BEFORE THE UTAH STATE TAX COMMISSION
: FINDINGS OF FACT,
Petitioner, : CONCLUSIONS OF LAW,
: AND FINAL DECISION
AUDITING DIVISION OF THE : Appeal No. 92-2265
UTAH STATE TAX COMMISSION, :
: Account No. XXXXX
STATEMENT OF CASE
This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Paul F. Iwasaki, Presiding Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was XXXXX. Present and representing the Respondent was XXXXX, Assistant Attorney General.
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 tax.
2. The audit period in question is XXXXX through XXXXX.
3. The Petitioner is a Utah corporation which designs, prints, and sells iron-on transfers.
4. In the course of its business, the Petitioner purchased XXXXX (i.e. paint thinner) which is used to dilute concentrated ink to the desired consistency or shade.
5. In addition to diluting the concentrated ink, the XXXXX is used to clean rollers, screens, and printing equipment utilized in manufacturing the iron-on transfers. The removed ink is recaptured and mixed together to create black ink which the Petitioner then uses.
6. The Petitioner did not pay sales tax on the purchases of the XXXXX.
7. The Petitioner has various types of materials including, price lists, flyers, and catalogs, printed at their direction by local printers.
8. The catalogs containing price lists, and flyers for seasonal or special promotional materials, are mailed by the Petitioner to active customers. The materials are also mailed out to potential customers identified by the Petitioner. The vast majority of mailings are made to customers outside of the State of Utah.
9. The Petitioner did not pay sales or use tax on the cost of the above described printed materials.
10. Some of the catalogs are sold by the Petitioner to customers for $$$$$, and sales tax is collected and remitted on catalog sales. These direct sales are not included in the audit deficiency.
11. No expert testimony was presented by either party regarding the physical properties of XXXXX, and whether or not the XXXXX become an ingredient or component part of the ink used in the iron-on transfers.
12. The Petitioner argued that the purchases of the XXXXX were exempt from sales tax as purchases of tangible personal property purchased for resale either in its original form or as an ingredient or component part of a manufactured or compounded product as provided for by §59-12-104(27) Utah Code Ann.
13. The Petitioner argued that the catalogs, flyers, and price lists it purchased from local printers were exempt from sales tax claiming the printed materials constituted a magazine shipped out of state by common carrier and thus not subject to sales tax as provided for by Utah State Tax Commission Admin. Rule R865-1965S(g).
CONCLUSIONS OF LAW
1. There is levied a tax on the purchaser for the amount paid or charged for retail sales of tangible personal property made within the state. (Utah Code Ann. §59-12-103(1).)
2. 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 or a manufactured or compounded product is exempt from sales and use tax. (Utah Code Ann. §59-12104(27).)
3. Sales of newspapers or newspaper subscriptions are exempt from sales tax. (Utah Code Ann. §59-12-104(18).)
4. Newspaper publishers, may purchase newsprint, ink, staples, plastic, or paper protective coverings, rubber bands, or other materials distributed with the newspapers tax free.
Advertising inserts distributed with a newspaper that are identified with the name and date of distribution or the newspaper are exempt from sales and use tax.
To be classified as a newspaper, the publication must appear to be a newspaper in the general or common sense and must contain the following elements:
a) published at short intervals, daily, or weekly;
b) must not, when its successive issues are put together, constitute a book;
c) must be intended for circulation among the general public;
d) must contain matters of general interest and report on current events.
If magazines are shipped out of state by a common carrier and distributed free of charge to out of state recipients, there is not a taxable transaction associated with the production or acquisition or the magazines. (Utah State Tax Commission Admin. RuleR865-19S-65.)
DECISION AND ORDER
In the present case, there are two issues to be decided by the Commission: (1) is the purchase of mineral spirits by the Petitioner for use in its business exempt from sales tax; and (2) is the purchase of catalogs, flyers, and price lists by the Petitioner from local printers exempt from sales tax. These two issues will be discussed as follows:
The Petitioner argued that although it is possible for the Petitioner to purchase the necessary inks it uses in pre-mixed colors, it is more economical for the Petitioner to purchase the inks in concentrated form and then dilute them with the mineral spirits to the desired consistency or shade of color. The Petitioner argued that by taxing the purchases of the XXXXX, the Petitioner is, in essence, being penalized for making such a business decision.
It is clear that retail sales of tangible personal property made within the state are subject to sales tax unless the transaction is specifically exempted by statute. Here, although the purchases of the ink by the Petitioner for use in its business is exempt from sales tax because it is purchased for resale either in its original form or as an ingredient or component part of a manufactured or compounded product, the Petitioner failed to show that the same exemption would apply for the XXXXX. Specifically, the Petitioner failed to show that the XXXXX became an ingredient or component part of the finished product.
The Commission in Niederhauser Ornamental and Metal Works Co. Inc. v. Auditing Division of the Utah State Tax Commission, Appeal No. 90-1606, addressed the issue of the taxability of paint thinners. In that case, and after receiving expert testimony, it was determined that mineral spirits, or paint thinners used to dilute paint, evaporates and that the substance that is left on the finished product is the pigment or solids which is contained in the paint and not the mineral spirits. It is based upon this determination that the Auditing Division assessed a sales tax deficiency on the XXXXX in the present case.
It should be noted that the owner of XXXXX, who has a degree in mechanical engineering, testified that in his opinion the mineral spirits became a component part of the finished product. Such testimony, however, was not accepted as expert testimony in the present case and little or no weight is accorded to that testimony. Absent expert testimony to show that the mineral spirits become an ingredient or component part or the finished product, the Petitioner was unable to sustain the burden of proof necessary to show the mineral spirits fell within the exemption of §59-12-104(27).
Catalogs, Flyers, and Price Lists.
The Petitioner argued that its purchases of printed materials such as the catalogs, price lists, and flyers used in its business, from local printers was exempt from the imposition of sales tax under Utah State Tax Commission Admin. Rule R865-1968(G). That rule provides that "if magazines are shipped out of state by common carrier and distributed free of charge to out of state recipients, there is not a taxable transaction associated with the production or acquisition of the magazines."
The Petitioner's argument fails for two reasons:
(1) The transaction which RuleR865-19S-65 applies to is the transaction between the magazine vendor and its subscriber. Here, the transaction at issue is not the transaction between the Petitioner and its customers, but rather, the transaction between the Petitioner and the printer from whom it purchased the goods;
More significantly, however, the Petitioner's argument fails because (2) The catalogs, price lists, and flyers purchased by the Petitioner are not magazines, newspapers, or advertising inserts contained in newspapers under any general or common sense definition. Therefore, they do not fit within Rule 65S, and thus do not qualify as an exemption under §59-12-104(18).
The fact that the items in question are ultimately shipped out of state by common carrier is of no consequence in determining the taxability of the above mentioned transaction.
Clearly, the purchase of the catalogs, price lists, and flyers which the Petitioner distributed free of charge were not items purchased for later resale. It should be noted, however, that the catalogs sold directly to customers upon request for $$$$$, are not at issue in this case. Sales tax was collected and remitted on those sales and no deficiency was assessed for those items.
Based upon the foregoing, the Tax Commission hereby affirms the determination of the Auditing Division in assessing a sales tax deficiency for the purchases of mineral spirits and printed materials by the Petitioner. It is so ordered.
DATED this 23rd day of November, 1993.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson Roger O. Tew
Joe B. Pacheco Alice Shearer