96-0126

Sales and Use Tax

Signed 8/7/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

COMPANY C :

Petitioner, : FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. : AND FINAL DECISION

COLLECTION DIVISION OF THE : Appeal No. 96-0126

UTAH STATE TAX COMMISSION, : Account No. #####

Respondent. : Tax Type: Sales & Use Tax

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on March 27, 1997. Jane Phan, Administrative Law Judge, heard the matter for and on behalf of the Commission. Present and representing Petitioner was PETITIONERS REP., Esq., of XXXXX. Present and representing Respondent was Brian L. Tarbet, Assistant Attorney General, along with Julie Packard and Gary Nuffer of the Collection Division.

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is use tax.

2. The period in question is March 1, 1994 through February 22, 1995.

3. The parties stipulated to the material facts in this matter[i]¹. On February 22, 1996, the Auditing Division of the Utah State Tax Commission issued a statutory notice against Petitioner assessing additional use taxes in the amount of $$$$$ and interest thereon of $$$$$. Petitioner timely filed an appeal of this assessment of additional tax and interest and this assessment is the subject of this Formal Hearing. Petitioner does not contest the amount of the subject assessment, but instead contests the basis of the assessment.

4. The assessment at issue relates to use tax on promotional materials sent to Utah residents during the audit period. The promotional materials are used as a means to solicit mail order sales of Petitioner's products including books, magazines and other products.

5. Pursuant to an agreement with the Tax Commission, Petitioner agreed to register, collect and remit sales and use taxes on all of its taxable sales to residents of Utah and has in fact remitted all tax due on such sales. Under the agreement, Petitioner did not concede nexus with Utah. Nor did the Utah Tax Commission concede that Petitioner was not liable for the tax on promotional materials.

6. Petitioner does not maintain any facilities, offices, property, employees, agents or representatives in Utah. Petitioner does not maintain a physical presence in Utah.

7. COMPANY B is located in STATE and is a wholly-owned subsidiary of Petitioner.

8. Petitioner contracted with COMPANY B for the service of preparation, printing, personalizing, addressing, stuffing, sorting and mailing the promotional materials.

9. The contractual arrangement between Petitioner and COMPANY B indicated that COMPANY B would provide or procure and coordinate the services necessary to prepare, print, personalize, address, stuff, sort and mail all of Petitioner's requirements for direct mail promotional materials. The payment to COMPANY B for these services was a sum equal to COMPANY B direct costs and expenses incurred in providing the services, plus three percent.

10. COMPANY B made arrangements with COMPANY C, a Company located outside of Utah, and other companies also located outside of Utah, for the printing and mailing of the promotional materials. Neither the Petitioner nor COMPANY B contracted with any third party located in Utah for the actual printing or mailing of the promotional materials. COMPANY B paid COMPANY C and the other companies for the services of printing and mailing the promotional materials. All arrangements, instructions and payments for the promotional materials were made by COMPANY B in its STATE offices.

11. COMPANY C and the other companies retained title to the promotional materials until the promotional materials were delivered to the Utah residents. COMPANY C transferred the promotional materials to U.S. Postal Service trailers, which were located at its facility.

12. A subsidiary of Petitioner sent employees to Utah, an average of seven times annually, in connection with XXXXX magazine. These visits to Utah did not exceed a few days per visit.

13. Prior to 1970 a wholly-owned subsidiary of Petitioner owned, and then in 1970 sold, real estate located in Utah.

APPLICABLE LAW

Utah Code Ann. §59-12-103(1) provides in pertinent part:

There is levied a tax on the purchaser for the amount paid or charged for the following: . . . (l) tangible personal property stored, used or consumed in this state.

"Use" is defined in Utah Code Ann. §59-12-102(24) as follows:

(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 leasing of that property, item or service.

(b)"Use" does not include the sale, display, demonstration or trial of that property in the regular course of business and held for resale.

The Commission has considered the tax treatment pursuant to Utah Code Ann. §59-12-102 and §59-12-103 of items given as premiums, gifts or rebates and adopted Utah Administrative Rule R865-19S-68(A)(1993) which states:

Donors of articles of tangible personal property, which are given away as premiums or otherwise, are regarded as the users or consumers thereof and the sale to them is a taxable sale.

ANALYSIS

The issue before the Commission is whether Petitioner is liable for the additional use tax assessment pursuant to Utah Code Ann. §59-12-103(1)(l) on the promotional items mailed to Utah residents. Petitioner's representative argues that Petitioner is not liable for the additional use tax based on the statutory requirements of that section and based on constitutional provisions. Respondent maintains that Petitioner is liable for the tax and asks that the assessment be upheld.

The Commission first considers the constitutional issue of nexus as raised by the Petitioner in this matter as it finds this issue to be dispositive. It is Petitioner's position that the assessment violates the Commerce Clause of the United States Constitution because Petitioner did not have substantial nexus with Utah. The U.S. Supreme Court has expressly held that contact by mail or common-carrier alone, without a physical presence in the state, is insufficient nexus for taxation. See Quill Corp. v. North Dakota, 504 U.S. 298 (1992)[ii]². In Quill the Supreme Court upheld its decision in National Bellas Hess, Inc. v Department of Revenue of Ill., 386 U.S. 753 (1967). Bellas Hess created a safe harbor for vendors whose only connection with customers in the taxing state is by common carrier or the United States mail. Under Bellas Hess, such vendors are free from state-imposed duties to collect sales and use taxes. Quill at 315.

Clearly, without further contact, Petitioner's promotional activities to generate sales which take place through the United States mail are insufficient nexus for the State to impose the use tax assessment. The only additional contacts with Utah are the fact that sales people visited Utah for a total 21 days a year, a subsidiary sold property in Utah in 1970, twenty years prior to the audit period, and Petitioner entered into an agreement with the Tax Commission to register, collect and remit sales and use taxes on all of its taxable sales to residents of Utah.

In National Geographic Society v. California Bd. of Equalization, 430 U.S. 551,556 (1977) the Supreme Court rejected a "slightest presence standard of constitutional nexus". In Quill the Court indicated that the Commerce Clause required "substantial nexus." Quill at 313.[iii]³ After reviewing these decisions and the facts in this case the Commission determines that Petitioner did not have substantial nexus with the State of Utah sufficient to meet the requirements of the Commerce Clause.[iv]⁴

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that Petitioner had insufficient nexus with the State of Utah for the assessment of use tax against Petitioner as set out in the Statuary Notice dated February 22, 1996. The Commission vacates the assessment at issue. It is so ordered.

DATED this 7 day of AUGUST, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Richard B. McKeown

Chairman Commissioner

Joe B. Pacheco Pam Hendrickson

Commissioner Commissioner