95-0964

Sales

Signed 4/17/96

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX,

Petitioner, ) FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. ) AND FINAL DECISION

AUDITING DIVISION OF THE ) Appeal No. 95-0964

UTAH STATE TAX COMMISSION, :

) Account No. XXXXX

Respondent. :

) Tax Type: Sales & Use Tax

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX. Commission Chairman W. Val Oveson, heard the matter for and on behalf of the Commission. Present and representing Petitioner were XXXXX, Deputy County Attorney and XXXXX, Deputy County Attorney. Present and representing Respondent were XXXXX, Assistant Attorney General, XXXXX, Deputy Director of the Auditing Division, and XXXXX, Audit Manager.

The tax in question is sales and use tax. The period in question is XXXXX through XXXXX.

Petitioner is a contractor engaged to manage the XXXXX Facility for XXXXX. The contract specifically designated Petitioner as an agent of the county. All funds involved in the operation of the XXXXX are county funds, either by way of direct deposit by the county into the operating account, or by virtue of receipt from third-parties pursuant to XXXXX operations. The operating account is a public account and is fully accessible by the XXXXX Treasurer. Petitioner handles all funds in accordance with the county's fund management ordinances and policies. The contract precludes Petitioner from engaging in private business activities, or utilizing any of the county's property or funds, for anything other than the county purposes set out in the contract. Vendors are informed that sales are to the XXXXX, a tax-exempt entity of XXXXX. Upon delivery, the title, as well as risk of loss or damage, rests with XXXXX. Any purchases made by Petitioner, pursuant to its agency relationship with XXXXX, are made by a Special Deputy County Purchasing Agent in accordance with duly adopted county purchasing procedures. Petitioner operates the county's facility in accordance with an annual management plan submitted, reviewed, approved and monitored by XXXXX on a monthly basis.

The issue in this case is whether the structure of the arrangements between Petitioner and XXXXX are sufficient to cause Petitioner to be so closely connected to the government that the two cannot realistically be viewed as separate entities thus allowing Petitioner to be exempt from Utah Sales and Use Tax pursuant to Utah Code Ann. '59-12-104(2). In other words, is the Petitioner an agent, or merely a contractor, as outlined in the Utah Code?

APPLICABLE LAW

The applicable Utah law on the issue is Utah Code Ann. '59-12-104(2).

The following sales and uses are exempt from the taxes imposed by this chapter:

****

(2) sales to the state, its institutions, and its political subdivisions:...... (amended effective July 1, 1994, to limit the exemption for construction materials)

Utah State Tax Commission Administrative Rule R865-19S-91 further clarify=s the statutes as follows:

A. Sales of tangible personal property for services as defined in '59-12-102 and '59-12-103 to federal, state, and municipal government facilities managers or supply contractors are subject to sales or use tax if the manager or contractor uses or consumes the property. Tax is due even though a contract vests title in the government and even if direct payment is made by the government to a vendor.

B. In order to receive immunity from the imposition of sales or use tax, the purchasing entity must actually be the government, or so closely connected to the government that the two cannot realistically be viewed as separate entities. It must be clear that the government intends the contractor or manager to be its agent. A contract to perform services as a project manager or product supplier does not, in and of itself, create an agency relationship.

ANALYSIS

Utah State Tax Commission Administrative Rule R865-19S-91 was motivated by the U.S. Supreme Court=s decision in United States v. New Mexico, 455 U.S. 720, 71 L.E.2d 580, 102 S.Ct. 1373 (1982). In this case, the Supreme Court upheld New Mexico=s gross receipts tax and a compensating use tax on certain government contractors who were providing management, maintenance, and construction and repair work for an agency of the U.S. Government. The court reasoned that the Government was not immune from New Mexico=s tax., @What the Court=s cases leave room for, then, is the conclusion that tax immunity is appropriate in only one circumstance: When the levy falls on the United States itself, or on an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned.@ (Quoting United States v. New Mexico, 455 U.S. 720 at 734) The exact wording in the Tax Commission rule comes from this quotation. The court goes on to state, AThus, a finding of constitutional tax immunity requires something more than the invocation of traditional agency notions: to resist the State=s taxing power, a private taxpayer must actually Astand in the Government=s shoes.@ (Citing City of Detroit v. Murray Corp, 355 U.S. at 503.)

Although the concepts of law articulated in New Mexico apply to the relationship between the federal government and its contractors, the legal theories are similar to the relationship between local government and their contractors. Indeed, if the State of Utah attempted to impose a tax on federal government contractors and not on local government contractors, the federal government might claim unequal treatment and void the state tax.

After thoroughly reviewing New Mexico, and applying the legal principles of the case to the issue before us, the Commission concludes that XXXXX made a valiant attempt to structure its relationship with Petitioner to meet the standards outlined in the case. It is the judgment of the Commission that the standard has been met, and that Petitioner has become an Ainstrumentality@ of XXXXX.

The standards relied on by the Commission to grant the exemption to Petitioner are outlined in Kern-Kimerick, Inc. v. Scurlock, 347 U.S. 110, 98 L.Ed 546, 74 S.Ct 403 (1954), as follows: 1) Petitioner=s representative identified themselves as a County procurement agent; 2) when purchases were made title passed directly to the County; 3) the purchase orders used by Petitioner declared that the purchase was made by the County and that the County was liable on the sale; 4) Petitioner required specific County approval for each transaction,(through adoption of a modified County Purchasing Ordinance); 5) Petitioner=s purchasing agent was officially designated as a County purchasing agent by resolution of the County Commission.

Petitioner argues that decisions of the Utah Supreme Court have addressed the issue of what requirements must be met for a sale to be deemed one to a tax exempt entity as outlined in Brown Plumbing and Heating v. Utah State Tax Commission, 861 P.2d 435 (Utah, 1993) and Thorup Brothers Construction Inc. v. Auditing Division of the Utah State Tax Commission, 860 P.2d 324 (Utah, 1993). In both cases, tax exempt entities procured materials which were incorporated by a contractor into a building pursuant to a contract between the tax exempt entity and the contractor. The exempt entity made payment to the vendors with their own check, thus creating a direct payment between the exempt entity and the vendor. This feature of the cases makes them very different from the instant case and is irrelevant to the Commission in arriving at our decision. The Court invalidated a portion of the Commission=s rule R865-19S-91 relative to the method of payment. The Commission can no longer invalidate an exemption if the exempt entity pays the vendor directly with their own check. Again, because of the facts of the case, this issue is moot.

In summary, the county has met the requirements proscribed by the U.S. Supreme Court to demonstrate that Petitioner was their agent and was standing in XXXXX shoes. All transactions entered into by Petitioner pursuant to its agreement with XXXXX, including those specifically identified in the audit and notice of deficiency, were actions of XXXXX and thus exempt from the imposition of Utah sales and use tax pursuant to Utah Code Annotated Section 59-12-104(2).

DECISION AND ORDER

Petitioner is an agent and/or instrumentality of XXXXX in the operation of the XXXXX, a XXXXX facility. Sales which are made to Petitioner in that capacity, are sales to XXXXX and thus exempt from Utah's sale and use tax. It is so ordered.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

DATED this 17 day of April 1996.

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 R861-1A-5(P) and Utah Code Ann. ''59-1-601(1), 63-46b-13 et. seq.)