BEFORE THE UTAH STATE TAX COMMISSION
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS OF LAW,
v. : AND FINAL DECISION
OPERATIONS DIVISION OF THE : Appeal No. 91-0822
UTAH STATE TAX COMMISSION, :
: Account No. XXXXX
Respondent. : Tax Type: Sales & Use Tax
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner were XXXXX, Esq., of XXXXX, XXXXX, CEO and owner of XXXXX and XXXXX, General Manger of XXXXX. Present and representing Respondent were XXXXX, Assistant Attorney General, XXXXX of the Operations Division and XXXXX of the Auditing Division.
Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:
FINDINGS OF FACT
1. Petitioner is appealing Respondent's denial of a refund request filed by Petitioner on XXXXX.
2. The refund requested was for $$$$$ in sales tax paid relating to vending machine sales made in several schools during the period in question, XXXXX through XXXXX.
3. Respondent had denied the refund request on XXXXX. Petitioner timely filed the Petition for Redetermination in this matter and it eventually proceeded to this Formal Hearing.
4. During the period in question Petitioner owned vending machines which it placed in certain public schools pursuant to an oral agreement with the schools.
5. Under this oral agreement the schools allowed Petitioner to place its vending machines in the schools in return for which the schools received a percentage of the proceeds from the sale of the snacks, foods and candy items sold from the vending machines.
6. The oral agreement also allowed the schools some control over the vending machine sales. Each school determined where the vending machines were located within the school and when they were turned on. The schools also had some input as to what products were sold from the machines.
7. Students, school faculty, and school visitors were the purchasers of the products from Petitioner's vending machines in the schools.
8. Petitioner collected the proceeds from the machines, processed the proceeds through its internal accounting and remitted a check to the schools on a monthly basis for the percentage agreed to in the oral arrangement.
9. Petitioner did not invoice the schools for the items sold in its vending machines. The schools did not issue a check to Petitioners for the items sold in the vending machines.
10. From the testimony presented, Petitioner did not sell its vending machine products to the schools and the schools did not act as a retailer, reselling the vending machine products. Instead Petitioner sold its products through the vending machines directly to the students, teachers and school visitors who purchased the products.
11. Petitioner restocked the machines on a regular schedule, generally without request from the schools. When a problem arose with either the vending machine or a product sold in the machine the schools would contact Petitioner and Petitioner would fix the problem. Petitioner served the product from the vending machines. The schools did not serve the vending machine products to their students.
12. If the vending machines were vandalized or broken into it was the schools who decided whether or not to prosecute the offender.
13. Some of the vending machines were located in or near the schools' cafeterias. Federal regulation of school lunch programs consider these items to be "competitive food" items and require that they have "minimal nutritional value." 7 CFR Ch. 11 §210.11.
14. The proceeds each school received from the vending machine sales did not go into the fund for the school lunch program. No discount was given on the vending machine sales to low income students who qualified for free or reduced price school lunches.
15. From the testimony presented, Owners of Petitioner had also owned XXXXX which sold snacks, food and candy items from vending machines in public schools. In XXXXX XXXXX filed a request for a refund of sales tax paid on its sales from vending machines located in public schools. That refund request was granted and a refund paid to XXXXX.
16. Following the sales tax refund, XXXXX did not thereafter pay sales tax on any of its products sold from the vending machines in public schools up to and including the period of this refund request by Petitioner.
17. XXXXX refund application was entered as Petitioner's Exhibit 2 at the hearing. In answering the question on the refund request form that asked why XXXXX believed its claim should be allowed, the representative for XXXXX had written, "Sales to schools have been reported as taxable in the past. This business' sales of food and candy items is primarily to schools-your office was contacted to verify this adjustment." However, Testimony from XXXXX representative indicated that the products were sold from vending machines located in the schools to students, staff and visitors to the school.
18. Following Petitioner's submission of the refund request that is the subject of this appeal, Petitioner's representative had several telephone conversations with Tax Commission employees concerning the refund request. Petitioner's representative remembered making the phone calls and kept a record of the dates of these phone calls, with whom he had spoken and what was said. The testimony of Petitioner's representative was that he was told by Tax Commission employees that sales tax was not assessed on sales from vending machines in public schools. Representatives from the Operations Division testifying at the Formal Hearing had little recollection of the phone calls or conversations which took place.
19. XXXXX, an employee of the Auditing Division at the time of the refund request, testified that he thought it was the policy of the Auditing Division that sales tax was not assessed on vending machines sales in public schools until XXXXX when the Tax Commission issued Tax Bulletin 15-88.
CONCLUSIONS OF LAW
Sales tax is levied upon the retail sales of tangible personal property made within the state unless it qualifies for a sales tax exemption. (Utah Code Ann. §59-12-103(1)(a)(1995).
Exemptions set out in Utah Code Ann. §59-12-104 (1995) include the following:
(2) sales to the state, its institutions, and its political
subdivisions. . .
(13) sales of meals served by: (a) public elementary and secondary
schools. . .
