Signed 11/12/91






Petitioner )






) Account No. XXXXX

Respondent )





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 were XXXXX, Assistant Utah Attorney General, XXXXX, Assistant Director, and XXXXX, both with the Auditing Division.

Based upon the evidence and testimony presented at the

hearing, the Tax Commission hereby makes its:


1. The tax in question is sales and use tax.

2. The period in question is XXXXX, through XXXXX.

3. Petitioner is a commercial diving contractor located in XXXXX, Utah. Approximately 70% of its business consists of contracts with government entities. It also contracts with private enterprises such as XXXXX and XXXXX.

4. Respondent conducted an audit of Petitioner's compliance with Utah's Sales and Use Tax Act for the period of XXXXX. Petitioner requested that the audit be performed on a 100% test basis. However, the only records available were the following invoices:

XXXXX Vendors whose names began with the letters P through Z.

XXXXX All vendors.

XXXXX All vendors.

XXXXX No invoices.

XXXXX No invoices.

Due to the lack of records, Respondent developed and applied separate projection factors for vendors with names beginning A through 0 and P through Z, then applied those factors to the periods for which records were missing. Using that process, Respondent concluded Petitioner had failed to pay sales and use tax in the amount of XXXXX. Respondent assessed an additional 10% negligence penalty in the sum of XXXXX, plus applicable interest.

5. The sales and use tax assessed against Petitioner arises from four categories of transactions. First, Petitioner purchased diving supplies and equipment as well as office supplies from out‑of‑state vendors. Second, Petitioner purchased the same types of supplies and equipment from in‑state vendors. Petitioner then used the items in performance of its contracts with government or industry. Some of the items were consumed during the contracts while other items of equipment survived completion of the contracts and remain in the possession of Petitioner. Third, in a few instances equipment was ordered by Petitioner's employees, with the employees then reimbursing Petitioner for the cost. This category is limited to only a few instances and relatively small amounts. A fourth and final category is purchases which Petitioner concedes to be taxable but which were not taxed due to inadvertent error.

6. Petitioner contends that no sales or use tax is due with respect to the first two categories of transactions identified above, on the grounds the supplies and equipment were used in government contracts, or in contracts with private industry exempt from tax under Utah's Sales and Use Tax Act.


Utah Code Ann. '59‑12‑103 provides in material 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;... (g) services for repairs or renovations of tangible personal property or services to install tangible personal property in connection with other tangible personal property;... (1) tangible personal property stored, used, or consumed in this state...Utah Administrative Code R865‑19‑225 provides:

Every retailer, lessor, lessee, and person doing business in this state or storing, using, or otherwise consuming in this state tangible personal property purchased from a retailer, shall keep and preserve complete and adequate records as may be necessary to determine the amount of sales and use tax for which such person or entity is liable. Utah Code Ann. '59‑1‑401(3) provides:

The penalty for underpayment of tax is as follows: (a) If any underpayment of tax is due to negligence, the penalty is 10% of the underpayment.


Respondent's audit has assessed Petitioner with use tax on items that were used by Petitioner in the performance of contracts with government or mineral extraction entities. Petitioner contends that because such entities are themselves exempt from tax, items Petitioner used in the performance of contracts with those entities are also exempt from tax.

In making the foregoing argument, Petitioner misconstrues the applicable exemption provisions of the Sales and Use Tax Act. The Act specifically exempts sales made to the state and its institutions or subdivisions. [See Utah Code Ann. '59‑12‑103(2)]. It exempts direct sales to the federal government if taxation is prohibited by federal law. [See Utah Code Ann. '59‑12‑103(12)]. It further exempts certain sales relating to construction or modernization of mineral extraction or processing facilities. [See Utah Code Ann. '59‑12‑104(16)]. However, it is only purchases by those entities which are exempt. In the present case, the purchases were made by the Petitioner. Such sales are therefore subject to tax under the general terms of Utah's Sales and Use Tax Act, and do not fall within any of the exemptions from tax provided by the Act. The transactions are therefore subject to use tax as determined by the Respondent's audit.

With respect to the imposition of a 10% negligence penalty, such a penalty is justified on two grounds. First, Petitioner failed to determine whether its transactions were subject to tax. Second, Petitioner failed to keep adequate records of the transactions in question. As to interest charges assessed against Petitioner, such charges are a reasonable charge for Petitioner's use of tax funds after the funds should have been remitted to the Commission.

In summary, the Commission finds that weight of the available evidence supports the Respondent's audit determination, including its assessment of tax, penalty and interest. Petitioner's Request For Redetermination is therefore denied and the audit determination is affirmed. It is so ordered.

DATED this 12th day of November, 1991.


R. H. Hansen Roger O. Tew

Chairman Commissioner


Joe B. Pacheco S. Blaine Willes

Commissioner Commissioner


NOTICE: You have twenty (20) days after the date of the final order to file a request for reconsideration or thirty (30) days after the date of final order to file in Supreme Court a petition for judicial review. Utah Code Ann. ''63‑46b‑13(I.3), 63‑46b‑14(2)(a).