95-0080
Sales
Signed 3/19/96
____________________________________
COMPANY A, :
:
Petitioner, : ORDER
:
v. : Appeal No. 95-0080
:
AUDITING
DIVISION OF THE : Account No. #####
UTAH STATE TAX COMMISSION, :
:
Respondent. : Tax Type: Sales
_____________________________________
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 April 18,
1996. Joe B. Pacheco, Commissioner, and
G. Blaine Davis, Administrative Law Judge, heard the matter for and on behalf
of the Commission. Present and
representing Petitioner was PETITIONERS REP. from the XXXXX. Present and representing Respondent were
RESPONDENT REP., Assistant Attorney General, together with Mr. Bert Ashcroft
and Ms. Shelly Robinson from the Auditing Division.
Respondent
performed an audit on the books and records of Petitioner for the audit period
of January 1, 1991 through December 31, 1993.
As a result of the audit, an assessment was made for additional sales
and use taxes in an amount of $$$$$, plus interest to January 26, 1995 in an
amount of $$$$$, for a total proposed deficiency of $$$$$ as of January 26,
1995, with interest continuing to accrue at the statutory rate.
During
the pendency of this appeal, Petitioner provided Respondent with additional
information and documentation which is acceptable to the Auditing Division and
which supports a reduction of the audit deficiency. This additional information and documentation included exemption
certificates relating to some of the sales of Petitioner, including the
exemption certificates attached to the Petitioner’s brief dated February 28,
1996, as Exhibits M, N and O. Those
copies of invoices show COMPANY A
payment of sales tax on some of its
purchases. Information was also provided regarding the nature of computer
software purchased by Petitioner, and information necessary to provide credit
for tax collected on container deposits to reflect the holding of the Utah
Court of Appeals in Mount Olympus Waters, Inc. v. Utah State Tax Commission,
877 P.2d 1271 (Ut. Ct. App. 1994).
Based
upon the additional information, the tax and interest deficiency for the audit
period has been recomputed to reflect the deductions addressed by the parties
and agreed to by the parties as provided above. The recomputed tax deficiency is $$$$$, and the recomputed
interest deficiency is $$$$$ as of May 31, 1996, with interest continuing to
accrue at the statutory rate.
Petitioner
and Respondent have both agreed that the recomputed tax deficiency stated above
accurately accounts for the adjustments to the audit resulting from the
additional information and documentation which has been provided and which was
acceptable to the Auditing Division.
Petitioner and Respondent have entered into a stipulation agreeing to
the adjustments to the audit deficiency, but agreeing that the remaining issues
would be presented to the Commission at the hearing.
Both
parties have requested that the Tax Commission accept and approve the
recalculated tax deficiencies as set forth in the amended audit deficiency
notice, and that an Order be issued directing that the adjustments be made to
the audit to reflect the recomputed tax amount and the resulting interest. Such recalculated tax and interest
deficiencies are subject to review and possible challenge by political
subdivisions as provided in Utah Code Annotated §59-12-209. Notice of the proposed recalculated
deficiency will be provided to such political subdivisions.
Following
the stipulation of the parties, there are still four separate issues to be
decided by the Commission. The primary
issue is whether or not the natural gas and electricity used as fuel to process
the water is a non-commercial consumption and therefore, not subject to sales
tax. It is the position of Petitioner
that the use of such natural gas and electricity is used for manufacturing and
processing, which is not a commercial use of the fuel, and is therefore, not
subject to sales tax.
Petitioner
has operated for more than thirty years, and its product lines include spring
water, distilled water, and purified water.
The spring water is processed by drawing it from the spring of
Petitioner, and then transporting it by truck to be stored at the plant of
Petitioner. The water is then passed
through carbon and other filters, and is exposed to ozone. The water is then exposed to ultra violet
light, bottled and placed in boxes.
