96-0319
Sales and Use Tax
Signed 4/15/97
BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
COMPANY A., :
:
Petitioner, : FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. : AND FINAL DECISION
:
AUDITING
DIVISION OF THE : Appeal No. 96-0319
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 November 14, 1996. Alice Shearer, Commissioner, heard the matter for and on behalf
of the Commission. Present and representing
Petitioner were XXXXX, Attorney at Law and LAW FIRM. Present and representing Respondent were RESPONDENT REP.
Assistant Attorney General, XXXXX, Auditor, XXXXX, Director of Auditing
Division and Brad Simpson, Deputy Director of Auditing.
1. The Auditing Division of the Utah State Tax
Commission (“Tax Commission”) audited COMPANY A for the period April 1992 through December 1994.
2. On September 6, 1995, the Tax Commission
sent a preliminary notice which assessed a deficiency including interest in the
amount of $$$$$.
3. On January 31, 1996, the Tax Commission sent
a proposed assessment including interest in the amount of $$$$$.
4. Petitioner challenges $$$$$ of the
assessment dealing with electricity sold or furnished to COMPANY A.
Based
upon the evidence and testimony presented at the hearing, the Tax Commission
hereby makes its:
FINDINGS OF FACT
1. COMPANY B, a STATE limited liability company
(“COMPANY B”) is owned ninety-eight percent (98%) by COMPANY A, a Utah limited
liability company (“COMPANY A”), and two-percent (2%) by COMPANY C., a STATE
corporation (“COMPANY C.”).
2. COMPANY Z, a STATE corporation (“COMPANY Z”)
and COMPANY X, a STATE corporation (“COMPANY X”), each own a forty-nine percent
(49%) interest in COMPANY A. The remaining
two percent (2%) of COMPANY A is owned by COMPANY C.
3. COMPANY Z and COMPANY X each own fifty
percent (50%) of the issued and outstanding stock of COMPANY C.
4. COMPANY A is engaged in the mining business
and extracts XXXXX from a mine located XXXXX of CITY, STATE (“AREA 1”) and
produces fertilizer products from the XXXXX at a plant located XXXXX of CITY,
STATE (“AREA 2”).
5. COMPANY B. owns and operates a XXXXX
(“COMPANY B”) which transports XXXXX from the AREA 1 to the AREA 2. The COMPANY B is approximately ##### miles
long.
6. COMPANY B. owns and operates electric pumps
at a pumping station located at the AREA 1 end of the COMPANY B, or the XXXXX
terminal, and a mid-point pumping station located in STATE.
7. Since the construction of the COMPANY B,
COMPANY U has delivered electricity to the AREA 1 through a single meter. The electricity is used both in the
operation of the AREA 1 and COMPANY B’S XXXXX terminal pumping station.
8. COMPANY A pays the total bill for all
electricity delivered by COMPANY U to
the meter at the AREA 1.
9. COMPANY U does not collect sales tax with
respect to any of the electricity it delivers to the meter located at the AREA
1 because COMPANY A has filed a certificate with COMPANY U stating that all
such electricity is exempt from sales tax because it is used in a mining
operation.
10. The amount of electricity used by COMPANY
A.’s XXXXX terminal pumping station is measured by meters owned by COMPANY A.
located at the pumping station.
11. COMPANY A charges COMPANY B for the
electricity used in operating the pumps at the same rate that COMPANY U charges
for the electricity it delivers to the meter at the AREA 1.
ISSUE
The
issue in this case is whether the taxpayer is required to pay Utah sales taxes
on the charges for electricity used by COMPANY A in the operation of the pumps
at the XXXXX terminal of the pipeline.
ARGUMENTS
Petitioner
advances two arguments to defeat the audit assessment. Each will be considered.
1. Petitioner states: COMPANY A is
not a vendor of electricity and therefore not liable to collect and remit the
sales tax. COMPANY A does not sell the
electricity. If the Taxpayer is not the
“vendor” of the electricity, there is no basis for assessing the sales tax
liability against the Taxpayer. A
vendor is defined as:
(I) any person
receiving payment or
other consideration
upon a sale of
tangible personal
property or any
other item or service
under §59-12-103(1),
or to whom such
payment or consideration
is payable; [Utah Code
Ann. §59-12-102(22)(a)]
Under
this definition, the Taxpayer is not the “vendor” of the electricity used to
operate the pumps. In order for the
Taxpayer to be a “vendor,” the Taxpayer must have sold the electricity and the
Taxpayer must have received consideration.
The
Taxpayer never acquired the electricity in question. Rather, the electricity was delivered directly from COMPANY U to
COMPANY B.
Petitioner
concludes that no sale took place, therefore, no tax was owing.
Respondent
counters: The transaction between COMPANY A and COMPANY B constitutes a
sale under Utah Code Annotated §59-12-102(15).
(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
§59-12-103(1), for
consideration. It
includes: (c) any sale
of electrical energy,
gas, service or
entertainment taxable under
this chapter.
The
transaction is also taxable under §59-12-103(c), which taxes energy “sold or
furnished for commercial consumption.”
(1) There is levied a
tax on the purchaser
for the amount paid or
charged for the
following: (c) gas,
electricity, heat, coal,
fuel, oil, or other
fuels sold or furnished
for commercial
consumption.
