BEFORE THE UTAH STATE TAX
COMMISSION
_____________________________________
XXXXX
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 89-1035
UTAH STATE TAX COMMISSION, :
: Account
No. XXXXX
Respondent. :
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for a formal hearing on
XXXXX. Commissioners G. Blaine Davis
and Joe B. Pacheco, and Hearing Officer Joseph G. Linford, heard the matter for
and on behalf of the
Commission.
Present and representing the Petitioner was XXXXX, attorney at law. Present and representing the Respondent was
XXXXX, Assistant 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 the audit period XXXXX.
3.
Petitioner, XXXXX, is a Utah corporation which operates two gravel pits, one at
XXXXX and one at XXXXX, Utah, and one asphalt plant at XXXXX.
Petitioner
sells gravel, asphalt, and concrete at retail.
4.
Purchasers of Petitioner's materials have the option of (a) picking up the
material at the pit or the plant, (b) having a third party carrier transport
the material, or (c) having Petitioner deliver the material. If a customer requests Petitioner to deliver
the material, Petitioner has the option of using its own trucks or transporting
the material by a third party carrier. The price for Petitioner's material is
the same regardless of any delivery arrangements. When Petitioner arranges delivery through third party carriers,
Petitioner only charges its customers the same transportation costs
(hereinafter "transportation costs," "freight charges," or
"delivery charges") charged by the carrier. Petitioner makes no surcharge for making the arrangements. When Petitioner delivers the materials in
its own vehicles, Petitioner's freight charges are competitive and comparable
to those charged by third-party carriers in Petitioner's area.
5.
Approximately 30% of Petitioner's asphalt and 5% of Petitioner's gravel is
picked up at the plant or pit by the customer or by a carrier hired by the
customer.
6.
Approximately 15% of Petitioner's asphalt and 15% of Petitioner's gravel is
delivered to the customer by a carrier hired by Petitioner. The carrier's charges are invoiced by
Petitioner to the customer.
7.
Prior to XXXXX, Petitioner invoiced material and transportation together
without any distinction between the two and collected sales tax on the total
charge for material and transportation.
After XXXXX, Petitioner began invoicing material and transportation
charges separately, collecting tax only on the charges for materials, and not
on the transportation charges. Since
that time Petitioner's internal records have separately accounted for the
transportation revenues and revenues from its sales of materials.
8.
As the basis of Petitioner's sales quotations for bids and estimates,
Petitioner has maintained a quotation sheet which shows the amounts charged for
material and shows separately the amount charged for delivery of the material
to various locations.
9.
XXXXX, is a Utah corporation whose three shareholders are three of the four
shareholders of Petitioner. XXXXX was
established in XXXXX largely for the purpose of doing federal jobs under the
XXXXX Act. This act required XXXXX to
pay its employees higher wages than Petitioner was customarily paying. Before XXXXX, Petitioner was making sales of
its materials to XXXXX and collecting sales tax on those sales. After XXXXX, Petitioner did not collect
sales tax from XXXXX on the delivery charges.
10.
Petitioner charges a small batch charge for deliveries of batches of concrete
which are too small to absorb the costs of delivery. Petitioner regards this as a delivery charge and, therefore, did
not charge sales tax on these small batch charges after XXXXX.
11.
Respondent, Auditing Division, determined that Petitioner should have collected
sales taxes on the freight charges and small batch charges, including those in
XXXXX transactions. The total amount of
sales tax for freight charges under the audit is $$$$$. In addition, the total amount of tax due on
the charges for freight to XXXXX is $$$$$.
The amount of sales tax due under the audit for the small batch charges
is $$$$$.
12.
Petitioner claims it should be accorded credit for its sales taxes collected on
the sales of materials to XXXXX, because Petitioner and XXXXX have been
determined by the XXXXX to be a single entity for XXXXX purposes. The total amount of sales tax Petitioner
claims was erroneously paid in transactions between Petitioner and XXXXX, and
for which Petitioner claims credit, is $$$$$.
13.
Penalties were assessed by the Auditing Division pursuant to Utah Code Ann.
§59-1-401 and59-12-110(5), which Petitioner disputes.
CONCLUSIONS OF LAW
1.
Utah Code Ann. §59-12-103(1)(a),(b) provides, in pertinent part:
(1)
There is levied a tax on the purchaser for the amount paid or charged for the
following:
(a)
retail sales of tangible personal property made within the state;
(b)
amount paid to common carriers...for: (i) all transportation...
2.
Petitioner claims that its charges for the transportation of its materials are
exempt from the above tax under the provisions of Utah Code Ann.
§59-12-104(18), which provides in pertinent part:
The
following sales and uses are exempt from the taxes imposed by this chapter:
(18)
intrastate movements of freight...
3.
Utah Administrative RuleR865-19S-71 provides in pertinent part:
A.
Generally, charges for transportation to the place where title passes to the
vendee are included in the tax base, but charges for transportation after title
passes are not included.
1.
If the sales are made f.o.b. point of origin, the title passes to the purchaser
at that time, and any subsequent shipment of the merchandise is a shipment of
the purchaser of his own property. The
vendor, in such a situation, would not have to collect the tax on the amount of
freight paid because the shipment would not be part of the sale.
