BEFORE THE UTAH STATE TAX COMMISSION
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
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.
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
Joe B. Pacheco G. Blaine Davis