BEFORE THE UTAH STATE TAX
COMMISSION
_______________________________
XXXXX : FINDINGS OF FACT,
Petitioner : CONCLUSIONS OF LAW,
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 91-0344
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. 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:
FINDINGS OF FACT
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.
CONCLUSIONS OF LAW
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).)
DECISION AND ORDER
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.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
R. H. Hansen Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco S.
Blaine Willes
Commissioner Commissioner