95-0985

Sales

Signed 6/6/96

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

XXXXX,

Petitioner, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

v. ) AND FINAL DECISION

)

AUDITING DIVISION OF THE ) Appeal No. 95-0985

UTAH STATE TAX COMMISSION, )

) Account No. XXXXX

Respondent. ) Tax Type: Sales & Use Tax

) Audit Period: XXXXX

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on XXXXX. Joe B. Pacheco, Commissioner, heard the matter for and on behalf of the Commission. Present and representing Petitioner was XXXXX, Attorney at Law. Present and representing Respondent was XXXXX, Assistant Attorney General, together with XXXXX and XXXXX of the Auditing Division.

This matter was originally scheduled as an Initial Hearing. However, based upon a motion by the Petitioner and agreed to by Respondent, the hearing was changed to a Formal Hearing.

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its Findings of Fact, Conclusions of Law and Final Decision.

FINDINGS OF FACT

1. The tax in question is sales tax.

2. The period in question is XXXXX through XXXXX.

4. Petitioner stated that a payment was made to the drilling contractor for equipment that was lost during a drilling operation. The payment was made to indemnify the contractor. Petitioner says that there was not a sale in accordance with the definition of Utah Code Annotated '59-12-102(15). The transaction involving the lost equipment was not a sale because ownership did not pass and there was not a transfer of title, and neither party intended that title would pass for equipment which is lost. In addition, there was never any intent to sell the equipment by the drilling contractor and there was not intent to buy by XXXXX. Because there was no transfer of title or possession, it was physically impossible for XXXXX to take possession of the equipment. Petitioner says that the drilling contractor was in control of the equipment during the drilling operations and the sole owner of the equipment at all times when it was lost in the drilling hole. The Petitioner went on to say that the drilling contractor was providing drilling services to XXXXX in XXXXX County, and at no time did they take possession of nor did they have control of the equipment which was being used in the drilling process.

5. Petitioner said that the payment which was made was a reimbursed charge similar to an insurance payment. This payment was made because the drilling contractor required XXXXX to reimburse them if equipment was lost in the hole. The payment was intended to be for the cost of the equipment if it was lost, and it was understood by both parties that the "lost in hole" charge was intended to keep the drilling contractor in the same position as it was before the equipment was lost. Although XXXXX bears the risk of the cost if the equipment is lost in the hole, the payment did not create a sale because XXXXX did not take possession nor did title pass to XXXXX.

6. XXXXX says it has no equipment for drilling and does no drilling of its own. All of the work at the well site is contracted out. The drilling contractor, in this case XXXXX, handles all of the drilling for XXXXX. The contractor provides specialized tools for directional drilling. The testimony of XXXXX, a witness for the Petitioner, says that the XXXXX company never sells or rents the specialized equipment and does all drilling on its own.

7. The drilling plan for this well site called for an angle turn at the 7,000 foot level. The equipment got stuck at the 9,700 foot level and the drilling contractor was unable to turn or move the equipment up or down. XXXXX said that this type of occurance is fairly unusual.

8. Another specialized service company, separate from the drilling contractor, provided the "fishing service" which is a procedure used to free the drilling string from where it was stuck in the well.

9. Once the determination was made that the fishing service company could not jar the drilling string loose, the string was considered lost and gone forever. No one reenters the well to recover the tools after that point. Petitioner said that the equipment is unrecoverable and it is too cost prohibitive to recover. A cement plug is put in the well hole at this point.

10. XXXXX notified the drilling contractor after the efforts to retrieve the equipment was abandoned. XXXXX billed XXXXX for the cost of the equipment lost in the hole.

11. Subsequent to being notified of the lost equipment, more tools were brought in and XXXXX prepared an invoice for reimbursement of the lost tools.

12. A side-track was made which was a new and different well hole around the original well path.

13. XXXXX does not claim ownership to the equipment lost in the hole, and says it made a payment of XXXXX of the replacement cost to the drilling contractor to bring them back to the position they were before the loss.

14. XXXXX says it owns the lost equipment, even as of today. The equipment is proprietary and is not for sale.

15. XXXXX says it does not claim the property and does not intend to purchase the property.

16. XXXXX says it did not exercise the insurance option because it is self-insured.

17. Respondent argues that a sale took place and that one only needs to look at the invoice for that determination. The invoice from XXXXX has "sold to" clearly printed on it. XXXXX was provided tools and equipment, and XXXXX provided money for the tools and equipment in consideration. Nothing in the agreement says that XXXXX retains title to the equipment. Furthermore, even though Petitioner says there was not a sale, the equipment was in Petitioner's possession and remains on Petitioner's property.

18. Respondent argues that you need to look at the whole definition of a sale in the statute. Utah Code Annotated '59-12-103(1)(a) and(m) which say; There is levied a tax on the purchaser on the amounts paid or charged for the following:

a) retail sales or tangible personal property made within the state;

m) leases and rentals of tangible personal property if the site is in this state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state; and

19. Respondent says, the fact that the Petitioner claims there was no sale but that the payment is only a reimbursement is a distinction without a difference.

20. Respondent points out that the Auditing Division need not solely prove that a sale took place but could place liability based on the use in this state; property was consumed in this state on behalf of the Petitioner and the equipment ends up as Petitioner's property.

APPLICABLE LAW

Utah Code Annotated '59-12-103(1) states there is levied a tax on the purchaser for the amounts paid or charged for the following;

a) Retail sales of tangible personal property made within the state;

m) Leases and rentals of tangible personal property if the property site is in this state, if the lessee took possession in this state, or if the property is stored, used, or otherwise consumed in this state; and

Utah Code Annotated '59-12-102. Definitions.

15) "Sale" means any transfer of title, exchange, or barter, conditional or otherwise, in any manner, of tangible personal property or any other taxable item or service under subsection 59-12-103(1) for a consideration. It includes;

a) Installment and credit sales;

b) Any closed transaction constituting a sale;

c) Any sale of electrical energy, gas, services or entertainment taxable under this chapter;

d) Any transaction if the possession of property is transferred but the seller retains the title as security for the payment of the price; and

e) Any transaction under which right to possession, operation, or use of any article of tangible personal property is granted under a lease or contract, and the transfer of possession would be taxable if an out right sale were made.

19(a) "Use" means the exercise of any right or power over tangible personal property under subsection 59-12-103(1), incident to the ownership or the lease under that property, item, or service.

ANALYSIS

Utah Code Annotated '59-12-102(15) provides that a sale means any transfer of title, exchange or barter, conditional or otherwise, in any manner, of tangible personal property or any other taxable item or service under section '59-12-103(1) for a consideration.

In order for the sale to be completed the transaction must include a transfer of title for a consideration, and the transfer of possession, or any of the other provisions of Section 59-12-105(15). The payment in this appeal was simply an insurance payment, and no sale took place when Petitioner reimbursed the drilling contractor for the cost of the lost equipment. The equipment is the property of XXXXX and is abandoned and lost forever in the drilling hole.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that no sale occurred in the transaction between XXXXX and XXXXX, and the payment between the parties is viewed as an insurance payment meant by XXXXX to indemnify XXXXX for the lost equipment. The Commission therefore, reverses the assessment of the Auditing Division and reduces the assessment in this appeal to $$$$$. It is so ordered.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

DATED this 6 day of June, 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.)