2.
If the sale is made f.o.b. destination, the title to the merchandise passes
from the vendor to the vendee when the subject of the sale reaches the point of
destination. In this situation the
price charged the purchaser includes the cost of the merchandise plus the
freight charge, and sales tax is charged on the total price of the article
including the freight.
B.
Determine when title passes:
1.
Passage of title depends on the intent of the parties, as determined by the
terms of the contract, conduct of the parties, usages of the trade and the
circumstances of each case.
2.
If the subject matter of the contract has not been ascertained and appropriated
to the contract, or if something remains to be done by the seller to put the
goods in a deliverable state, title does not pass until such occurs.
3.
If a contract requires the seller to deliver the goods to the buyer, or at a
particular place, or to pay the freight or cost of transportation to a
particular place, title to the property does not pass until the goods have been
delivered to the buyer, or have reached the place agreed upon.
C.
Whenever it is customary for the seller to deliver goods to the buyer, it is
generally understood that title passes at the time of delivery...
D.
Unless a contrary-intent appears, delivery to the buyer or to a carrier for
shipment to the buyer is prima facie evidence of an intention to pass title.
E.
In a case of delivery, f.o.b. point of shipment with full freight allowed, the
vendor is responsible to the carrier for the payment of the freight
charges. The freight is included in the
sales price as quoted to the purchaser, and the price quoted is the same to any
other purchaser. Under this situation,
the sales and use tax base is the quoted price including freight.
F.
The deductibility of transportation charges is not controlled by, or dependent
upon[,] the separate billing thereof, form of the bill of lading, manner of
payment, or the method of accounting followed by either the vendor or
purchaser. These factors may, however,
be considered in determining the nature of the transaction or sale involved.
Sales
Tax Exemption on Freight Charges
4.
Petitioner contends that the administrative rule is contrary to the exemption
of §59-12-104(18) and is of no effect.
5.
Petitioner is claiming an exemption from the sales tax imposed by Utah
law. Therefore, under the law, the
exemption is to be construed strictly against Petitioner as the one claiming
that exemption. See Parson Asphalt
Products, Inc. vs. Utah State Tax Commission, 617 P.2d 397, 398 (Utah 1980).
6.
Utah Code Ann. §59-12-103 levies a sales tax on charges for transportation by
common carriers.
Therefore,59-12-104(18) must have reference to exempting the intrastate
movements of freight by common carriers since transportation by common carriers
is what is taxed in the preceding statute.
In other words, the exemption statute would not attempt to exempt from
the tax something upon which no tax was levied in the first place. Therefore, the exemption contained in
§59-12-104(18) applies only to common carriers. Petitioner was not a common
carrier during the period in question and the exemption does not apply. Additionally, the exemption contained in
§59-12-104(18) was not enacted until 1987, and it became effective on
XXXXX. Therefore, the exemption did not
exist for most of the audit period in question, and Petitioner cannot claim an
exemption under §59-12-104(18) until the effective date of that provision. However, even if Petitioner was a common
carrier, and even if the exemption had been in effect for the full audit
period, the transactions in this case would, nevertheless, not be exempt under
the analysis contained in the following paragraphs.
7.
Petitioner contends that RuleR865-19S-71 is contradictory to the Utah Supreme
Court decision in Whitehill Sand and Gravel Company vs. State Tax Commission,
106 Ut. 469, 150 P.2d 370 (1944). In
that case the seller's internal records separated transportation charges from
gravel charges, although these charges were not separated on invoices given to
the customer. Sales tax was charged
only on the cost of the gravel and not on the cost of transportation. The Tax Commission determined that sales tax
should have been imposed on the transportation charges. The Court reversed on the sales tax imposed
on transportation after the point of delivery, but affirmed on the sales tax
imposed on transportation prior to the point of delivery. Petitioner asserts that the Whitehill
reasoning applies to render the freight charges in the instant case nontaxable. The Whitehill decision turned on the
following language:
It
is clear that if the deficiency here assessed is made up of a percentage of the
transportation charges incurred and paid by the purchaser after he took title
rather than of items included in the purchase price to him, the assessment must
be set aside. [Emphasis added.]
106
Ut. at 472. In Whitehill, a portion of the tax audit was held invalid because
the transportation charges concerned were paid by the purchaser after he took
title and were not included in the purchase price. The issue concerning the taxability of the freight charges in the
instant case, therefore, turns on the passage of title. The rule is not contradictory to the
Whitehill decision, but, instead, the rule is patterned after the Whitehill
decision. The controlling fact is the
point of delivery. If the purchasers of
materials either send their own trucks or hire common carriers to pick up the
materials, then no sales tax is imposed on the freight charges. However, if the Petitioner delivers the
materials to the purchasers either with its own vehicles or by common carrier,
then the transportation charges are subject to sales tax.
8.
The taxability of Petitioner's transportation charges is in issue because
Petitioner is taxed on the transportation charges as a seller whose performance
is not complete until delivery. The
transportation charges to the point of delivery are part of the purchase price
of the goods and should be taxed. Utah Code Ann. §70A-2-401(2) provides:
(2)
Unless otherwise explicitly agreed title passes to the buyer at the time and
place at which the seller completes his performance with reference to the
physical delivery of the goods, despite any reservation of a security interest
and even though a document of title is to be delivered at a different time or
place...
