94-2080
Sales and Use
Signed 10/16/95
BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX, )
:
Petitioner, : ORDER
:
v. : Appeal No. 94-2080
:
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. Present and representing Petitioner were XXXXX, XXXXX, CPA, and
XXXXX. Present and representing
Respondent were XXXXX, Assistant Attorney General, and XXXXX, XXXXX and XXXXX
of the Auditing Division.
Petitioners
are appealing certain assessments made by
Respondent as listed in the Statutory Notice of Amended Audit dated
XXXXX for the audit period of XXXXX through XXXXX.
APPLICABLE LAW
The
Commission has adopted the following concerning computer software as set out in
Utah Administrative Code R865-19S-92:
(A)(1) "Canned computer software" or "prewritten
computer software" means a program or set of programs that can be
purchased and used without modifications and has not been prepared at the
special request of the purchaser to meet their particular needs.
(A)(4) "License Agreement" means the same as a lease or
rental of computer software.
(B) The sale, rental or lease of canned or prewritten 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.
Utah
Code Ann. §59-12-103(1) provides for a tax on gas, fuel, heat electricity and
coal as follows:
There is levied a tax on the purchaser for the amount paid or charged
for the following: (c) gas, electricity, heat, coal, fuel oil, or other fuels
sold or furnished for commercial consumption.
The
Commission has determined that use in manufacturing is not "commercial
consumption" as set out in Utah Administrative Code R865-19S-35(B) as
follows:
Noncommercial consumption is defined as fuel used in: . . . (3) use in manufacturing tangible personal
property or use in producing or compounding of a product which will be resold.
An
exemption from sales and uses tax for occasional or isolated sales is provided
in Utah Code Ann. §59-12-104 as follows:
The following sales and uses are exempt from the taxes imposed by this
chapter: . . . (14) isolated or occasional sales by persons not regularly
engaged in business, except the sale of vehicles or vessels required to be
titled or registered under the laws of this state.
Utah
Administrative CodeR865-19S-38 (D) defines isolated or occasional sales in
relevant part as follows:
Isolated or occasional sales made by persons not regularly engaged in
business are not subject to the tax.
The word "business" refers to an enterprise engaged in selling
tangible personal property or taxable services notwithstanding the fact that
the sales may be few or infrequent.
Utah
Code Ann. §59-12-103 levies tax on purchases of tangible property as follows:
There is levied a tax on the purchaser for the amount paid or charged
for the following: (a) retail sales of tangible personal property made within
the state.
ANALYSIS
Petitioner
is appealing the assessment of additional sales and use tax and interest on
XXXXX different types of transactions included in the XXXXX. These XXXXX transactions each present
separate issues for consideration.
The
first issue in this matter is the applicability of sales and use tax on
Petitioner's license of XXXXX.
Petitioner did not specifically dispute the fact that the XXXXX in
question was "XXXXX" and not "XXXXX" software. Instead Petitioner relies on the fact that
its use of the XXXXX was licensed pursuant to a license agreement and not
leased or purchased. Petitioner asserts
that XXXXX XXXXX is not by definition
tangible property.
Petitioners
argument is unpersuasive. This issue
has been specifically addressed by the Commission in Utah Administrative
CodeR865-19S-92 which states that payments for canned software under a license
agreement as well as charges for maintenance, consultation, enhancement and
upgrading are taxable. The second issue for consideration is
the tax treatment of liquid nitrogen.
Petitioner purchases liquid nitrogen for use in its manufacturing to
calibrate certain items. Utah Code Ann.
§59-12-103(1) imposes a tax on the sale of gas, electricity, heat, coal, fuel
oil or other fuel sold for commercial or residential consumption. The Commission has determined by rule that
manufacturing is not a commercial use for the purposes of this statute. Therefore, it is inferred that sales of
these items when used for manufacturing are not subject to sales tax.
The
question is whether or not the liquid nitrogen is "gas, electricity, heat,
coal, fuel oil or other fuel." If it
is one of these substances then Petitioner's purchases of liquid nitrogen are
exempt. Petitioner asserts that the
liquid nitrogen is a gas. Petitioners
presented information that the nitrogen is generally stored, shipped and sold
only in a highly pressurized, liquid, state in order to more conveniently
transport large quantities. As soon as
this liquid nitrogen is exposed to regular atmospheric pressure and room
temperature it immediately becomes a gas.
Respondent's
position on this issue is that the form of
the substance at the time of the sale is the relevant form for the
purposes of determining whether it is a gas, asserting that Petitioner
purchases the nitrogen in liquid form so it is not a gas for the purposes of
Utah Code Ann. §59-12-103. In applying
this statute the Commission has determined that the legislature intended that
"gas" means natural gas or gas used as fuel. Because Petitioner was not using the liquid
nitrogen as a fuel it is not exempt from tax.