COMPANY
A furnishes electricity to COMPANY B from lines that attach after its
meter. There is no question COMPANY A
provides, supplies or furnishes electricity to COMPANY B. Therefore the amount charged by COMPANY A is
taxable.
COMPANY
A is a vendor under §59-12-102(27)(a) as it received payments, i.e.
consideration, for the product it furnished.
Ҥ59-12-102(27)(a)
“Vendor” means
(i) any person
receiving payment or
consideration upon a
sale of tangible
personal property or
any other taxable
item or service under
§59-12-103(1),
or to whom such
payment or consideration
is payable.
The
Commission is not persuaded by the Petitioner’s argument. COMPANY A did furnish electricity to COMPANY
B. and received payments from them for its cost.
2. Petitioner argues: The electricity is being used in mining, and
is exempt from sales tax. Mining is
defined as “a non- commercial consumption” in the Tax Commission Rule
865-19S-35 and as such, it is exempt.
“R865-19S-35(B)
“Non-commercial consumption”
means fuel used in: 1.
Mining or extraction
of minerals; 2. Off
highway agriculture,
including commercial
greenhouses, irrigation
pumps, farm machinery,
and other farming
activities to produce
the agriculture product
up to the time of
harvest or placement of the
products into storage
facilities; and
3. Use in
manufacturing tangible personal
property or use in
producing or compounding
of a product which
will be resold.”
Furthermore,
the same rule, 865-19S-35, states that where electricity is delivered to a single
meter, that the predominant use of the electricity shall determine whether the
electricity delivered to the meter is exempt from sales tax.
“865-19S-35(F) If a
firm has activities
that are commercial
and noncommercial
and all fuels are
furnished at given
locations through
single meters, the
predominant use of the
fuels shall
determine taxable
status of the fuels.”
Over
75% of all the electricity delivered by COMPANY Y is used in the mine, only 25%
in operation of the pipeline so all is exempt under the rule. For the audit period, the total cost of all
electricity delivered by COMPANY U to the Mine, and the cost of the electricity
used to operate the pumps at the XXXXX terminal pumping station were as
follows:
Total Cost of Cost
of Electricity
Time Period Electricity for
Pumping Station
4/17/92 to
8/31/92 $$$$$ $$$$$
9/1/92 to
8/31/93 $$$$$ $$$$$
9/1/93 to
8/31/94 $$$$$ $$$$$
9/1/94 to 11/30/94 $$$$$ $$$$$
The
slurry line is part of the mining processing operation, and the start of the
line and the ending of the line in CITY
are both on the COMPANY A property. But
for the distance or other physical limitation a slurry line would not be used
by the company from the mine to the plant.
Even if a slurry line were used, the only reason this one is a common
carrier, set up as a separate corporation, and regulated by XXXXX is because it crosses over state lines.
Respondent
disagrees: COMPANY B is not part of the mining operation but is a
common carrier transportation corporation and as such, a separate entity from
COMPANY A. As a common carrier it has
established tariff rates and could be utilized by other corporations for transportation
besides COMPANY A.
COMPANY
B is a separate legal entity and COMPANY B’s business is slurry
transportation. COMPANY A is a mining
company and its use of electricity is not at issue. Utah Code Annotated §59-12-103 establishes the base for sales and
use tax, §59-12-103(1)(c) includes gas and electricity in the base for sales
and use tax.
The
use of electricity in the COMPANY B is a commercial consumption, and as such,
subject to sales tax. §59-12-102(4) defines commercial use:
Ҥ59-12-102(4)
“Commercial use” means
the use of gas, electricity,
heat, coal,
fuel, oil, or other
fuels that does
not constitute
industrial use under §(10)
or residential use
under §(16).”
The transportation of minerals by COMPANY B
is simply another commercial transportation application.
The
Commission recently set the boundaries of “mining activity for the purposes of
the tax exemption,” stating “the mining
activity ends when the oil and gas enters the COMPANY B for transportation from
the producing property. Any activities
in connection with the oil or gas performed thereafter do not constitute part
of the mining process.” The Commission,
in response to taxpayer inquiry, has set the bounds which should be considered
mining activities within the scope of the sales tax exemption. Transportation of the product from the
producing property is beyond the scope of mining as determined in this advisory
opinion.
The
Commission agrees that COMPANY B is a separate legal entity, not part of the
mining operations of XXXXX. The
electricity is used in COMPANY B commercial activities and is subject to tax.
DECISION AND ORDER
Based
upon the foregoing, the Tax Commission finds that XXXXX has not established
that there is an exemption that would enable it to furnish electricity it
receives from COMPANY P to COMPANY B. tax free. COMPANY B. is a common carrier
transportation corporation, not a mining operation, and it uses the electricity
in its commercial transportation business.
The amount charged COMPANY B for the electricity furnished by COMPANY A
was subject to sales tax during the audit period. COMPANY A was the vendor and was liable to collect the tax from
COMPANY B. and remit it to the State of Utah.
It is so ordered.
DATED
this 15 day of APRIL, 1997
BY ORDER OF THE UTAH STATE TAX COMMISSION
W. Val
Oveson Richard
B. McKeown
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner
^^