94-1439
Sales and Use
Signed 12/22/95
BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX, )
:
Petitioners, : ORDER
:
v. : Appeal No. 94-1439
:
AUDITING
DIVISION OF THE : Account No. XXXXX
UTAH STATE TAX COMMISSION, :
:
Respondent. : Tax Type: Sales and Use
_____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for an Initial Hearing
pursuant to the provisions of Utah Code Ann. §59-1-502.5, on XXXXX. Jane Phan, Administrative Law Judge, heard
the matter for and on behalf of the Commission. Petitioners XXXXX and XXXXX XXXXX were present and represented
themselves. Present and representing
Respondent were XXXXX, Assistant Attorney General, XXXXX and XXXXX of the
Auditing Division.
Petitioners
are appealing the assessment of additional sales and use tax, a 10% negligence
penalty and interest as set out in the Amended Utah Sales and Use Tax Audit,
dated XXXXX, for the audit period of XXXXX through XXXXX.
Petitioners
own XXXXX. XXXXX did not have
sufficient credit to enter into its own lease agreements. During the audit period Petitioners personally
leased fax machines, a computer system, telephone answering machines, and a
torque converter rebuilder from XXXXX ("XXXXX"). In turn Petitioners leased this equipment to
XXXXX passing their costs in the lease with XXXXX to XXXXX.
Petitioners
did not charge XXXXX sales tax on the lease payment amount collected for the
equipment. XXXXX did not charge
Petitioners sales tax on the equipment lease payments it collected. Petitioners stated that they had other
leases with XXXXX in which XXXXX was collecting sales tax and that they did not
know that XXXXX was not collecting sales tax on the leases at issue. Petitioners stated that the payment invoices
they received from XXXXX did not indicate whether or not sales tax was
included.
Over
one year into the lease term XXXXX discovered that it had neglected to obtain
an exemption certificate for the equipment lease payments at issue. Petitioners assert that XXXXX contacted
XXXXX's bookkeeper who had Mr. XXXXX sign an exemption certificate for XXXXX,
as President of XXXXX, on XXXXX. XXXXX
was never issued an exemption certificate from the Petitioners personally. XXXXX had no leases directly with XXXXX.
During
the audit period Petitioners leased a torque converter rebuilding system to
XXXXX. XXXXX issued an exemption certificate to Petitioners who assert it is
exempt from sales and use tax as equipment for new or expanding operations
under Utah Code Ann. §59-12-104(15).
Prior to the purchase XXXXX had to purchase remanufactured torque
converters from other sellers.
Petitioners also represented that a new production facility was
purchased and renovated to accommodate this new business operation in 1989.
APPLICABLE LAW
Utah
Code Ann. §59-12-103 levies tax on leases of tangible property as follows:
There is levied a tax on the purchaser for the amount paid or charged
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...
Collection
of this tax is administered under Utah Code Ann. §59-12-107(2)(a) which states,
"Each vendor shall collect the sales or use tax from the purchaser."
Utah
Code Ann. §59-12-102 provides the following definition:
(11) "Sale" means any transfer of title, exchange, or barter,
conditional or otherwise, in any manner, of tangible personal property or any
other taxable item or service under SubSection 59-12-103(1), for a
consideration. It includes: . . . (e) any transaction under which right to
possession, operation, or use of any article of tangible personal property is
granted under a lease or contract and the transfer of possession would be
taxable if an outright sale were made.
Utah
Code Ann. §59-12-104(15) exempts from sales and uses tax the following
transactions:
[S]ales or leases of machinery and equipment purchased or leased by a
manufacturer for use in new or expanding operations (excluding normal operating
replacements which includes replacement machinery and equipment even though
they may increase plant production or capacity, as determined by the
commission) in any manufacturing facility in Utah; (a) manufacturing facility
means an establishment described in SIC codes 2000 to 3999 of the 1987 Standard
Industrial Classification Manual . . .
The
Tax Commission is granted the authority to waive, reduce, or compromise
penalties and interest upon a showing of reasonable cause. (Utah Code Ann. §59-1-401(10).)
ANALYSIS
Three
issues are presented in this appeal.
The first issue is whether the assessment against Petitioners of sales
tax on the equipment lease payment should be upheld. The second issue presented is whether the lease of the torque
converter rebuilding system qualifies for an exemption pursuant to Utah Code
Ann. §59-12-104(15). The third issue is
whether the negligence penalty was validly assessed and whether Petitioners
have shown sufficient reasonable cause for waiver of the penalty or interest.
In
considering the first issue of whether the assessment against Petitioners of
sales tax for the equipment lease payments was valid, the following factors are
considered. The fact that the lease
payments are taxable transactions is not in dispute. However, the Respondent is not asserting that the sales tax
should have been collected and remitted to the State of Utah twice, one time
for the lease payments from Petitioners to XXXXX and one time for the lease
payments from XXXXX to Petitioners.
Respondent states that had Petitioners paid tax on the lease payments to
XXXXX and then only passed along to XXXXX the exact cost of the payment the tax
would probably have been satisfied.
