96-0858
SALES & USED TAX
SIGNED 4/19/97
BEFORE
THE UTAH STATE TAX COMMISSION
____________________________________
COMPANY C, )
:
Petitioner, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
v. ) AND FINAL DECISION
:
AUDITING DIVISION OF THE ) Appeal
No. 96-0858
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 July
2, 1997. Commissioners Joe B. Pacheco
and Pam Hendrickson, along with Jane Phan, Administrative Law Judge, heard the
matter for and on behalf of the Commission.
Present and representing Petitioner was PETITIONERS REP., Esq. Also present was XXXXX, COMPANY C Chief
Financial Officer, and XXXXX. Present
and representing Respondent were Brian Tarbet, Assistant Attorney General, along
with Kim Ferrell and Loren Squire of the Auditing Division.
Based upon the evidence and testimony
presented at the hearing, the Tax Commission hereby makes its:
FINDINGS
OF FACT
1. The material facts in this
mater were uncontested and for the most part set out in a Stipulation entered
into between the parties on June 20, 1997.
This appeal involves the enterprise zone investment credit as an offset
against the corporate franchise tax pursuant to Utah Code Ann. '9-2-413(1)(b)(1992) and '59-20-113 (1)(b).
2. The audit period in question is January 1, 1988 through December 31,
1994.
3. For each of the tax years
1988 through 1994 Petitioner claimed on its Corporate Franchise Tax Return an
enterprise zone investment tax credit.
4. Respondent audited Petitioner's
Corporate Franchise Tax Returns and disallowed portions of the enterprise zone
credit with a Statutory Notice of Assessment, issued on April 9, 1996. There were two different areas where the
credit was disallowed. Respondent
disallowed a portion of the enterprise zone credit on the grounds that the
graduated percentages did not recalculate each year. The resulting additional assessment was approximately $$$$$ in
tax along with interest.
5. The second area of
disallowance of the enterprise zone credit related to equipment which the
Auditing Division determined did not meet the requirements of the statute. The parties stipulated that some of these
items were replacement assets and some were assets purchased for additions or
expansions. Petitioner had also
acquired a Caterpillar 944 for which the credit was disallowed by the
Respondent as not being placed into service during 1993, the year the credit
was claimed. Petitioner proffered that
the Caterpillar 944 had been placed into service and this proffer was unrefuted
by Respondent. The additional tax
assessment from all the categories of disallowed equipment is approximately
$11,000 plus interest.
6. The assets of Petitioner are
primarily located in COUNTY where Petitioner has its general offices, a feed
mill, a processing plant, a hatchery and a service station. The investments at issue in this appeal were
solely for Petitioner's operations in COUNTY.
Petitioner also has some operations in COUNY, COUNTY and COUNTY but
investments for operations in these counties were not at issue.
7. COUNTY for the years 1988
through 1994 was designated a qualified Enterprise Zone under the Enterprise
Zone Act, Title 9, Chapter 2, Utah Code Annotated.
8. The Utah Legislature adopted
the enterprise zone tax credit in 1988.
The legislation provided that the qualifying investment must be an
investment of plant, equipment, or other depreciable property. In the portion of the transcript of the
House of Representatives provided by Respondent, there was some discussion by
the legislators at the time the statute was adopted concerning what investment
would qualify for the investment tax credit, and that the Tax Commission should
have some discretion in this determination.
There was no mention of the graduated percentages of the tax credit or
whether the percentages were for the life of the enterprise zone or would
recalculate annually. Legislators did
compare the enterprise zone credit to the federal investment tax credit.
9. Petitioner provided a letter
from Representative XXXXX, the sponsor of the rural enterprise zone
credit. The letter was dated January
25, 1996, approximately eight years after adoption of the legislation at issue. In the letter, she explained the intent of
the legislation was for the credit to be "continuous" and "on-going."
Petitioner had also presented a letter from its accountant, dated
December 14, 1995. In the letter the
accountant explained that it was his position that the enterprise zone credit
was not a once in a lifetime credit.
10. Subsequent to the audit
period at issue the legislature amended the enterprise zone provisions to
expressly state that the graduated percentages for the credit would recalculate
annually.
