BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. : AND FINAL DECISION
AUDITING DIVISION OF THE : Appeal No. 90-0785
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. Alan Hennebold, Presiding Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was XXXXX. Present and representing the Respondent was XXXXX.
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 and use tax.
2. The period in question is XXXXX.
3. The Audit Division conducted an audit of XXXXX sales and use tax liability for the period in question. As a result of that audit, the Audit Division assessed XXXXX with additional sales and use tax liability arising from five separate categories of transactions, as follows: "services not taxed" (accounting code fees and subscription fees), "purchases not taxed" (taxable purchases by XXXXX during the audit period), "services taxed at an incorrect rate" (failure to collect Resort Communities Tax), "credits for bad debt", and "additional taxable sales" (calling card transactions). The total amount of additional tax assessed was $$$$$, plus interest. The Audit Division also assessed a penalty against XXXXX of 10% of the additional tax due, on the grounds XXXXX underpayment of its tax liability was due to negligence.
4. XXXXX filed a timely appeal of the audit determination with respect to each of the five categories, and also appealed the imposition of penalty.
5. At the formal hearing in this matter, the parties advised the Commission that several of the issues in dispute had been resolved. The Audit Division had issued an amended audit relieving XXXXX of liability arising from its credits for bad debt, thereby reducing XXXXX tax deficiency to $$$$$ and the penalty assessment to $$$$$. For its part, XXXXX conceded liability on three of the four remaining categories. XXXXX did not concede liability in the category of "services not taxed", nor did it acquiesce to the imposition of penalty in any of the four categories included in the Audit Division's amended audit.
5. As a result of the parties' actions and concessions, the only issues now before the Commission are XXXXX liability for sales tax on its charges to customers for "accounting codes" and "subscription fees", and XXXXX liability for penalty of 10% of the tax assessed by the amended audit.
6. "Accounting codes" allow XXXXX customers to allocate telephone toll charges, using a code dialed in addition to the telephone number. The customer's calls are then sorted and identified on the customer's bill according to such codes. XXXXX charges its customers a monthly fee for use of the accounting code service. "Subscription fees" are monthly charges paid by XXXXX customers for access to certain XXXXX services, such as "800" number service. Accounting code and subscription fee charges are not based on usage.
7. XXXXX did not collect sales tax on its accounting code charges or its subscription fees because it did not believe such items were "telephone services" within the meaning of Utah Code §59-10-103(1)(b), the applicable provision of Utah's Sales and Use Tax Act.
8. XXXXX supports its request for waiver of penalty attributable to its failure to pay sales tax on purchases of certain assets, to collect the "resort communities" portion of sales tax, and to collect sales tax on "calling card" charges with the explanation that its automated sales/use tax reporting system was new and failed to identify such items as taxable. The problems with its reporting system were compounded by XXXXX rapid expansion during the period in question. Regarding the penalty imposed in connection with the accounting code and service fee issue, the Petitioner argues that its interpretation of applicable law was reasonable, and that its failure to pay tax cannot be considered negligent.
CONCLUSIONS OF LAW
Utah's Sales And Use Tax Act levies a tax on the amount charged for intrastate telephone service. (Utah Code Ann. §59-12-103(1)(b)).
"Telephone service" means the transmission for hire of signs, signals, writings, images, sounds, messages, data, or other information of any nature by wire, radio, light waves, or other electromagnetic means . . . ." (Utah State Tax Commission Administrative Rule R865-19O-9S, promulgated March 17, 1989, effective July 1, 1988.)
The Tax Commission is granted the authority to waive, reduce, or compromise penalties and interest upon a showing of reasonable cause. (Utah Code Ann. §59-1-401(8).)
DECISION AND ORDER
As previously noted, the two issues before the Commission in this matter are XXXXX liability for sales tax on charges to customers for accounting codes and subscription fees, and its liability for penalty. Those issues will be discussed in that order.
