 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 XXXXX, Presiding
Officer. Petitioner was represented by
XXXXX, Tax Manager. Respondent was
represented by XXXXX, Assistant Attorney General, XXXXX, XXXXX, 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 through
XXXXX.
3. XXXXX XXXXX Company entered into a loan
agreement with XXXXX Corporation, on XXXXX to finance an industrial development
project in Salt Lake City. The
financing mechanism was the issuance of Industrial Development Bonds (IDB's) by
XXXXX Corporation. Proceeds from the
sale of the bonds were to be used to purchase land, improvements on the land,
and certain unspecified equipment in order to expand XXXXX Leasing's industrial
operations in Salt Lake City. The loan
was guaranteed by Petitioner, XXXXX Company, in a guarantee agreement accepted
XXXXX. This agreement states that XXXXX
is the record owner of the project and also that the parties to the guarantee
agreement understand that XXXXX will lease the project to Petitioner.
4. Pursuant to the provision of the loan
agreement that XXXXX and Petitioner would be the only principal users of the
project on the date of issuance of the bonds, these two companies executed
lease agreements for the real property and the equipment to be acquired for the
project. These agreements were dated
XXXXX. The lease term for the equipment
began on XXXXX XXXXX, with rent beginning to accrue at that time and the first
payment due on XXXXX. The rental
amounts were determined as if the equipment had been purchased and placed in
service as of the date of the lease at a projected purchase cost of $$$$$. A rent credit was provided for in the lease
to rebate the rent charged for equipment not yet placed in service. This was
because the equipment was to be purchased at various times during XXXXX, and
this rent credit was included in the lease in fairness to the lessee. The interest earned on the funds not yet
expended for purchase of equipment was determined to be a fair measure of the
amount of the rent credit.
5. Subsequent to the execution of the equipment
lease, the equipment was purchased and placed in service at various times
during XXXXX. XXXXX determined that in
XXXXX a rent credit of $$$$$ was due to the lessee to adjust for the XXXXX
unearned rent. The two companies
determined that the best way to apply the rent would be for XXXXX to pay
Petitioner a direct rebate of the rent credit amount. XXXXX was also given credit for the interest earned on the
unspent funds, which was used by XXXXX to make future principal and interest
payments on the XXXXX.
6. Subsequent to the execution of the original
lease, XXXXX and Petitioner amended the lease.
This undated amendment provided that rent on the equipment should not begin
accruing until XXXXX and that rent payments would not begin until XXXXX.
7. Under this arrangement, Petitioner received
the $$$$$ rebate plus the advantage of the amended lease. All of the equipment had been purchased by
XXXXX when the lease payments under the amendment were to begin.
Therefore,
since Petitioner was not paying rent on the equipment until XXXXX, the rebate
which they received of $$$$$ was, in effect, a rebate for rent that they did
not pay. Additionally, the amount of
this rebate far exceeds the amount of rent that would have been paid by
Petitioner from January to August XXXXX if the lease had not been amended.
8. Petitioner contends that this so-called
rebate was not a lease payment and is therefore not subject to sales tax. However, the evidence clearly indicates that
this rebate was to be used by Petitioner to make lease payments in XXXXX.
This
is a credit toward future lease payments, but it does not reduce the total
amount of the lease. Sales tax will
still be due on all lease payments, and the evidence leads to the assumption
that the tax will be due on the total amount of the lease agreement. It is to Petitioner's advantage to pay the
sales tax at the XXXXX rate rather than at a future higher rate.
CONCLUSIONS OF LAW
1. Utah Code Ann. §59-12-103(1)(k) provides
that a sales and use tax shall be levied on a purchaser for the amount paid or
charged for leases and rentals of personal property if the situs of the
property is in Utah, if the lessee takes possession in Utah or if the property
is stored, used, or otherwise consumed in Utah.
2. Utah State Tax Commission Administrative
Rule R865-19S-20(C) provides that sales tax credits may be applied where
adjustments in sales price occur such as discounts or rebates which cannot be
anticipated. Under Utah Code Ann.
§59-12-102(10)(e) a "sale" as referred to in this rule would include
lease transactions.
3. The application of the law to the available
evidence supports Respondent's position.
The rent credit was given by XXXXX to Petitioner in XXXXX and was then
used to defray XXXXX lease payments.
Therefore, §59-12-103(1)(k) does apply to render taxable the $$$$$ rent
credit which is the subject of this case.
DECISION AND ORDER
Based
on the foregoing, it is the decision and order of the Utah State Tax Commission
that the request of Petitioner be denied.
Sales tax in the amount of $$$$$ plus applicable interest is due.
DATED
this 12th day of April, 1990.