92-1717 - Sales & Use Tax

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX )

Petitioner, : FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. : AND FINAL DECISION

AUDITING DIVISION OF THE : Appeal No. 92-1717

UTAH STATE TAX COMMISSION, :

: Tax Type: Sales & Use Tax

Respondent. :

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX, 19YY. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was XXXXX, Esq., of Prince XXXXX, XXXXX, XXXXX and XXXXX. Present and representing Respondent were XXXXX, Assistant Attorney General, and XXXXX.

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

FINDINGS OF FACT

1. The tax in question is sales and use tax.

2. The period in question is the audit period from XXXXX, 19YY to XXXXX, 19YY.

3. Petitioner is appealing the assessment of tax and interest as set out in the Statutory Notice of Sales Tax Deficiency, dated XXXXX, 19YY. The deficiency at issue is $$$$$ in sales and use tax and interest of $$$$$ as computed to XXXXX, 19YY. Interest has continued to accrue on the unpaid portion of the tax liability.

4. Petitioner is an association formed under the laws of the State of Utah. Petitioner serves small communities and rural areas throughout XXXXX Utah and XXXXX.

5. Petitioner purchased equipment in order to provide subscribers with a business or residential dial tone and the capability to connect to other telephone systems and receivers. This equipment includes but is not limited to, telephone switching equipment, telephone cables, radio equipment and other tangible personal property. Schedule 2 and 3 of the Sales and Use Tax Audit Summary imposes sales and use tax on these items of equipment and parts (“Telephone Transmission Equipment”). The gross purchase price of these items upon which Respondent has assessed the tax is $$$$$.

6. Petitioner bills its subscribers on a monthly basis. These bills list several separate charges which are summed for the total bill. Some of these charges are referred to as service or usage charges and some as toll or dial tone charges. This bill does not indicate in any manner that the customer, in addition to receiving telephone service, is leasing from Petitioner the Telephone Transmission Equipment. On its face the bill appears to be a bill for telephone service.

7. Petitioner's representative acknowledged that when a customer signed up with Petitioner they signed an application for telephone service, which did not mention a lease or rental of the Telephone Transmission Equipment. Petitioner's Revised Bylaws, which were in effect during the period in question, discussed the provision of telephone service with no mention of subscribers leasing equipment. Petitioner's Local Access Tariff Filing, in effect during the period in question, also referred to telephone service with no mention of equipment leasing.

8. At all times at issue the Telephone Transmission Equipment remained in the possession of and under the control of Petitioner. Petitioner was the ultimate consumer and end-user of the equipment.

9. Petitioner alleges that the charges for service or usage are charges for message transmittal, acknowledging that this is a charge for telephone service. Petitioner alleges that the charges for toll or dial tone are essentially rental charges allowing customers to access the telephone equipment. However, the weight of the evidence is to the contrary considering the information presented and the foregoing findings. Petitioner did not lease its Telephone Transmission Equipment to its subscribers. The essence of the arrangement between Petitioner and the subscribers was the provision of services not the leasing of equipment. Petitioner is the end user of the equipment.

10. Petitioner had collected and remitted sales tax on both the charges for service or usage and the charges for toll or dial tone.

11. In XXXXX 19YY, a representative for Petitioner requested from the Commission an Advisory Opinion based on a fictitious photocopy business which offered to its customers use of networked computer workstations for an hourly charge. The advisory opinion indicated, "the purchase of the workstation, file server, peripheral devices and other network components are exempt from tax as purchases for resale to the extent that they are for use of the customer under the rental charge agreement." (Utah State Tax Commission, Advisory Opinion, August 20, 1993.) The representative testified that he had not been representing a photocopy business at the time he requested the Advisory Opinion. He testified that he felt if he had said it was a telephone company the Commission would find it was taxable and he was attempting to determine how a similarly situated businesses would be treated. The factual circumstances surrounding the photocopy business and Petitioner's operation are too dissimilar for the Advisory Opinion to have any applicability to the issues in this appeal.

12. In Schedule 1 of the Audit Summary, Respondent included as taxable premise visit charges. The premise visit charge is the fee charged by Petitioner to relocate the cable drop or network interface device at the request of a subscriber. Relocation would be necessary if the subscribers were to make an addition to their property which would cover over the drop or network interface. The premise visit charge during the period in question was solely for the relocation. It was not a charge for repair or maintenance of the equipment. The taxable value assessed by Respondent for the premise visit charges during the audit period was $$$$$.

13. Petitioner’s Exhibit I lists several items which were purchased for resale. At the hearing the parties stipulated to the removal of these items from the assessment. The total taxable value of these items is $$$$$.

14. In Schedule 3 of the Tax Audit Summary, Respondent imposed sales and use tax upon software maintenance agreements purchased by Petitioner for the maintenance and upgrading of its canned software programs.

APPLICABLE LAW

The legislature has provided for a tax on telephone service in Utah Code Ann. §59-12-103(1)as follows:

(1) There is levied a tax on the purchaser for the amount paid or charged for the following:

(b) amount paid to common carriers or to telephone or telegraph corporations, whether the corporations are municipally or privately owned for:

(ii) intrastate telephone service;

The Tax Commission has defined telephone service, for the purposes of Utah Code Ann. §59-12-103(1)(b), in Utah Administrative RuleR865-19S-90 as follows:

A. “Telephone service” means the transmission for hire of signs, signals, writing, images, sounds, messages, data, or other information of any nature by wire, radio, light waves, or other electromagnetic means, and includes the following:

1. Nonrecurring telephone service charges are telephone service charges which are ordinarily charged to subscribers only once or only under exceptional circumstances.