ANALYSIS
This appeal presents two issues to the Commission. The first issue is whether the graduated
percentages for investment tax credit allowed in Utah Code Ann. '59-20-113 prior to the 1996 amendment, are on
a one time basis, or whether they recalculate every year. The second issue concerns the disallowed
equipment and Utah Administrative Rule R865-6f-28.
The first issue, which pertains to the largest portion of the
additional tax assessment, is whether the graduated percentages for investment
tax credit allowed in Utah Code Ann. '9-2-413 and '59-20-113
(1992) are on a one time basis, or whether they re-calculate every year. The law provided that for the first $$$$$ in
qualifying investment a 10% tax credit was allowed. For the next $$$$$ in qualifying investment a 5% tax credit was
allowed. For investments in excess of
$100,000 the tax credit decreased to 2%.
The law does not expressly state whether these percentages are on
a one time basis or whether they recalculate
every year.[1] After reviewing the information provided by
the parties the Commission agrees with Petitioner's position that the graduated
percentages recalculate annually.
The second issue addressed by the parties in this appeal related to
various items of equipment which the Auditing Division determined did not meet
the requirements of the statute. There
were three types of equipment. The
first was a Caterpillar 944 which the Commission finds had been placed into
service during 1993 so that the relating credit should be reinstated.
The second group were assets that were additions or expansions to
existing assets. Respondent had
disallowed these assets under Utah Administrative Rule R865-6F-28. However, in the stipulation, Respondent
agreed that assets in this category were for additions or expansions. Therefore, the Commission finds that
Petitioner is entitled to the credit for these assets.
The third group were assets that were replacements for older
assets. These assets were disallowed
under Utah Administrative Rule R865-6F-28(C).
The parties stipulated that these assets were replacement assets. Petitioner acknowledges that Utah
Administrative Rule R865-6F-28 specifically disallows the credit for
replacement assets. However, Petitioner
argues that the Tax Commission exceeded its authority and the language of the
statute in adopting the rule. The Tax
Commission disagrees with this argument and finds that the credit was properly
disallowed for these assets.
APPLICABLE LAW
The Utah Legislature provided for an enterprise zone investment credit
In Utah Code Ann. '59-20-113(1992)
as follows:
(1) The following state tax credits against
income tax or corporate franchise tax are applicable in an enterprise zone:
(a) a tax credit of $750 for each new
full-time position filled in a non-retail capacity...
(b) an investment tax credit of 10% of the
first $10,000 in investment, 5% of the next $90,000, and 2% of the remaining
qualifying investment of plant equipment, or other depreciable property. . .
The duration of each enterprise zone was five years, at the end of
which the County could reapply for the designation. (Utah Code Ann. '59-20-108.)
The Tax Commission adopted a rule concerning the enterprise zone
investment tax credit. Utah
Administrative Code R865-6F-28(1994) provides in part:
A. 1. "Qualifying investment" means
an investment in plant, equipment, or other depreciable property that is newly
purchased or constructed. . .
C.
The replacement of existing assets does not qualify for the investment
tax credit.
CONCLUSIONS OF LAW
1. The graduated percentages for
the enterprise zone investment tax credit, as provided in Utah Code Ann. '59-20-113 (1992), recalculate annually.
2. The Tax Commission
appropriately defined "qualifying investment" so that assets
purchased to replace existing assets were excluded. Utah Administrative Rule
R865-6F-28.
DECISION
AND ORDER
Based upon the foregoing, the Tax Commission
finds that Petitioner is entitled to the approximately $$$$$ in enterprise zone
investment tax credit on the grounds that the graduated percentages recalculate
annually. Further, Petitioner is
entitled to the credit for the assets to which the parties stipulated were
"additions or expansions" and the Caterpillar 944. However, Respondent properly disallowed the
credit relating to the replacement assets.
It is so ordered.
DATED this 14 day of NOVEMBER, 1997.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val Oveson Richard
B. McKeown
Chairman Commissioner
Joe B. Pacheco Pam Hendrickson
Commissioner Commissioner
^^
[1]The law was amended in 1996 to allow for
graduated per-centages that recalculated annually, among other changes. Utah Code Ann. '9-2-413.