91-0344 - Sales











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. XXXXX, formerly Petitioner's corporate secretary, and XXXXX, consultant, represented Petitioner. XXXXX, Assistant Utah Attorney General, with XXXXX and XXXXX of the Auditing Division, represented Respondent.

Based upon the evidence presented at the hearing, the Commission hereby makes its:


1. The tax in question is use tax.

2. The period in question is XXXXX through XXXXX.

3. Respondent audited Petitioner's sales and use tax liability for the period in question. As a result of that audit, Respondent assessed additional tax of $$$$$, a 10% negligence penalty of $$$$$, and associated interest. Petitioner challenges two portions of the audit; the assessment of tax on Petitioner's use of inventory items in out-of-state construction projects, and assessment of tax on the transfer of items from Petitioner's inventory account to its depreciable assets account.

4. Petitioner is a XXXXX, XXXXX and XXXXX of XXXXX supplies. It purchases materials on an exempt basis, which materials are then held in inventory. The materials are removed from inventory for resale or for Petitioner's use in XXXXX in Utah and other states. In the course of XXXXX projects, the materials are permanently affixed to, and become part of, the real property.

5. In those instances where Petitioner withdraws materials from inventory for use outside Utah, it has paid use tax to the state in which the real property is located.

6. In XXXXX, Petitioner's accounting firm made an audit adjustment to Petitioner's accounts, moving materials valued at $$$$$ from its "inventory" account to its "depreciable assets" account. Petitioner contends that the accounting adjustments were incorrect because the materials had in fact been requisitioned for use on contracts, then returned to inventory unused and subsequently sold at retail, subject to Utah sales tax.


1. Sales or use tax is levied upon the ultimate consumer of tangible personal property. (Ralph Child Construction Co. v. State Tax Commission, 12 Utah 2d 53, 362 P.2d 422 (1951).)

2. Sale of tangible personal property to real property contractors and repairmen is generally subject to tax. The person who converts the personal property into real property is the consumer of the personal property since he is the last to own it as personal property. (Utah State Tax Commission Administrative RuleR865-19S-58.)

3. Contractors must accrue and report tax on all merchandise bought tax-free and used in performing contracts to improve or repair real property. (Utah State Tax Commission Administrative RuleR865-19S-58.)

4. Parties seeking exemptions from taxation bear the burden of proving that they qualify and are legally entitled to the exemption. (Parson Asphalt Products v. Utah State Tax Commission, 617 P.2d 397 (1980).)

5. Sales of materials and supplies to contractors for use in out-of-state jobs are taxable unless sold in interstate commerce in accordance with Utah State Tax Commission Administrative RuleR865-19S-44. (Utah State Tax Commission Administrative RuleR865-19S-58.)

6. Before a sale qualifies as a sale made in interstate commerce, the transaction must involve movement of the property across state lines, the movement must be essential to the sale, and the seller must be obligated to make delivery across state lines to the buyer. (Utah State Tax Commission Administrative RuleR865-19S-44.)

7. Sales of tangible personal property to persons within Utah, which property is subsequently shipped outside Utah and incorporated pursuant to contract into real property outside Utah is exempt from Utah sales and use tax, except to the extent such other state imposes a sales or use tax on the property and allows a credit for taxes imposed by Utah's Sales and Use Tax Act. (Utah Code Ann. 59-12-104(33).)

8. The Commission is granted authority to waive, reduce, or compromise penalties and interest upon a showing of reasonable cause. (Utah Code Ann. 59-1-401(8).)


Petitioner's appeal raises three issues. First, must Petitioner accrue use tax when it removes tangible personal property from inventory for use in real property construction projects in other states. Second, is Petitioner obligated to accrue use tax on the transfer of materials from its inventory account to its depreciable assets account. Third, is the imposition of a 10% negligence penalty appropriate. These issues will be discussed in the above order.

The Utah Supreme Court has recently considered a factual situation very similar to the facts of this case. In XXXXX v. Utah State Tax Commission, 802 P.2d 714 (Utah XXXXX), the taxpayer also removed materials from inventory for use in its XXXXX, which projects were located in Utah and in other states. As in this case, the taxpayer in XXXXX argued that materials taken from inventory for projects outside Utah were used in interstate commerce and therefore exempt from Utah use tax under the Commerce Clause of the United States Constitution and Utah Code Ann. 59-12-104(12). The Court rejected the taxpayer's argument, reasoning that the act of taking items out of inventory for use in a construction contract is a taxable event. The Court further reasoned that because the taxable event took place in Utah, it was not "in interstate commerce". The Commission can find no basis for distinguishing the Court's holding in XXXXX from the present case.

Since the period under consideration in XXXXX, Utah's Sales and Use Tax Act has been amended by the addition of Utah Code Ann. 59-12-104(33), effective XXXXX. The amendment exempts the sale of tangible personal property from tax, if such property is subsequently removed from Utah pursuant to contract, then incorporated in real property outside Utah. However, this exemption does not apply if the state in which the property is used imposes a sales or use tax and allows a credit against such tax for taxes paid to Utah. Because each state in which Petitioner did business imposes tax and allows credit for taxes paid to Utah, the foregoing exemption does not apply to the transactions in question.

The Commission therefore finds that use tax is due Utah on items removed from Petitioner's inventory and used in real property construction projects outside Utah. The Commission recognizes that Petitioner may have erroneously paid sales tax to other states, and encourages Petitioner to apply to such other states for refund.

The Petitioner's second contention is that no tax should be assessed with respect to accounting entries moving items from the company's inventory account to its depreciable assets account. While Petitioner argues that the accounting entries do not reflect what actually happened with the items in question, Petitioner must provide evidence to document its position. Petitioner has not provided such evidence. Instead, the accounting entries which Petitioner claims to be in error remain on Petitioner's books. In the absence of contrary evidence, the Commission must rely upon the accounting records,

and therefore finds that a taxable transaction occurred when the items in question were converted from inventory to depreciable assets.

The final issue is whether the Commission should waive the 10% negligence penalty assessed in this matter. It appears that Petitioner made a good faith effort to satisfy its tax liability arising from construction projects in other states by paying tax to such other states. The Commission therefore finds reasonable cause to waive the penalty associated with that portion of the audit assessment. The Commission finds no reasonable basis to waive the remainder of penalty or interest assessed against Petitioner.

This matter is remanded to Respondent for redetermination of the penalty assessment in accordance with this decision. The remainder of the of the audit determination is affirmed. It is so ordered.

DATED this 20th day of August, 1992.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco S. Blaine Willes

Commissioner Commissioner