95-0672
Sales and Use
Signed 7/25/96
BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX,
Petitioner, : ORDER
:
v. : Appeal No. 95-0672
:
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 and XXXXX. Present and representing Respondent were
XXXXX, Assistant Attorney General, and XXXXX.
Respondent
performed an audit on the books and records of Petitioner for the audit period
XXXXX. As a result of the audit, an
assessment of $$$$$ along with interest thereon of $$$$$ was made for
additional sales and use tax as set out in the Amended Audit Summary. Petitioner is appealing a portion of the
assessment resulting from items on Schedule 2 and Schedule 3.
ANALYSIS
Petitioner
is challenging three areas of the assessment.
Petitioner is challenging the portion of the assessment related to
Petitioner's acquisition of certain items of office furniture and equipment,
referred to as the "XXXXX."
The second area is the portion of assessment arising from Petitioner's
purchases of stock footage. The third
is the assessment arising from Petitioner's purchase of XXXXX equipment.
I.
XXXXX EQUIPMENT.
Petitioner
was assessed for a taxable amount of $$$$$ for the XXXXX equipment. Petitioner's representative received some
used office furniture and equipment from her father which had been left in an
office building he had purchased, then resold.
Petitioner's representative explained that her father is not in the business
of selling office furniture or equipment.
His business is buying and selling real estate. This was a one time transaction which she
thought should be exempt pursuant to Utah Administrative RuleR865-19S-38 as an
isolated and occasional sale.
From
the circumstances presented by Petitioner, which were not contested by
Respondent, this XXXXX equipment appears to be an isolated and occasional sale
which should be exempt from tax.
II.
STOCK FOOTAGE
Petitioner
produces an audio or video product which it sells to its customers. Petitioner purchases the one-time right to
use in its product images from tapes, disks or slides which include previously
photographed images or sound. These
images are referred to as "stock footage." Vendors supply the stock footage to Petitioner who temporarily
licenses the use of the stock footage to include in its final product. After its use the stock footage is either
returned to the vendor or if the vendor gave Petitioner a duplicate, the
duplicate is stored in Petitioner's library, but the Petitioner has no right to
use the stock footage again for any other production. Respondent has assessed tax on Petitioner's purchase of the right
to use the stock footage.
Petitioner
argues that Respondent's assessment for the stock footage results in double
taxation because the stock footage is a key ingredient in Petitioner's final
product. When complete, Petitioner's
final product is sold and the customer pays sales tax on the final product
price. Petitioner argues that it is
unfair and double taxation to tax the charge paid by Petitioner for the right
to use the stock footage as well as tax the final product. Petitioner further asserts that the stock
footage should not be taxed because it is an integral or component part of the final
product.
Petitioner's
representatives point out that if, instead of using stock footage, Petitioner's
photographers went out and photographed the desired image no tax would be
assessed. They compared these
circumstances to paying a license fee or royalty for the limited right to
duplicate artwork, a transaction which Petitioner maintains is not taxable.
Respondent
maintains that the stock footage does not become and remain an integral part of
Petitioner's final product and is therefore subject to sales or use tax under
Utah Code Ann. §59-12-103 and Utah Administrative RuleR865-19S-29(B). Respondent likens the stock footage to a
tool used to produce the final product, not a component part. Pointing out the Petitioner's customers have
no right to the stock footage for any purpose other than use in the singular
finished product. Respondent states
that Petitioner either leases or purchases the stock footage as a customer of
the stock footage vendor. The supplied
footage is never sold to Petitioner's customers and title does not pass to Petitioner's
customers. Instead, according to
Respondent, Petitioner consumes the stock footage in the production of a
finished product.
Respondent
further argues that if Petitioner's purchase of the stock footage was a
license, then the licensing fee would be taxable similar to the licensing of
software under Utah Administrative RuleR865-19S-92(A)(4).
In
considering whether the stock footage is eligible for exemption, the Commission
recognizes that Petitioner's right to use the stock footage is consumed in its
production of the final product. Utah
Code Ann. §59-12-104(28) allows an exemption from sales and use tax for
property purchased for resale in its original form or as an ingredient or
component part. In Nucor Corp. v.
Utah State Tax Commission, 832 P.2d 1294 (Utah 1992) the Utah Supreme Court
upheld a decision where the Tax Commission had considered whether the primary
purpose of the purchase was for resale.
The facts and circumstances as presented indicate that Petitioner's
purchase of the right to use the stock footage was not for resale. The purchase of the stock footage is
therefore not exempt from sales tax pursuant to Utah Code Ann. §59-12-104(28).
III.
PURCHASE OF THE XXXXX EQUIPMENT
On
XXXXX, Petitioner purchased an XXXXX which is equipment used in editing video
tape productions. The XXXXX was located
on Petitioner's premises and Petitioner's employee operated this equipment. Outside producers would pay the Petitioner
for the editing services of the machine operated by Petitioner's employee. For
the remaining months of XXXXX Petitioner received approximately $$$$$ from the
use of this machine. About half came
from Petitioner's customers and half from other producers. In January of XXXXX Petitioner received
income of $$$$$. In XXXXX the employee
trained in using the XXXXX left Petitioner's employment. The equipment remained
unused until XXXXX when Petitioner leased it to another XXXXX in Utah.
Petitioner
argues that the assessment of sales tax on the purchase of the XXXXX is taxing
several times over the same equipment, by taxing at the time of the purchase,
when used by the outside producers, when the outside producers sold their final
product and when it was ultimately leased to the other Utah production
company. Petitioner also argues that it
purchased the XXXXX for the purposes of leasing the equipment to outside
producers so the purchase was not taxable.
Petitioner's representative requested for equity reasons that if the
purchase was found to be taxable, since Petitioner only used the equipment for
one year and it was estimated to have a seven year economic life, Petitioner
should be required to pay only one/seventh of the sales tax.
Respondent
argues that sales tax is levied upon the amount paid for "retail sales of
tangible personal property made within the state." Utah Code Ann.
§59-12-103(1). Respondent maintains
that the XXXXX qualifies as "tangible personal property" and the
purchase was a taxable event because the XXXXX was not purchased for resale or
lease.
Respondent
points to Utah Code Ann. §59-12-102(15)(e) which includes in the definition of
sale "any transaction under which right to possession, operation or use of
any article of tangible personal property is granted under a lease." When Petitioner performed editing services
for outside producers the equipment remained at Petitioner's premise and was
generally operated by Petitioner's employee.
Respondent maintained that this arrangement with the outside producers did
not qualify for the exemption.
Furthermore, the transaction in question is the original purchase of the
XXXXX equipment, not the subsequent lease a year or so later.
Upon
review of the information provided, although Petitioner did charge outside
producers for its use, the invoices indicated the charge was for editing
services, not rental of the XXXXX equipment.
Further, Petitioner also used the equipment in the productions it made
for its own clients. The facts indicate
that at the time of the purchase the XXXXX was purchased for use and not for
lease, so the purchase was therefore subject to sales tax. The Commission determines that the law does
not allow the assessment of only a fraction of the tax for the period of time
the Petitioner used the equipment.
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 of tax and interest
made by Respondent against Petitioner for the XXXXX audit period, as it
pertains to the assessment relating to the XXXXX purchase, the stock footage
and all other audit items is sustained, with the following exception. The assessment of tax and interest as it
pertains to the XXXXX equipment is deleted.
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 25 day of July, 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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