9.
RuleR865-19S-71 is in accord with the Whitehill case and the provisions of
70A-2-401(2). Where Petitioner's
performance is completed by the delivery of the goods and the transportation
charges are included with the cost of the materials, it all constitutes one
transaction and the title to the goods does not pass until the time of
delivery. Under both §70A-2-401(2) and
Whitehill, then, the tax on the transportation charges is appropriate. Even though Whitehill was decided years ago
under a statutory scheme different from that which exists today, it, and the
law cited above, supports the taxability of the transportation charges at issue
here.
10.
The above is true even when Petitioner quotes a customer a price f.o.b. at
plant or pit and then gives the customer a separate delivery price, because
title does not pass at the pit or the plant.
Taxability is not determined by the manner of quotation of prices or
manner of billing of invoices.
Taxability of the transportation charges is determined by whether the
transportation is before or after the point of delivery. Transportation before the point of delivery
is taxable. Transportation after the
point of delivery is not taxable. Under
§70A-2-401(2), title does not pass until the completion of the delivery by the Seller
or by a third party carrier at seller's instance unless there is an explicit
agreement otherwise. There is no such
explicit agreement in this case.
Petitioner argues that there is such an agreement, but the evidence does
not sustain that position. There is no
explicit agreement and where the actual intent of the parties is unclear, under
Rule R86S-19-71S(B), (C), and (F), title passes at the point of delivery.
11.
Petitioner contends that requiring it to collect sales tax for transporting or
arranging the transportation of its goods to the point of delivery, while not
taxing the shipment of goods by a common carrier, is unfairly
discriminatory. The Commission finds,
however, that the distinction is, who owns the property when it is being
transported. If the seller still owns
the goods, then transportation is part of the sales price and is subject to
sales tax. If the purchaser owns the
goods, then it is transporting its own property and such expenses are not
subject to sales tax.
Small Batch Charges
12.
Petitioner asserts that its small batch charges for the delivery of small
amounts of concrete are also not taxable.
Petitioner admits that the small batch charges constitute nothing more
than a delivery charge. Under the law
as outlined above, it is clear that delivery charges where the seller, i.e.,
Petitioner, makes the delivery or arranges for its delivery, and title
therefore passes at delivery, the charges for that delivery are taxable as part
of the purchase price for the material in one transaction.
Credit
for Tax Paid in XXXXX Transactions
13.
Petitioner claims credit for sales tax paid on transactions with XXXXX. Petitioner asserts that, where Petitioner
and XXXXX were determined by XXXXX to be the same entity for purposes of XXXXX
wage jurisdiction, the sales tax should not be imposed since there can be no
taxable sale within a single entity.
The Tax Commission finds, however, that Petitioner and XXXXX were two
separate legal organizations. They were
established, operated, and regarded by Petitioner as such. Because they are two separate entities,
sales tax paid from one to the other on sales between them is appropriate. Institutional Laundry, Inc., vs. Utah State
Tax Commission, 706 P.2d 1066 (Utah 1985); Ogden Utah Railway and Depot Company
vs. State Tax Commission, 16 Ut.2d 23, 395 P.2d 57 (1964).
14.
However, even under Petitioner's theory the tax liability would still be
incurred. If Petitioner and XXXXX were
considered one legal entity, at least a use tax would nevertheless apply
because the materials concerned would be consumed within that single
entity. The ultimate consumer of goods
is liable for sales or use tax on transactions involving those goods.
Penalties
15.
The Tax Commission finds that negligence penalties of 10% assessed under Utah
Code Ann. §59-1-401 and59-12-110(5) are appropriate. Until XXXXX, Petitioner was correctly imposing taxes on
transportation charges, but they merely assumed that no sales tax would be due
on the freight charges at issue and terminated the collection of that tax. Petitioner based this assumption on invoices
from other companies upon which Petitioner asserts no tax was charged for
freight costs. Petitioner admitted,
however, that it did not contact anyone at the Tax Commission, did not research
the tax bulletins or other publications, and did not consult an attorney or
accountant regarding this issue.
Petitioner, in effect, made little or no effort to discover the actual
law or policy regarding the taxability of the transportation charges or to
determine if the proposed treatment of transportation charges as exempt from
taxes was correct. The negligence penalty as imposed is appropriate.
DECISION AND ORDER
Based
upon the foregoing, the Tax Commission finds that the exemption from sales tax
for intrastate movements of freight does not apply to Petitioner because sales
tax was imposed only on transportation charges prior to the point of
delivery. Sales tax on freight charges
where Petitioner delivered the goods to its buyers or arranged for that
delivery are appropriate. The same
reasoning applies to small batch charges, since these are the same as
transportation charges which are taxable under the law. Petitioner is not entitled to credit for
sales tax paid on transactions involving XXXXX Construction. The penalty imposed against Petitioner is
appropriate. It is so ordered.
DATED
this 4th day of December, 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