Respondent
argues that under Utah law, vendors receiving lease payments are required to
collect taxes for the amount of the lease.
Respondent asserts that Petitioners were "vendors" and failed
to comply with this requirement in their lease of the equipment to XXXXX. So the Petitioners should pay the sales tax
on the equipment lease payments.
Although
XXXXX was also a vendor, it was not required under §59-12-107(2)(a) to collect
sales tax from the Petitioners on the equipment lease payments because it has
an exemption certificate from Petitioners and the equipment was leased for
release. On XXXXX, XXXXX contacted Petitioners'
office for an exemption certificate.
XXXXX had no leases with XXXXX.
Respondent asserts that XXXXX accepted the exemption certificate in good
faith as from the Petitioners personally and that XXXXX is entitled to rely on
the exemption certificate.
Further,
Utah Code Ann. §59-12-103 levies the tax on the purchaser or lessee. Despite who should have collected the tax it
was ultimately not XXXXX who should have paid the tax. If, as Petitioners assert, XXXXX should have
colleted the tax than it would be Petitioners who should have paid the
tax. The Auditing division is merely
requiring that Petitioners pay the tax that was due from them at the time of
the lease payments but was not collected or remitted.
Petitioners
point out that in a recent audit of XXXXX the Respondent determined a properly
completed exemption certificate issued to XXXXX was invalid because the
purchaser was not a business that would normally resell the item
purchased. They required that XXXXX pay
the tax which XXXXX had not collected from the purchaser relying on the
exemption certificate. Petitioners
argue that the Auditing Division is showing an unfair prejudice by requiring
them to pay, along with penalties and interest for XXXXX's error. However, this transaction with XXXXX is not
before the Commission in this appeal and the Commission does not have
sufficient information as to why this occurred. Further, this argument is unpersuasive because no injury or injustice was done to
Petitioners, the tax assessment is for tax that they should have paid in the
first place.
The
second issue presented is whether or not the lease of the torque converter
rebuilding system meets the requirements for exemption from sales and use tax
under Utah Code Ann. §59-12-104(15).
The exemption applies to establishments described in the Standard
Industrial Classification (SIC) Codes 2000-3999. Petitioners assert that SIC Code 3714 is applicable and that they
should be entitled to rely on the exemption certificate issued from XXXXX to
them for the lease payments made for the torque converter rebuilding
system. Respondent asserts that torque
converter rebuilders are not covered under this SIC Code and therefore the
lease of the torque converter rebuilder is not exempt under Utah Code Ann.
§59-12-104(15).
SIC
Code 3714 is for establishments primarily engaged in manufacturing motor
vehicle parts and accessories, but not engaged in manufacturing complete motor
vehicles. Specifically included under
this code are "manufactures of motor vehicle parts and accessories, except
motor vehicle stamping," and Petitioners argue that this would apply to
torque converter rebuilding. Respondent
points out that the words rebuilding are not mentioned and assert that it does
not apply to rebuilders of motor vehicle parts and accessories. Respondent points out that rebuilding is
specifically mentioned in only two categories of the SIC Code 3714 which are
for "motor vehicle gasoline engine rebuilding on a factory basis,"
and "rebuilding motor vehicle gasoline engines and transmissions on a
factory basis." Respondent asserts
that since the torque converter is not an engine or transmission the rebuilding
of a torque converter does not qualify under this SIC Code. The Commission concurs with Respondent,
noting that manufacturing and rebuilding are two distinct activities. Further, it is not clear whether the torque
converter rebuilding is a significant part or just an incidental part of
XXXXX's business.
The
third issue is whether either the penalties or interest should be waived. From review of the facts there is sufficient
reasonable cause for waiver of the 10% negligence penalty assessed in this
matter. More stringent reasonable cause
guidelines are applied for waiver of interest because the State of Utah was denied
the benefit of the use of the funds and the Petitioners retained the use of the
funds from the time the taxes were actually due. Interest is generally waived only in the event an error on the
part of the Tax Commission led to the late payment of the tax at issue. There was no indication of an error on the
part of the Tax Commission in this matter.
DECISION AND ORDER
Based
upon the information presented at the hearing, and the records of the Tax
Commission, the Commission affirms the assessment of additional sales and use
tax and the interest thereon in the Amended Utah Sales and Use Tax Audit
Summary, dated XXXXX, for the audit period of XXXXX through XXXXX. Sufficient cause has been shown for waiver
of the 10% negligence penalty.
This
decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become
the Final Decision and Order of the Commission unless any party to this case
files a written request within thirty (30) days of the date of this decision to
proceed to a Formal Hearing. Such a
request shall be mailed to the address listed below and must include the
Petitioners' name, address, and appeal number:
Utah State Tax Commission
Appeals Division
210 North 1950 West
Salt Lake City, Utah 84134
Failure
to request a Formal Hearing will preclude any further administrative action or
appeal rights in this matter.
DATED
this 22nd day of December, 1995.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner
^^