Spring water is sold in large containers and marketed as a replacement
for tap water. However, in smaller
containers it is also marketed as an alternative to soft drinks and other
beverages at food and convenience stores.
The
purified water, which is sold by COMPANY A, is taken from municipal water supplies,
and is then softened and filtered. It
is then subjected to reverse osmosis, and deionization. Following the deionization, the water is
exposed to ozone, then to ultra violet light, and is finally bottled and placed
in boxes. Purified water is used
primarily for laboratory purposes, including laboratories in hospitals and
industry.
The
distilled water processed by COMPANY A, is again taken from municipal water
sources and is softened and filtered.
This water is also subject to reverse osmosis, then distilled in a
pharmaceutical grade still, again filtered, exposed to ozone, and then exposed
to ultra violet light. Ultimately it is
bottled and placed in boxes for sale and distribution. Distilled water is used in special diets and
some manufacturing processes.
Most
of the spring water of Petitioner is sold in five gallon containers, although
some is sold in smaller containers.
Spring water accounts for approximately 60% of the sales of Petitioner,
while purified water accounts for approximately 10% of the sales, and the
remainder is primarily sales of distilled water.
Utah
Code Annotated §59-12-103, imposes a sales and use tax on amounts paid or
charged for, “(c) gas, electricity, heat, coal, fuel oil, or other fuels sold
or furnished for commercial consumption;” tax is also imposed at a different
tax rate on those same fuels when used for
residential use. However,
Petitioner argues that its use of such fuels is not for either commercial
consumption or residential use, but that it is instead used for processing,
which is neither residential use or commercial consumption.
Rule
R865-19S-35, Utah Administrative Code, defines both commercial consumption and
non-commercial consumption. The rule
provides that commercial consumption is as defined in the statute, and
“non-commercial consumption is defined as fuel used in mining, agriculture, or
manufacturing.” The provisions relating
to mining and agriculture clearly do not apply. Subparagraph (3) relates to manufacturing, and provides that
non-commercial consumption would include “use in manufacturing tangible
personal property for use in producing or compounding of a product which will
be resold.” The processes used by
Petitioner in preparing the water for resale do not constitute the compounding
of a product. Petitioner has argued
that ozone is added to the water, but it is clear that the ozone is not a
component part of the final finished product, but instead it is bubbled through
the water. The ozone does not remain as a component part when the water is
sold.
The
Utah Court of Appeals held in the case of Mount Olympus Waters, Inc. v. Utah
State Tax Commission, 877 P.2d 1271 (Utah Ct. App. 1994) that Mount Olympus
is not a manufacturing facility.
Although Petitioner argues that it meets the definition of
non-commercial consumption set forth above because it combines two or more
ingredients or parts to produce a product, the Commission specifically finds
that the ozone, which is the only product added, does not remain with the water
and does not constitute a component part at the time it is sold. Therefore, the Commission specifically finds
that the process does not constitute manufacturing as defined or intended by
the rule.
The
1996 Utah Legislature amended Utah Code Annotated §59-12-102, in which the
definition of commercial use is contained, and specifically provided that
commercial use does not include industrial use. The amendment added a definition for industrial use, which
includes industrial use, mining, agriculture and manufacturing, the same
categories which were included in the rule prior to 1996. Utah Code Annotated §59-12-102(10)(c),
defines exempt manufacturing as “manufacturing tangible personal property at an
establishment described in SIC codes 2000-3999 of the 1987 Standard Industrial
Classification Manual of the Federal Executive Office of the President, Office
of Management and Budget.” Therefore,
while the new statute is much more precise by including the SIC codes, it is
consistent with the Auditing Division’s position and prior interpretations from
the Commission based upon the rule.
Although the new statute does not govern this proceeding, it is helpful
in interpreting the intent of the Legislature in providing an exemption for fuels
used for purposes other than commercial consumption or residential use.
Accordingly,
the Commission finds that the gas, electricity, and other fuels used by
Petitioner are not exempt from the sales and use tax.
