95-0330

Sales Tax

Signed 8/9/95

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX )

XXXXX : FINDINGS OF FACT,

Petitioner, ) CONCLUSIONS OF LAW,

v. : AND FINAL DECISION

)

AUDITING DIVISION OF THE : Appeal No. 95-0330

UTAH STATE TAX COMMISSION, )

Respondent. : Account No. XXXXX

) Tax Type: Sales & Use Tax

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission upon Respondent's Request For Decision dated XXXXX. At the Prehearing Conference in this matter, with Jane Phan, Administrative Law Judge, presiding, XXXXX, C.P.A., of XXXXX present and representing Petitioner and XXXXX, Assistant Attorney General, XXXXX and XXXXX present and representing Respondent, and as was set out in the Prehearing Order dated XXXXX, Petitioner waived its rights to a Settlement Conference and requested that a decision be made based on the file and the memoranda to be submitted.

Based upon the file the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The penalty in question was a negligence penalty of $$$$$ calculated at 10% of the additional sales and use tax of $$$$$ assessed against Petitioner resulting from an audit. Petitioner is appealing the negligence penalty and not the additional tax assessment or the interest assessed relating to the audit.

2. The audit period in question is XXXXX through XXXXX. 3. The audit in question was Petitioner's second sales and use tax audit. The prior audit was for the period of XXXXX through XXXXX pursuant to which additional tax in the amount of $$$$$ was assessed against Petitioner. No penalty was assessed resulting from the prior audit.

4. In both audits Petitioner had made errors in its tax treatment of reusable "prepress" material.

5. During the first audit, the Auditing Division worked with the firm of Certified Public Accountants retained by Petitioner. This accounting firm stated that, to the best of their understanding, they thought they had taken the necessary action to have Petitioner correct the errors found in the first audit relating to the reusable prepress material.

APPLICABLE LAW

If any underpayment of tax is due to negligence, the penalty is 10% of the underpayment. Utah Code Ann. '59-1-401(5)(a)(i) (1994 Supp.).^[1]

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)(1994 Supp.).^[2]

ANALYSIS

The only issue in this appeal is the assessment of the 10% negligence penalty. In considering this issue there are two questions for analysis. Whether or not the underpayment of the tax was due to negligence under '59-1-401 (5)(a)(i) or whether or not Petitioner has shown sufficient reasonable cause for waiver of the penalty and interest under '59-1-401(10).

In the record Petitioner has given two reasons supporting waiver of the negligence penalty. First, Petitioner states that the penalty should be waived because there was no intent to evade payment of tax, that Petitioner just did not understand the tax treatment of the reusable prepress materials even after the first audit.

The second reason given by Petitioner was that after the first audit Respondent's representatives should have done a better job in explaining the tax at issue. Petitioner stated that during the first audit, the auditor did not make it clear to Petitioner, or to the accounting firm that represented Petitioner, how to comply with the tax law relating to the reusable prepress materials. In fact, the accounting firm that represented Petitioner stated by letter that after speaking with the tax auditor following the first audit and a reading of the law and Tax Commission bulletin, it did not correctly understand the law. It then advised Petitioner incorrectly. The accounting firm went on to state that Petitioner immediately implemented this advice. Petitioner asserts that it had followed the instructions given by the Auditing Division after the first audit to the best they were understood by both Petitioner and the accounting firm representing Petitioner.

Respondent asserted in Respondent's Brief that the negligence penalty was validly assessed against Petitioner because Petitioner was "at least negligent," in its failure to pay tax on the reusable prepress items. Respondent supported this position by the fact that much of the additional tax assessed in the subject audit resulted from the tax on the same reusable prepress materials that was found to be unpaid in the first audit. Respondent maintains that the Auditing Division informed Petitioner of the prepress liability at the time of the first audit.

Further, Respondent stated in its Brief that the negligence penalty is appropriate in this case because "a reasonable investigation into the applicable rules and statutes would have revealed that the taxes were due," and Petitioner's nonpayment is not based on "a legitimate, good faith interpretation of an arguable point of law." Citing the decision in Broadcast Int'l v. Utah State Tax Comm'n, 882 P.2d 691 (Utah App. 1994).

Lastly, Respondent argued that public policy supported imposition of the penalty to encourage payment of taxes.

Clearly the results of the first audit put Petitioner on notice of its incorrect tax treatment of reusable prepress items and that it should reasonably investigate the applicable rules and statutes. However, Petitioner did take action. Petitioner had retained a firm of certified public accountants who undertook a reasonable investigation to interpret the provisions of the law relating to the errors of the first audit and advised Petitioner accordingly. Although incorrect, the accountant's advice was based on a good faith interpretation of an arguably difficult area of law. This advice was immediately followed by Petitioner. Petitioner relied on the advice of its tax adviser which, in these circumstances, is sufficient reasonable cause for waiver of the penalties.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that sufficient cause has been shown which would justify a waiver of the penalties associated with the sales and use tax audit for the audit period of XXXXX through XXXXX, in the amount of $$$$$. It is so ordered.

DATED this 9th day of August, 1995.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

NOTICE: You have twenty (20) days after the date of a final order to file a Request for Reconsideration with the Commission. If you do not file a Request for Reconsideration with the Commission, you have thirty (30) days after the date of a final order to file a.) a Petition for Judicial Review in the Supreme Court, or b.) a Petition for Judicial Review by trial de novo in district court. (Utah Administrative Rule R861-1-5A(P) and Utah Code Ann. ''59-1-601(1), 63-46b-13(1), 63-46b-14(3)(a).)