The
third issue concerns whether or not double taxation had occurred on items sold
by Petitioner for which the purchaser has already been audited and assessed
sales tax. Petitioner provided
statements from a former Tax Commission employee concerning the fact that often
double taxation occurs when the Commission audits both the buyer and
seller. However, Petitioner was able to
provide specific information on the alleged double taxation with only one
vendor, XXXXX.
The
tax amount involved in the sales to XXXXX was approximately XXXXX. XXXXX had been audited by the Auditing
Division and had paid additional taxes.
The sales in question occurred within XXXXX audit period. However, neither transaction occurred within
the test period of the audit. The
Auditing Division had performed an actual audit of XXXXX for only one year of
the audit period and used the information from this test period to determine a
projection factor for unpaid sales and use tax for the remainder of XXXXX audit
period. The items sold to XXXXX were
not specifically included in XXXXX audit, but they occurred during the period
that additional taxes were assessed based on the projection factor. Petitioner
maintains the assessment against Petitioner for these items would be double
taxation. However, Petitioner should
have collected sales tax on these items at the time it sold them to XXXXX
making Petitioner liable for the tax and making the assessment valid.
The
fourth separate issue in this matter is whether or not the purchase of the
electronic equipment from a member of the staff at XXXXX qualifies as an
isolated or occasional sale exempt from sales tax under Utah Code Ann.
§59-12-104 (14).
At
the hearing Petitioner's representatives stated that the special electronic equipment purchased from XXXXX should be
exempt as an occasional sale. In
support of this position Petitioner's representatives asserted that the
transaction was an occasional sale because it was a purchase from a professor.
At the hearing three documents were entered by Petitioner as exhibits. They were a copy of the check Petitioner had
written to XXXXX, XXXXX, a copy of Petitioner's purchase order and a copy of an
inter company memo from one of Petitioner's employees to another requesting
that payment be made for the electronic equipment. Although these items support the fact that payment was made to an
employee of the XXXXX, Petitioner provided no information on how many sales of
equipment this employee makes. For this
reason Petitioner had not met its burden of proof on this issue. The
fifth and final items in this appeal concern a number of purchases made by
Petitioner tax free by issuing exemption certificates to the vendors but which
were used internally and were subject to sales or use tax. The issue is whether the letter Petitioner
mailed to vendors which indicated cancellation or limitation of the exemption
certificates removes Petitioner's liability for sales tax on these items.
Purchaser
acknowledges that these purchases, which were listed in the audit as
"internal" and listed on the exhibit submitted by Petitioner marked
P-5, were subject to tax up until XXXXX.
Petitioner maintains that it sent a letter to vendors on XXXXX
cancelling all exemption certificates so that from that date forward it was up
to the vendors to charge Petitioner tax on sales. Petitioner further maintains that the Commission cannot assess
the tax against Petitioner and should instead go after the vendors.
Respondent
asserts that Petitioner is responsible for paying the tax on these
purchases. Respondent points out that
Utah Code Ann.§59-12-103 levies a sales
tax on the purchaser for amounts paid for tangible personal property and
asserts that ultimately Petitioner is responsible to pay sales tax on the
purchases. Petitioner was able to
purchase from the vendors tax free because it had given each vendor a sales tax
exemption certificate which stated that the goods were being purchased for
resale. Petitioner, however, did not
resell these items purchased.
Respondent points out that the letter sent by Petitioner is unclear and
does not really cancel the exemption certificates. Further, Respondent states that it cannot collect the unpaid tax
from the vendors because the vendors are entitled to rely on the exemption
certificates.
At
the hearing Petitioner provided a copy of the letter that it sent to its
vendors which stated, "XXXXX is in
the process of reviewing our sales and use tax situation. We need to know which companies we have
issued sales tax exemption certificates to.
If we have issued a certificate to you, would you please send us a copy
of it by the end of XXXXX. In the
future, all purchases are to be considered as taxable unless the purchase order
specifically states it is for resale, or the transaction is not a taxable type
transaction."
Petitioner's
argument, that after these letters were sent to the vendors the Petitioner is
not liable for the tax, is unpersuasive.
Respondent's position is supported by the Utah Supreme Court's decision
in Ralph Child Construction v. Tax Commission, 362 P.2d 422 (Utah
1961). In that case the Court
determined that the primary liability to pay the tax was on the consumer. Id.
at 424. It upheld an assessment against
the purchaser noting that the assessment was proper because no injury or
injustice was done to the purchaser, for the purchaser was merely being
required to pay the tax that was due at the time of the sale, but was not
collected from him. Id.at 42.
DECISION AND ORDER
Based
upon the information presented at the hearing, and the records of the Tax Commission,
the Commission affirms the additional sales and use tax and interest
assessments as set out in the Statutory Notice of amended audit, dated XXXXX,
for the audit period of XXXXX through XXXXX.
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
Petitioner's 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 16 day of October, 1995.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner
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