The
second issue raised by Petitioner in this proceeding is its attempt to satisfy
the requirement for obtaining exemption certificates from businesses to which
it sold products without collecting the sales tax thereon. A substantial portion of the audit
assessment made by Respondent was for the failure of Petitioner to obtain the
exemption certificates on portions of the products which were sold and on which
no sales or use tax was collected.
Following the original audit, Petitioner contacted numerous customers
and obtained exemption certificates which were provided to the Auditing Division. Some of those exemption certificates were
satisfactory to the Auditing Division, which resulted in a substantial portion
of the adjustments made in arriving at the revised audit report stipulated to
by the parties. However, Petitioner
also provided several affidavits from its employees, including the Sales
Manager, Assistant Sales Manager of Petitioner, and the General Manager for the
XXXXX office. In each one of those
affidavits, the supervising employees of Petitioner state under oath that the
products shown on the invoices as sold to each of the named businesses were
delivered to the named business and were placed upon the shelves of the retail
business for retail sale to the general public. The businesses for which such affidavits were filed were
primarily service stations, convenience stores, markets, and other retail
establishments which are now out of business which eliminates the possibility
of now obtaining exemption certificates.
The
exemption at issue is provided by Utah Code Annotated §59-12-104(28), which
provides as follows:
(28) 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 of a manufactured or
compounded product;
Utah
Code Annotated §59-12-106 deals with the requirement to obtain exemption
certificates, and provides as follows:
(2) For the purpose of
the proper administration of this chapter and to prevent evasion of the tax and
the duty to collect the tax, it shall be presumed that tangible personal
property or any other taxable item or service under Subsection 59-12-103(1),
sold by any person for delivery in this state is sold for storage, use, or
other consumption in this state unless the person selling such property,
item, or service has taken from the purchaser an exemption certificate
signed by and bearing the name and address of the purchaser to the effect that
the property, item, or service was exempted under Section 59-12-104. The
exemption certificates shall contain information as prescribed by the
commission. (emphasis added)
To
provide for the administration of the exemption certificate requirement, the
Commission has adopted Rule R865-19S-23, Utah Administrative Code, which
provides in relevant part:
E. The burden of proving that a sale is for
resale or otherwise exempt is upon the person who makes the sale. If any agent of the Tax Commission requests
the vendor to produce a valid exemption certificate or other similar
acceptable evidence to support the vendor’s claim that a sale is for resale or
otherwise exempt, and the vendor is unable to comply, the sale will be
considered taxable and the tax shall be payable by the vendor. (emphasis added)
In
reviewing the overall scheme of the statutes and the rule, it is evident that
all sales are subject to tax unless an exemption is provided, and in order to
substantiate an exemption for resale, the selling vendor must obtain exemption
certificates. If the vendor does not
obtain exemption certificates, then there is a presumption that the sale is
taxable and not exempt. However, it
does appear that the presumption is intended to be rebuttable, and the rule
adopted by the Commission provides that the presumption can be rebutted by providing
an exemption certificate or “other acceptable evidence”. Therefore, the real issue before this
Commission is whether the affidavits submitted by Petitioner in support of its
position would constitute “other acceptable evidence” that the sale was for
resale.
In
examining the affidavits, it is clear that the parties to whom the products
were sold have not refused to provide such an exemption certificate, and there
is no dispute about whether the products were placed upon the shelves for
resale. Petitioner has represented that
all of the parties for whom affidavits were filed are now out of business and
they cannot obtain such an exemption certificate. There is also no question that each of the customers of
Petitioner was a retail business, had a retail sales tax licence, and that
presumably sales tax was collected on the sale of the product and was remitted
by the vendor, or that it at least became the responsibility of that vendor to
submit the sales tax upon the sale of the products. There is also no evidence that Petitioner has a retail store, or
otherwise regularly engages in the retail sale of those products.
