BEFORE THE UTAH STATE TAX COMMISSION
XXXXX : FINDINGS OF FACT,
Petitioner, ) CONCLUSIONS OF LAW,
: AND FINAL DECISION
AUDITING DIVISION OF THE ) Appeal No. 92-0125
UTAH STATE TAX COMMISSION, :
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
Joe B. Pacheco S. Blaine Willes