96-2109

Sales

Signed 4/21/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

COMPANY C, :

Petitioner, : ORDER

v. :

AUDITING DIVISION OF THE : Appeal No. 96-2109

UTAH STATE TAX COMMISSION, :

STATE OF UTAH, :

Respondent. : Tax Type: Sales

_____________________________________

STATEMENT OF CASE

No hearing was held and this decision is made based upon the record by agreement of the parties.

FINDINGS OF FACT

1. COMPANY C is a STATE Corporation.

2. COMPANY C is a wholly owned subsidiary of COMPANY A

, Inc.

3. COMPANY A, Inc., is a wholly owned subsidiary of COMPANY A, the parent company.

4. COMPANY C is engaged in the business of transporting Natural Gas Liquids (“NGLs”) for third-parties in the stream of interstate commerce.

5. COMPANY A’s Utah operations include approximately 250 miles of common carrier pipelines used in the interstate transportation of NGLs products from the overthrust belt area.

6. COMPANY C has been registered to do business in Utah since 1981, and has been in good standing since that date.

7. COMPANY C is a STATE corporation with corporate offices located at ADDRESS, CITY, STATE ZIPCODE.

8. COMPANY A’s registered agent in Utah is CT Corporation System, located at ADDRESS, CITY, Utah 84101-2006.

9. COMPANY C has pipeline in Utah located in STATE, XXXXX, XXXXX counties. All products placed in COMPANY C’s pipeline are destined for points outside the state of Utah. Several pump stations are located in Utah that are powered by turbines. Some of the turbines are fueled by the NGLs being transported in the pipeline.

10. COMPANY C has no marketing or storage activities in the state of Utah.

11. As operator of the pipeline system, COMPANY A is required for operational reasons to maintain minimum levels of linefill within the system.

12. COMPANY A’s employment in the state of Utah during the audit period was as follows:

1992 5 employees

1993 5 employees

1994 6 employees

1995 4 employees

13. COMPANY A has withheld Utah state income tax on these employees and remitted said tax to the Utah State Tax Commission.

14. The Auditing Division issued a Statutory Notice on June 26, 1996 in the amount of $$$$$, together with interest in the amount of $$$$$ through July 26, 1996.

15. COMPANY C timely appealed the assessment.

APPLICABLE LAW

The relevant Utah statute is Section 59-12-103 of the Utah Code which states:

(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 for commercial use;

. . . and (1) tangible property stored,

used, or consumed in this state. Utah

Code Ann. §59-12-103(1)(c), and (1) (1996).[i]¹

Utah Admin. Tax Commission Rule R865-21U-16.A (1996) states:

The fact that tangible personal property is purchased in interstate or foreign commerce does not exempt the property from the [sales and use] tax if the property is stored, used, or otherwise consumed within this state after the shipment in interstate or foreign commerce has ended.

ANALYSIS

This case involves Petitioner’s sales and use tax liability for the years 1992 through 1995. The amount in dispute is $$$$$. This issue involves tax and interest assessed on turbine fuel which is involved interstate commerce.

The use tax provision found in Section 59-12-103-(1)(1) works within the framework of the U.S. Constitution’s Commerce Clause. The power to regulate interstate commerce is vested in the Federal Government through the Commerce Clause and states cannot infringe on this right. See U.S. Const. art. I, §8, cl. 3. Pursuant to Utah Code Section 59-12-103(1)(1), the Commerce Clause, and ensuing case law, the Utah State Tax Commission passed an administrative rule to clarify and implement the Utah Use Tax and to ensure its constitutionality.

The Auditing Division is complying with the plain language of the Utah Code and Administrative Code in its assessment against COMPANY C. The tangible personal property that the Auditing Division has taxed are the NGLs taken out of the pipeline specifically to run the turbine compressors. In fact, the Code specifically states that the fuels used for commercial purposes are taxable. See Utah Code Ann § 59-12-103 (1)(c) (1996). Therefore, the assessment complies with the Utah Use Tax because It seeks to tax tangible personal property consumed in Utah. See Utah Code Ann. § 59-12-103 (1)(1) (1996).

Once COMPANY C takes the NGLs out of the pipeline, the “shipment in interstate” commerce for those specific NGLs has ended. See Utah Admin. Code R865-21U-16.A (1996). Indeed, after the NGLs are diverted out of the pipeline, they are consumed by power compressor turbines. Once the NGLs are consumed by the engines that run the compressors, the NGLs no longer exist.

It is only these NGLs, the ones diverted out of the pipeline to power the compressor turbines, that the Auditing Division has taxed.

In a similar case, Questar Pipeline Co. v. Utah State Tax Commission, 817 P.2d 316 (Utah 1991), the Utah Supreme Court was faced with similar circumstances. See Questar at 317. In Questar, the Utah State Tax Commission sought to tax Questar on compressor- fuel gas that it consumed in the course of maintaining a natural gas pipeline that ran through Utah. See id. The pipeline system ran through Utah, STATE, and STATE and distributed natural gas to these states. See id. Compressors were used to move the natural gas, and the fuel used to run the compressors was “diverted directly from the flowing gas in Questar’s pipeline.” Id. The Tax Commission sought to tax only the fuel that was diverted from the pipeline, taken from the stream of interstate commerce, and consumed in Utah.

The Utah Supreme Court upheld the Tax Commission’s assessment in Questar. In its decision, the Court first looked at the same Utah Code and Administrative Code provisions as those state above. See id. at 318. The Court found that the provisions of the statute and rules would allow for sales and use tax on Questar’s compressor-fuel gas.