In
this case, Respondent has correctly applied its interpretation of the law,
which imposes a presumption of taxability when no exemption certificates have
been provided, which places the burden of proof on Petitioner to establish by
other acceptable evidence that the sale was for resale. The Commission must therefore decide
whether, in its judgment, the affidavits constitute “other acceptable
evidence”. In making that evaluation,
the Commission is concerned primarily with the relevance, reliability, or
credibility of the information. In this
case, there is no question about the relevance of the affidavits which have
been submitted. If the facts are as
represented, then it clearly is relevant in determining whether Petitioner sold
the products for resale and whether the statutory exemption would apply.
Regarding
the credibility and reliability, the affidavits have been submitted by the area
sales manager for XXXXX, the sales manager and the assistant sales manager for
the company, who are supervisory or quasi-supervisory individuals. The
statements are made under oath before a Notary Public, and Respondent has not
challenged the statements or introduced any contradictory or rebuttal evidence
which would in any way place in dispute the facts which are represented by the
affidavits. In addition, all of the
known facts and circumstances support the representations made in the
affidavits. The written invoices
confirm that the products were sold to markets, service stations and
convenience stores which were retail establishments. Therefore, in the opinion of the Commission, in the absence of
any challenge or rebuttal evidence, the affidavits, together with all of the
surrounding circumstances, including all available written documentation,
constitute sufficient other acceptable evidence to establish that the sales
were exempt as sales for resale. When there is uncontroverted evidence that the
product was placed on retail sales shelves of a licensed retailer, which is
supported by all of the available written documentation and the surrounding
circumstances, there is at least an inference that the product was sold at
retail, and that sales tax was collected on such sale. (See Federal Rules of
Evidence, Rule 301).
Accordingly,
the Commission determines that the portion of the audit assessment represented
by the failure to provide exemption certificates should be removed and that the
audit report should be adjusted to remove such taxes.
The
third issue relates to products which were shipped from the Salt Lake office,
and for which Petitioner alleges the sales were actually made from the XXXXX
and XXXXX areas where the sales tax rates are slightly less than for the Salt
Lake area. Respondent has argued that
Petitioner does not have retail licenses to sell within the XXXXX and XXXXX
areas. No evidence on this issue was
submitted by Petitioner. Accordingly,
the Commission determines that Petitioner has not met its burden of proof to
establish that the audit report should be adjusted to reduce the rate on the
alleged XXXXX and XXXXX sales.
The
final issue was for certain sales to XXXXX, which Petitioner alleges were
exempt because Phillips 66 self accrues the sales tax. It is undisputed that if XXXXX does self
accrue, then Petitioner would not owe the tax, but if XXXXX does not self
accrue, then Petitioner would owe the tax assessed by the audit report. Petitioner was given additional time to
provide a letter or other evidence from XXXXX that it self accrues the
tax. No such evidence was submitted in
the time provided, or even to the date of this order, which is several months
after the date allowed. Therefore,
Petitioner has failed to meet its burden of proof on the issue relating to XXXXX,
and such sales are determined to be taxable.
DECISION AND
ORDER
Based
upon the information presented at the hearing, and the records of the Tax
Commission, the Commission finds that the amended audit assessment made by
Respondent against Petitioner should be sustained in its entirety, except that
the sales tax related to the failure to provide the exemption certificates
should be removed to the extent that it related to the affidavits provided as
Exhibits A, B, C, D, E, F, G, H, I, J, K, L, M, N, O and P which were attached
to Petitioner’s brief. With the
exception of the sales tax relating to the lack of exemption certificates as
set forth, the amended audit report is sustained. The stipulation amending the audit
report and reducing the audit deficiency is also approved. A copy of this decision was submitted to the
affected political subdivisions as provided by Utah Code Annotated §59-12-209,
and no response was received within the comment period.
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 19 day of March, 1996.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Richard
B. McKeown
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner
^^