(27) property purchased for resale in this state, in the regular course
of business, either in its original form or as an ingredient or component part.
Two issues are presented in this appeal. The first is whether Petitioner is entitled to the refund of sales taxes on its sales of food products from vending machines in public schools because these sales are exempt pursuant to Utah Code Ann. §59-12-104. The second issue is whether Petitioner is entitled to the refund because denial would result in a violation of the rule making requirements of the Utah Administrative Rule making Act at Utah Code Ann. §63-46a-1 (1995).
ISSUE 1: ARE THE SALES EXEMPT SALES UNDER UTAH CODE ANN. §59-12-104?
In asserting that the sales from the vending machines are exempt sales pursuant to Utah Code Ann. §59-12-104 the Petitioner, at the hearing and in the briefs submitted, has pointed to three different exemptions set out in that section. These exemptions are §59-12-104(2) sales to the institutions of the state, §59-12-104 (27) sales for resale and §59-12-104(13) sales of meals served by elementary and secondary schools.
However, in order to qualify for the exemptions listed under subsection (2), sales to the institutions of the state, or under subsection (27), sales for resale, there would have to be a sale of the products sold in the vending machines from the Petitioner to the schools. According to the facts as presented this did not occur. There was no sale of the vending machine products from Petitioner to the schools. Petitioner sold the products through the vending machines directly to the students, staff and school visitors who purchased the products.
The third exemption promulgated by Petitioner at the hearing and in the Post Hearing Memorandum is set out in subsection (13). Utah Code Ann. §59-12-104(13) exempts sales of meals served by public elementary and secondary schools. The Commission notes that in the drafting of this subsection the Utah Legislature used the words "served by" not "served at" public schools.
Petitioner asserts that the snacks, food stuffs and candy sold from the vending machines are meals that were served by the schools. This argument is unpersuasive because the facts presented at the hearing indicate that the items from the vending machines were not "served by" the schools. They were served by Petitioner regardless of whether they are considered to be "competitive foods" under federal regulations. The Commission notes that generally the schools did turn the vending machines on and off. However, it was Petitioner who owned the vending machines and owned the items sold from the vending machines. Petitioner restocked the machines, collected the money and corrected any problem with the machines or with the product in the machines. The weight of the facts presented indicate it was Petitioner who served the items from the machines.
Petitioner asserts the vending machine products were "meals" as required by Utah Code Ann. §59-12-104(13). To support this assertion Petitioner's representatives point to the fact that approximately 38% of the vending machines were in or near the schools' cafeterias and so were subject to federal regulation as "competitive foods" relating to the federal school lunch programs. Petitioner's assertion is unpersuasive. Although the federal government may regulate some of the vending machine products as "competitive foods" it does not necessarily follow that these products are "meals served by" the schools for purposes of the exemption.
ISSUE 2: IS PETITIONER ENTITLED TO A REFUND OF SALES TAXES BECAUSE
DENIAL WOULD RESULT IN A VIOLATION OF RULE MAKING REQUIREMENTS?
The second issue is whether Petitioner is entitled to the requested refund because denial of that refund would result in a violation of the rule making requirements of the Utah Administrative Rule Making Act set out in Utah Code Ann. §63-46a-1. Petitioner asserts that prior to the issuance of Tax Bulletin 15-88 on XXXXX it was the policy of the Operation Division and the Auditing Division that sales of food items from vending machines in public schools were not subject to sales tax and that the Tax Commission attempted to change the policy by the issuance of the Tax Bulletin. Petitioner asserts that a policy change of this nature would require compliance with rule making procedures set out in the Utah Administrative Rule Making Act.
Testimony presented by Petitioner does indicate that there may have been some confusion among employees of the Auditing Division and Operations Division during the period at issue concerning the tax liability of sales from vending machines in public schools. However, this does not represent the policy of the Tax Commission during the period in question. Further, the requirement to assess the tax was statutory. Utah Code Ann. §59-12-103 required sales tax to be paid on retail sales of tangible personal property unless they qualified for an exemption. This statute required tax on the vending machine sales at issue.
The fact that XXXXX received a refund of sales tax paid for vending machine sales made in public schools is not dispositive because of the written misstatement on the refund request form. XXXXX stated on its refund request form that the sales for which the refund was requested were made to schools. In reality the sales, although they occurred in the schools, were made to the students, staff and visitors of the schools. Had the sales been made to the schools as represented in the application it is possible that they would have qualified for exemption under Utah Code Ann. §59-12-104(2) and the refund would then would be valid. Sufficient evidence was not presented to indicate that the Tax Commission issued Tax Bulletin 15-88 to change an established policy. Instead it merely reiterated an existing policy.
DECISION AND ORDER
Based upon the foregoing, the Tax Commission denies Petitioner's request for a refund of $$$$$ of sales tax paid for the period of XXXXX through XXXXX. It is so ordered.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
DATED this 9th day of February, 1996.
W. Val Oveson Roger O. Tew
Joe B. Pacheco Alice Shearer