COMPANY C’s case is substantially similar to Questar. COMPANY C is engaged in the business of transporting NGLs through a number of states. See Stipulation of Facts (“Stipulation”) ¶ 4; and COMPANY A Inc. 10-K form p.2 (attached hereto)(stating, “MAPCO Inc. Is a diversified energy company which, through separate subsidiaries and affiliates [COMPANY C is a wholly owned subsidiary of COMPANY A], is engaged in the production of NGLs and coal; [and] the transportation by pipeline of NGLs . . .”). Similar to Questar, COMPANY C diverts a small portion of the NGLs from the pipeline to run compressor turbines at pump stations located every forty to fifty miles along the pipeline. See Petitioner’s Prehearing Memorandum (“Petitioner’s Memo”) p.1. Some of the NGLs that are diverted are consumed in compressor turbines located in Utah. The Auditing Division seeks to tax only the small portion of NGLs that are taken out of the pipeline and consumed in Utah. These NGLs, like the gas in Questar have been taken out of the stream of interstate commerce and are consumed in Utah.

As noted in the Questar decision, the provisions of the Utah statute and administrative rule, standing alone, allow the imposition of the Utah Sales and Use Tax on NGLs diverted out of a pipeline and consumed in Utah to power turbine compressors. See Questar at 318. After making this holding, the Utah Supreme Court further noted that Utah law “recognizes that the state’s taxing authority is subject to federal law.” Id. (citing Utah Code Ann. § 59-12-104(12) (1987) (repealed in 1996); the Supremacy Clause, U.S. Const. Art VI, cl. 2; and the Commerce Clause, U.S. Const. art. I, §8, cl.3) The most pertinent federal law is the Commerce Clause of the U.S. Constitution.

Generally, under the Commerce Clause, state laws that discriminate against or restrict interstate commerce are unconstitutional. The U.S. Supreme Court, however, has held that, under the Commerce Clause, states are permitted to tax corporations even if they are engaged in interstate commerce. The Court stated:

“It is a truism that the mere act of carrying on

business in interstate commerce does not exempt a

corporation from state taxation. ‘It was not the

purpose of the commerce clause to relieve those engaged

in interstate commerce from their just share of state

tax burden though it increases the cost of doing

business.’”

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 288 (1977) (quoting Colonial Pipeline Co. v. Traigle, 421 U.S. 100, 108 (1975) (quoting Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938))).

The test for determining the constitutionality of a state tax that relates to interstate commerce is found in the Supreme Court’s decision in Complete Auto. See Complete Auto at 279. The Utah Supreme Court recognized this test when it stated,

Complete Auto ruled that a state tax will be sustained

against a commerce clause challenge when the tax (1)

“is applied to an activity with a substantial nexus

with the taxing State,” (2) “is fairly apportioned,”

(3) “does not discriminate against interstate

commerce,” and (4) “is fairly related to the services

provided by the State.

Questar at 318 (quoting Complete Auto at 279).

As in the Questar case, the only prong of the Complete Auto test that is in dispute in this case is the first prong dealing with the element of substantial nexus. See Questar at 318.

Less than a month after the Supreme Court decided Complete Auto, it decided another case where it discussed the proper test for finding nexus. In National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), the Court sustained a use tax on the solicitation of advertising copy for a magazine. In deciding the case, the Court stated:

[T]he relevant constitutional test to establish the

requisite nexus for requiring an out-of-state seller to

collect and pay the use tax is not whether the duty to

collect the use tax relates to the seller’s activities

carried on within the State, but simply whether the

facts demonstrate “some definite link, some minimum

connection, between [the State and] the person . . it

seeks to tax.”

National Geographic, at 561 (quoting Miller Brothers Co. v. Maryland, 347 U.S. 340, 344-45 (1954)). Therefore, if COMPANY C has some definite link or minimum connection with Utah they have nexus sufficient to uphold the Utah Use Tax.

Under the Utah Code, nexus is found if, within this state, a vendor “has or utilizes an office, distribution house, sales house, warehouse, service enterprise, or other place of business; . . . maintains a stock of goods; . . . [or] regularly engages in any activity in connection with the leasing or servicing of property located within this state.” Utah Code Ann. § 59-12-107 (1)(a)(I), (ii) and (v) (1996). These factors from the Utah Code are in harmony with the definite link or minimum connection test from National Geographic. Under both tests, COMPANY C has nexus with Utah.

Mid-America argues that it does not have substantial nexus with Utah because the turbine fuel in question does not come to rest in Utah. See Petitioner’s Memo p.2. However, the NGLs do come to rest because their shipment through interstate commerce has ended. The NGLs do not travel any further than the turbines in Utah. Nevertheless, the “comes to rest” doctrine has been discredited by the U.S. and Utah Supreme Courts. Utah’s statute focuses on consumption and use and does not require that property come to rest in Utah before it becomes taxable. The Utah Supreme Court state that the “comes to rest doctrine” has “subsequently been discredited by the Supreme Court as no longer applicable or relevant under the Complete Auto test.” Questar at 319 (citing D.H. Holmes Co. v. McNamara, 486 U.S. 24, 30-31 (1988)). As a result of this ruling, the proper test for finding nexus continues to be the definite link or minimum connection test from National Geographic.

COMPANY C is not a Utah corporation, but it owns and maintains property in Utah, employed on average five people per year in Utah, paid Utah withholding tax, was registered to do business in Utah, and has an agent to represent them in state, and thus satisfies the definite link or minimum connection test and meets the requirements for nexus under the Utah Code.

DECISION

Based upon the foregoing, the Commission finds that COMPANY C has sufficient nexus with Utah, the Utah Use Tax was properly assessed against it, and COMPANY C is liable for the tax and subsequent interest. It is so ordered.

DATED this 21 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

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.)