The Tax Commission has adopted Utah Administrated RuleR865-19S-92 (B-F) concerning the taxation of computer software as follows:

B. The sale, rental or lease of canned or prewritten computer software constitutes a sale of tangible personal property and is subject to the sales or use tax. Payments under a license agreement are taxable as a lease or rental of the software package. Charges for program maintenance, consultation in connection with a sale or lease, enhancements, or upgrading of canned or prewritten software are taxable.

C. The sale, rental or lease of custom computer software is exempt from the sales or use tax, regardless of the form in which the program is transferred. Charges for services such as program maintenance, consultation in connection with a sale or lease, enhancements, or upgrading of custom software are not taxable.

D. Charges for services to modify or adapt canned computer software or prewritten computer software to a purchaser’s needs or equipment are not taxable if the charges are separately stated and identified.

E. The sale of computer generated output is subject to the sales and use tax if the primary object of the sale is the output and not the services rendered in producing the output.

F. This rule cites the most common types of transactions involving computer software and it should not be construed to be all inclusive but merely illustrative in nature.

The Tax Commission has adopted Utah Administrative RuleR865-19S-78(H) concerning the taxability of extended warranty agreements as follows:

Sales of extended warranty agreements or service plans are taxable, and tax must be collect at the time of the sale of the agreement. The payment is considered to be for future repair, which would be taxable. Repairs made under an extended warranty plan are exempt from tax, even if the plan was sold in another state.

The legislature has determined that certain leases and rentals are taxable as set out in Utah Code Ann. §59-12-103(1):

There is levied as tax on the purchaser for the amount paid or charge for the following:

(m) leases and rentals of tangible personal property if the property situs is in this state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state.

CONCLUSIONS OF LAW

1. The charges for premise visits were for relocation of the cable drop or the network interface, not for repair or maintenance and are, therefore, not subject to sales tax.

2. The dial tone or toll fees charged by Petitioner to its subscribers are subject to sales tax under Utah Code Ann. §59-12-103(1).

3. Petitioner’s software maintenance agreements purchased for the maintenance and upgrade of its canned software are subject to sales or use tax.

ANALYSIS

The parties have presented three issues to the Commission. The first concerns the assessment based on the premise visit charges. Respondent acknowledged that this charge was not taxable unless it was associated with related repairs. The undisputed evidence indicates that the premise visit charge was solely for relocation, not for repair or maintenance, and is therefore not taxable.

The second issue presented in this appeal is whether the Commission should uphold the assessment against Petitioner for Telephone Transmission Equipment as listed on Schedules 2 and 3 of the Sales and Use Tax Audit Summary. Petitioner requests that the assessment be withdrawn. Petitioner argues that the toll or dial tone charge is not a charge for telephone service, instead it is a fee for the use or rental of the Telephone Transmission Equipment. Petitioner argues that the fee charged for the use or rental is subject to sales tax and such tax has in fact been charged to the subscribers and remitted by Petitioner. However, according to Petitioner, since this is a fee for use or rental of the Telephone Transmission Equipment, not telephone service, the purchases of the Telephone Transmission Equipment are exempt from tax as purchases for resale.

The facts as presented do not support Petitioner's argument. There was no lease of the Telephone Transmission Equipment to the subscribers. Petitioner retained control and possession of the equipment.[i]¹ Therefore, Petitioner was the end user and the purchases listed in Schedules 2 and 3 are subject to sales and use tax.

Furthermore, the Commission does not agree with the distinction made by Petitioner between the toll or dial tone charges and the usage or service charges. The provision of a dial tone and use of the Telephone Transmission Equipment, which is necessary for the transmission of messages and operation of the telephone, was certainly contemplated by the Utah Legislature as part of the “telephone service” which they made taxable in Utah Code Ann. §59-12-103(1)(b). As for the Advisory Opinion presented by Petitioner, it concerns a factual situation which is dissimilar to the case at hand and, by Petitioner’s design, does not address a service that was specifically made subject to tax by legislation. Therefore, this Advisory Opinion does not lend support to Petitioner’s position on this issue.

The third issue presented was whether the Commission should sustain the imposition, pursuant to Schedule 3 of the Tax Audit Summary, of sales and use tax upon maintenance agreements purchased by Petitioner for the upgrading and maintenance of its software programs. Respondent requests that this assessment be upheld.

Petitioner argues that this assessment is unlawful and exceeds Respondent's statutory authority because, according to Petitioner, these maintenance agreements are not the purchases of services and they are not the purchases of tangible personal property. Petitioner alleges that they are merely agreements to perform services in the future upon the happening of a contingency that may never occur.

Petitioner did not dispute that the software in question was canned software. The tax liability of maintenance and upgrades of canned software programs has been considered by the Commission when adopting Utah Administrative RuleR865-19S-92. This rule provides that "charges for program maintenance, consultation in connection with a sale or lease, enhancements, or upgrading of canned or prewritten software are taxable." Accordingly, Petitioner is liable for sales tax on charges incurred for the maintenance and upgrade argument that contracts.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission sustains the assessment of tax and interest as set out in the XXXXX, 19YY, Utah Sales and Use Tax Audit Summary, except as it pertains to the $$$$$ in premise visit charges and the $$$$$ in items purchased for resale as listed on Petitioner’s Exhibit I. The Commission finds the premise visit charges and the items listed on Petitioner’s Exhibit I are not subject to tax and orders that the liability based thereon be removed from the audit. It is so ordered.

DATED this 13th day of September, 1996.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner