BEFORE THE UTAH STATE TAX
COMMISSION
___________________________________
XXXXX )
XXXXX : FINDINGS OF FACT,
Petitioner, ) CONCLUSIONS OF LAW,
: AND FINAL
DECISION
v. )
:
AUDITING
DIVISION OF THE ) Appeal No. 92-0125
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 C.P.A., accompanied by owners XXXXX
represented Petitioner. XXXXX, Assistant
Utah Attorney General, accompanied by XXXXX, 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 sales tax.
2. The period in question is XXXXX through
XXXXX.
3. Petitioner manufactures cabinets at its
facility in XXXXX Utah. It also buys or
manufactures for resale various moldings, doors and other wood products.
4. From the time of its organization, Petitioner
has used a cash basis for all tax reporting purposes, including sales and use
tax.
5. During XXXXX Respondent audited Petitioner
for compliance with sales and use tax for the period of XXXXX through
XXXXX. The audit employed a projection
method using the 1990 calendar year as a test period. The audit assessed Petitioner with additional sales tax of $$$$$
plus associated interest. No penalty
was assessed against Petitioner.
6. Respondent issued Statutory Notice of its
audit determination on XXXXX.
Petitioner then filed a timely Petition for Redetermination on XXXXX.
7. The audit in question consists of five
parts, each set forth as a separate audit schedule. Petitioner does not challenge schedules two or five, but does
contest schedules one, three and four.
8. The audit's schedule one deals with two
categories of transactions. The first category includes Petitioner's
"furnish and install" contracts with out-of-state customers, where
Petitioner agreed to supply and install specified cabinets, doors or other
materials in the customer's real property located in XXXXX. Petitioner employed subcontractors to
actually install such materials. The
second category includes transactions where invoices or contracts indicate that
out-of-state customers were to take delivery of merchandise at Petitioner's
XXXXX establishment.
9. No sales tax was paid to Utah or any other
state on the sales included in the audit's schedule one.
10. Schedule one includes the XXXXX transaction,
where an out-of-state customer purchased items from Petitioner, with delivery
to be made to the out-of-state location by common carrier. Respondent concedes the XXXXX transaction is exempt from tax under Utah
Code Ann. §59-12-104(12), and should be
removed from schedule one's list of taxable transactions.
11. Except for the XXXXX transaction, Petitioner
does not know whether other sales included in schedule one occurred as
specified in the applicable sales documents, or deviated from the terms of such
documentation.
12. With respect to schedule three, Petitioner
concedes it computed its sales tax liability on a cash basis during the period
covered by the audit. Schedule three adjusts Petitioner's tax accounting to an
accrual basis, thereby assessing sales
tax on some transactions for which Petitioner had not yet received payment.
13. Schedule four assessed sales tax against
Petitioner on items consumed in its manufacturing process. Petitioner has subsequently submitted a
small number of invoices from XXXXX which show that sales tax was paid on the
purchases covered by those invoices.
CONCLUSIONS OF LAW
1. Sales or use tax is levied on the purchaser
for the amount paid or charged for retail sales of tangible personal property
made within Utah. (Utah Code Ann. §59-12-103(a).
2. Sales or use tax is levied upon the ultimate
consumer of tangible personal property.
(XXXXX Construction Co. v. State Tax Commission, 12 Utah 2d, 53, 362
P.2d 422 (1951).)
3. Every vendor is responsible for the
collection of the sales or use tax imposed by Utah's Sales and Use Tax
Act. (Utah Code Ann. §59-12-107.)
4. 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.)
5. 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.)
6. 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.)
7. 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.)
8. 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)).
9. Parties seeking exemptions from taxation
bear the burden of proving that they qualify and are legally entitled to the
exemption. (XXXXX v. Utah State Tax
Commission, 617 P.2d 397 (1980)).
DECISION AND ORDER
Petitioner
challenges schedules one, three and four of Respondent's audit and raises other
arguments regarding the manner in which Respondent conducted its audit.
As
previously noted, schedule one assesses sales tax in two categories of
transactions. The first category is
sales by Petitioner pursuant to "furnish and install" contracts with
out-of-state customers. Petitioner did
not collect tax in such transactions because it considered them to be in
interstate commerce and therefore exempt under §59-12-104(12).
The
Utah Supreme Court has recently considered a very similar situation in
Trummurru Trades v. Utah State Tax Commission, 802 P.2d 714 (Utah 1990). There, the Utah taxpayer also furnished and
installed cabinets in projects located outside Utah. It argued that the cabinets were in interstate commerce and
therefore exempt from Utah's sales and 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 taking items out of inventory for use in a construction contract
is a taxable event, and that because the taxable event took place in Utah, it
was not "in interstate commerce".
The Court's holding in Trummurru supports Respondent's determination as
set forth in schedule one of the audit.
The
Court in Trummurru did not consider the effect of §59-12-104(33), which was
added to Utah's Sales Tax Act effective July 1, 1989. §59-12-104(33) 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. (Utah Code Ann. §59-12-104(33).) However, the foregoing 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 XXXXX where Petitioner made such
sales, does impose sales tax and also allow credit for similar taxes paid to
Utah, none of the transactions in dispute qualify for exemption under
§59-12-104(12).
The
second category included in schedule one is sales to out-of-state customers
where the invoice or contract indicates the customer "will call" for
the merchandise. Respondent has treated
such transactions as Utah sales, and has assessed Utah sales tax.
Petitioner
argues that although the sales documents indicate the customers were to take
delivery in Utah, in some cases Petitioner may instead have shipped the merchandise
to the customer outside Utah. In such
cases, Petitioner argues the transactions are in interstate commerce and
therefore exempt from tax. However,
Petitioner is unable to establish any specific transaction that deviate from
the "will call" provisions of the pertinent sales documents. The Commission concludes that the sales
documents themselves are the most reliable evidence of the nature of the
transactions in question. Those sales
documents establish that the various customers took delivery of the merchandise
in Utah and are therefore subject to the rule found in Administrative
CodeR865-19S-44 controls. It provides
as follows:
When
the commodity is delivered to the buyer in this state, even though the buyer is
not a resident of the state and intends to transport the property to a point
outside the state, the sale is not in interstate commerce and is subject to
tax.
Based
on the foregoing, the Commission concludes that those sales included in the
audit's schedule one are in fact subject to Utah sales tax, with the exception
of the XXXXX transaction, which both parties concede is not subject to tax.
The
audit's schedule three sets forth adjustments converting Petitioner from a cash
basis to an accrual basis for purposes of sales tax reporting. Petitioner
concedes that Utah's Sales Tax Act requires accrual reporting, but argues that
the change to the accrual reporting method should be phased in, to reduce the
immediate burden to Petitioner.
However, the Sales Tax Act is clear in its requirement that the accrual
reporting method be used. The
Commission has no authority to alter that requirement and therefore affirms
schedule three of the audit.
Finally,
schedule four assesses sales tax on various items consumed by Petitioner in its
manufacturing process. Petitioner
acknowledges that such items are subject to sales tax. Generally speaking, Petitioner purchased
such items on an exempt basis. However,
Petitioner has submitted a few XXXXX invoices indicating that sales tax was
paid in those transactions. Petitioner
therefore argues that the audit, based as it is on a XXXXX test period, fails
to give Petitioner proportionate credit for those transactions in XXXXX in
which tax was paid. Respondent has offered to perform a 100% audit of such
transactions for XXXXX, which offer Petitioner declines as being too
burdensome. Given the facts that
Petitioner has presented only a small number of invoices from XXXXX in which
tax was paid and has declined a 100% audit, the Commission affirms the results
of schedule four, except for those specific transactions in which Petitioner
has produced invoices showing tax has been paid.
Finally,
Petitioner has expressed several reasons for its belief that Respondent's audit
is unfair. First, with respect to tax
assessed under schedule one, Petitioner claims it is forced to pay taxes that
should have been paid by its customers.
Second, it claims it is forced to collect tax on behalf of the state,
with no recompense. Third, it argues it
acted in good faith during the audit period, and has been given no opportunity
by the audit to correct deficiencies before tax is assessed.
The
Commission notes that the audit in this matter applies well-settled provisions
of the Sales Tax Act which all vendors are required to comply with.
Furthermore, the Commission notes that no penalty has been assessed against
Petitioner for its various errors.
Finally, in at least a substantial portion of the transactions covered
by the audit, Petitioner was the ultimate consumer of the materials in
question, and was therefore liable for the tax.
In
summary, the Commission concludes that the Respondent's audit has properly
determined Petitioner's sales tax liability for the period in question, except
that the XXXXX transaction should be removed from schedule one, and schedule
four should be amended to remove those transactions for which Petitioner has
submitted invoices showing that the tax has been paid. This matter is remanded to Respondent for
issuance of an amended audit in compliance with this decision. IT IS SO ORDERED.
DATED
this 28th day of October, 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