Utah Code Ann. §59-12-103(1)(b) imposes sales tax on charges for "telephone service". XXXXX contends that the term "telephone service" is undefined by statute or rule and must be defined by reference to other sources. XXXXX therefore refers to the Internal Revenue Code's definition of "toll telephone service", which limits that term to only such telephone services as are based on "usage". Since accounting code and subscription charges are not based on usage, XXXXX contends such charges are not for telephone service and therefore not subject to sales tax under §59-10-103(1)(b).
As noted above, Utah's Sales and Use Tax Act requires collection of tax on charges for telephone service. Some applications of telecommunication technology might not be included in the term "telephone service". However, accounting codes and subscription fees clearly are charges for telephone services within the plain meaning of §59-12-103(1)(b). As such, they are subject to sales tax.
Furthermore, the Commission's RuleR865-19S-90 also contains an inclusive definition of the term "telephone service":
"Telephone service" means the transmission for hire of signs, signals, writings, images, sounds, messages, data, or other information of any nature by wire, radio, light waves, or other electromagnetic means, and includes the following: (omitted as immaterial to this discussion.)
XXXXX charges for accounting codes are charges for the gathering of data, by electronic means, of information regarding the customer's usage of telephone service, and the transmission of that data to the customer. While the final information is submitted in written form, at all other stages it is a function of electronic information transmission and falls within the Commission's definition of telephone service. Subscription fees provide customers with access to features such as 800 number service. In other words, a customer's cost for 800 number service is billed in two parts, the first a "subscription fee" and the second a usage charge. Payment of both is required before the customer can use the service; both are therefore "charges for telephone service" and subject to Utah's sales tax.
In summary, the Commission concludes that XXXXX charges for accounting codes and subscription fees are charges for telephone services within the meaning of §59-12-103(1)(b) of the Utah Sales Tax Act and the Commission's Rule R865-19O-9S, and are therefore subject to Utah sales tax as assessed in Respondent's audit determination.
The second issue before the Commission is XXXXX request that the Commission waive or reduce penalty assessed against it in the amount of $$$$$, which sum represents a 10% negligence penalty computed on the amount of additional tax found due under the amended audit. Of the penalty imposed, $$$$$ results from additional tax on accounting code and subscription charges, while the remaining penalty results from the other categories in the audit that XXXXX has conceded.
With respect to the penalty imposed on the conceded items, XXXXX points to its rapid growth and the failure of its tax reporting system, as a basis for waiver of penalty. In the Commission's view, XXXXX failure to devote resources to comply with Utah tax law is sufficient basis to conclude that Petitioner's underpayment of its sales tax liability was due to negligence, thereby supporting imposition of a 10% penalty as provided by Utah Law.
As to the penalty imposed for failure to collect and remit sales tax on accounting code and subscription charges, XXXXX argues that its interpretation of the Utah Sales Tax Act was reasonable, and that no penalty should be imposed as a consequence of a reasonable, if erroneous, interpretation of law. While the Commission has concluded in this decision that XXXXX interpretation of the Sales and Use Tax Act as it applies to accounting and sudbscription fees was incorrect, it was a good faith error within the bounds of reasonable interpretation. The Commission therefore waives the penalty imposed with respect to the additional tax attributable to the accounting and subscription charges.
In summary, the Commission affirms the Audit Division's imposition of additional sales and use tax liability against XXXXX as set forth in the Audit Division's amended audit. The Commission also affirms the Audit Division's imposition of a 10% penalty against XXXXX with respect to the tax due under that amended audit, except that no penalty will be imposed with respect to that portion of the additional tax attributable to XXXXX accounting code and subscription charges. The Audit Division will recompute the Petitioner's liability for penalty in accordance with this decision, and
advise Petitioner of the same. It is so ordered.
DATED this 12 day of November, 1991.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger O. Tew
Joe B. Pacheco S. Blaine Willes*