95-0504

Sales Tax

Signed 3/19/96

 

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX,

Petitioner, : ORDER

:

v. : Appeal No. 95-0504

:

AUDITING DIVISION OF THE : Account No. XXXXX

UTAH STATE TAX COMMISSION, :

:

Respondent. : Tax Type: Sales Tax

_____________________________________

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. Joe B. Pacheco, Commissioner, heard the matter for and on behalf of the Commission. Present and representing Petitioner by telephone were XXXXX, Director of Taxes, and XXXXX. Present and representing Respondent were XXXXX, Assistant Attorney General, XXXXX and XXXXX of the Auditing Division.

The sole issue Remaining in the Appeal is the taxability of blank movie tickets purchased by XXXXX.

APPLICABLE LAW

UTAH CODE ANN. §59-12-104(27) SUPP.. 1995 - Exemption(28) Property purchased for resale in this State, in the regular course of business, either in it’s original form or as an ingredient or component part of a manufactured or compounded product.

DISCUSSION

1. Petitioner purchases rolls of blank stock computer tickets for use in theaters. The computer at the XXXXX prints the movie information on the ticket when it is purchased by the customer: (the specific movie and movie time the customer requests.) The customer has a variety of movies to select from. When the customer makes a choice the information is relayed to the ticket seller and the transaction is printed on the ticket. Petitioner determines whether customers have the right to enter the movie by requiring the customer to show their ticket before entering the movie. Petitioner argues that the purchase of tickets that are used at the XXXXX are exempt because they are items purchased for resale and exempt pursuant to UTAH CODE ANN. 59-12-104(27).

2. Respondent argues that XXXXX is liable for sales taxes arising from it’s movie ticket purchases because XXXXX is the ultimate consumer of the tickets and the tickets are merely incidental to the purchase made by XXXXX customers.

3. Petitioner’s analysis for it’s position is that the customer is the consumer. The ticket has value to the customer.

The tickets, unlike projectors and bulbs used in showing movies, can be itemized to the end user - the customer. In providing the movie entertainment, XXXXX must “consume” projectors and bulbs. Their consumption cannot be separated by individual customers but they are consumed by many customers. As such, they are considered “consumed” by XXXXX and taxed to XXXXX. Additionally, the customer does not have rights to these items and never has possession of these items.

Distinguishing, the tickets have no value to XXXXX. They are not needed by XXXXX to provide the service of projecting a movie to the customer. The ticket only has value to the customer as proof of his or her right to attend a movie or receive a refund. The ticket can be itemized separately to each customer and the customer has possession of the ticket. See B.J. Titan Services v. State Tax Commission, Utah SC No.900368.

A ticket is also distinguishable from soap, towels, and linens that are in a motel room and “used” by the lodger (Sines v. State Tax Commission, 39 P.2nd 130). These items are “consumed” by the motel in providing the service of renting a room as many of these items are used again by other lodgers and are not generally traceable to any specific revenue.

Whereas, the tickets have a direct relationship to entrance to the movie and are not an indirect consumable such as bulbs, soaps and towels.

Additionally, tickets provided to customers in the service industry of movie exhibition are the same as paint used in the service industry of auto repair and the same as leather used in the service industry of shoe repair (See Utah RuleR865-19S-59 and Western Leather & Finding Co. v. State Tax Commission, 48 P.2nd 526, respectively). The customer "consumes" and "uses" the ticket. It is distinguishable from items "consumed" by XXXXX in order to provide the service. In the Utah Rule, paint is exempt since the customer leaves with the paint on their automobile but other tangibles “consumed” by the repairmen in order to provide the painting service are taxable to the repairmen such as, masking tape, sandpaper and other supplies.

Based on the cases and rulings above, taxpayers in all taxable service industries must distinguish between the tangible property that the customers actually take possession of and “consume” in connection with the service provided versus those which are used by the service provider to perform the service and which are only indirectly “consumed” by the customer. XXXXX believes the tickets are not any different from paint, leather, etc. transferred to customers in other service industries.

Respondent argues its position by saying the movie tickets purchased by XXXXX are ultimately consumed by XXXXX, not its customers, and XXXXX purchases of the tickets are therefore subject to sales tax. The Utah Code exempts “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” from sales tax. Utah Code Ann. §59-12-104(29) (Supp. 1995). In determining the applicability of this exemption, “the elemental question is “who consumes the property . . .” Sine v. State Tax Comm, 390 P.2d 130, 131 (Utah 1964). Sales made to the ultimate consumer are subject to sales tax. BJ-Titan services v. State Tax Comm’n, 842 P.2nd 822, 825 (Utah 1992).

In ascertaining the “ultimate consumer” of products, the Utah Supreme Court has noted that some materials “are not intended to become ingredients or component parts of the finished product.” Id. at 827. Also, the court has recognized that often, “tangible personal property used in providing professional services is consumed by the provider rather than the client.” Id. For example, although the customer uses the products, a motel owner is the ultimate consumer of towels, blankets, soap, and other property used in renting rooms. Sine, 390 P.2nd 130, 131

Utah 1964).

Thus, like the motel owner’s purchases in Sine, for the purposes of §59-12-104(29), XXXXX is the ultimate consumer of the movie tickets it purchases. XXXXX provides movies, not tickets, to its customers and the tickets are not intended to become components of the movies. Moreover, XXXXX uses the tickets to verify whether it’s customers have paid for the movies XXXXX provides. Furthermore, XXXXX is the last party to use the tickets when it requires customers to show their ticket before entering its movie theaters. Accordingly, the tickets used by XXXXX in providing movies are consumed by XXXXX, not its customers.

Additionally, the tickets purchased by XXXXX are merely incidental to the product and/or service it provides. In BJ- Titan, the Utah Supreme Court identified six considerations used to determine “whether the object of the transaction constitutes tangible personal property or services.” 842 P.2nd at 826. These considerations include:

(1) the value of the tangible property to the customer in relation to that of the services; (2) the cost of the property to the seller; (3) the customer’s rights to possession or ownership of the property; (4) the ability to separately itemize charges for the property and services; (5) the extent to which the services increase the value of the property or to which the property increases the value of the services; and (6) the extent that such services are rendered in similar transactions.

Id

Applying these considerations, movie tickets have a minimal value to XXXXX customers compared to the value of the movie itself. Also, the cost of the tickets to XXXXX is insignificant compared to the cost of the movies. Although XXXXX customers possess the tickets, they do so to allow XXXXX to determine whether they have paid for the movie. Additionally, XXXXX may be able to separately itemize charges for the tickets, but no more than the motel owner in Sine could separately itemize the towels, blankets, and soap used by its customers. Furthermore, the tickets in no way increase the value of XXXXX movies to its customers. Finally, in similar transactions (i.e. admissions to sporting events, concerts, etc.), tickets are used in the exact same manner; as a means of determining whether customers have paid, not as a component of the actual product or service. Therefore, the movie tickets used by XXXXX are only incidental to the movies it provides.

DECISION AND ORDER

The Tax Commission determines that the Petitioner, not the customer, is the ultimate Consumer of the movie tickets. In addition the ticket is only incidental to the movies provided by XXXXX. Based on the above the Tax Commission finds the purchase of the movie ticket taxable to the Petitioner, XXXXX, and rules in favor of the Respondent, Auditing Division.

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 Roger O. Tew

Chairman Commissioner

Joe B. Pacheco Alice Shearer

Commissioner Commissioner

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