BEFORE THE UTAH STATE TAX
COMMISSION
________________________________
XXXXX
: FINDINGS
OF FACT,
Petitioner, : CONCLUSIONS OF LAW,
: AND FINAL
DECISION
v. :
AUDITING
DIVISION OF THE : Appeal No. 92-2265
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. 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:
XXXXX
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
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner