97-0307

SALES TAX

Signed 1/26/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

COMPANY A, :

Petitioner, : ORDER

v. : Appeal No. 97-0307

AUDITING DIVISION OF THE : Account No. #####

UTAH STATE TAX COMMISSION, :

Respondent. : Tax Type: SALES TAX

_____________________________________

IMPORTANT NOTICE: On October 7, 1997 the Utah Supreme Court, in Evans and Sutherland Computer Corp v. Utah State Tax Commission, invalidated the informal adjudicative process by disallowing trial de novo to the District Court. Therefore, your appeal is now being processed as a formal adjudicative proceeding. Under this process, you are entitled to an additional right. Utah Law allows for an Initial Hearing before the matter is heard on the record in a formal proceeding. Therefore, the hearing held in this matter will constitute the Initial Hearing. Please note in the body of the decision your right to, and the method of request for, a formal hearing.

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. §59-1-502.5, on October 27, 1997. Joe B. Pacheco, Commissioner, together with Pam Hendrickson, Commissioner, heard the matter for and on behalf of the Commission. Present and representing Petitioner was PETITIONERS REP.. Present and representing Respondent were XXXXX, Assistant Attorney General, and XXXXX and XXXXX 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 tax type involved is sales tax.

2. The period involved is October 1, 1993 through July 31, 1996.

3. During the audit period, Petitioner worked under contract for the United States government. Pursuant to that contract, the Petitioner purchased from COMPANY B ("COMPANY B"), calibration services which were performed on equipment owned by the United States government.

4. In accordance with a 1974 agreement Petitioner claims it had with Auditing Division, Petitioner only paid sales tax on 35% of the calibration services purchased.

5. In January, 1997, and following a sales tax audit, Respondent issued Petitioner an audit summary that assessed Petitioner for sales tax on 100% of the calibration services purchased during the audit period.

6. In February, 1997, Petitioner filed a petition for redetermination of the assessment, asserting that the calibration services it bought were 100% exempt from Utah sales tax.

7. Respondent answered the petition for determination in March, 1997, reasserting its claim that sales tax was due on 100% of the calibration service purchases.

ISSUE

The sole issue in this appeal is the determination of whether sales tax applies on the maintenance and calibration charges in transactions where these charges are procured by a government contractor and the services are performed on equipment owned by the United States government.

APPLICABLE LAW

1. Utah Code Ann. section 102(20) states:

"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...

2. Utah Code Ann. section 59-12-103(1)(g) states in pertinent part:

(1) There is levied a tax on the purchaser for the amount paid or charged for the following:

...

(g) services for repairs or renovations of tangible personal property ...

3. Utah Code Ann. section 59-12-104 states in pertinent part:

The following sales and uses are exempt from the taxes imposed by this chapter:

...

(16) sales of tooling, special tooling, support equipment, and special test equipment used or consumed exclusively in the performance of any aerospace or electronics industry contract with the United States government or any subcontract under that contract, but only if, under the terms of that contract or subcontract, title to the tooling and equipment is vested in the United States government as evidenced by a government identification tag placed on the tooling and equipment or by listing on a government-approved property record if a tag is impractical;

...

(21) (a) sales of tangible personal property used or consumed primarily and directly in farming operations, including sales of irrigation equipment and supplies used for agricultural production purposes, whether or not they become part of real estate and whether or not installed by farmer, contractor, or subcontractor...

...

(27) property purchased for resale in this state, in the regular course of business, either in its original form or as an ingredient or component part of a manufactured or compounded product;

4. Utah Admin. Rule R865-19S-41[i]¹ states in pertinent part:

...

C. Sales made directly to the United States government or any authorized instrumentality thereof are not taxable, provided such sales are ordered upon a prescribed governmental purchase order form and are paid for directly to the seller by warrant on government funds. Vendors making such sales are required to retain purchase orders, voucher stubs, or like evidence of governmental purchase and payment...

5. Utah Admin. Rule R865-19S-87 states in pertinent part:

A. As used in Utah Code Ann. Section 59-12-104(6), and for the purpose of this rule:

1. "Tooling" means jigs, dies, fixtures, molds, patterns, taps, gauges, test equipment, other equipment, and other similar manufacturing aids generally available as stock items.

2. "Special Tooling" means jigs, dies, fixtures, molds, patterns, taps, gauges, other equipment and manufacturing aids, and all components of these items that are of such a specialized nature that without substantial modification or alteration their use is limited to the development or production of particular supplies or parts thereof or performing particular services.

3. "Support equipment" means implements or devices that are required to inspect, test, service, adjust, calibrate, appraise, transport, safeguard, record, gauge, measure, repair, overhaul, assemble, disassemble, handle, store, actuate or otherwise maintain the intended functional operation status of an aerospace electronic system.

4. "Special test equipment" means either single or multipurpose integrated test units engineered, designed, fabricated, or modified to accomplish special purpose testing in performing a contract. These testing units may be electrical, electronic, hydraulic, pneumatic, or mechanical. Or they may be items or assemblies of equipment that are mechanically, electrically, or electronically interconnected so as to become a new functional entity, causing the individual item or items to become interdependent and essential in performing special purpose testing in the development or production of peculiar supplies or services.

...

6. Utah Admin. Rule R865-19S-91 states in pertinent part:

A. Sales of tangible personal property or services as defined in Utah Code Ann. Section 59-12-102 and 59-12-103 to federal, state, or municipal government facilities managers or supply contractors are subject to sales or use tax if the manager or contractor uses or consumes the property. Tax is due even though a contract vests title in the government and even if direct payment is made by the government to a vendor.

...

C. In order to receive immunity from the imposition of sales or use tax, the purchasing entity must actually be the government, or so closely connected to the government that the two cannot realistically be viewed as separate entities. It must be clear that the government intends the contractor or manager to be its agent. A contract to perform services as a project manager or product supplier does not, in and of itself, create an agency relationship.

...

ANALYSIS

Under Utah Code Ann. §59-12-103(1)(g), sales tax is levied on amounts paid for the repair or renovation of tangible personal property. Petitioner is required under its contract with the United States government to maintain specified equipment owned by the government, so that the equipment is periodically calibrated "to certain parameters of accuracy." Petitioner contracts with XXXXX to perform these calibration and maintenance services. While Respondent claims that these services are fully taxable under the above law, Petitioner claims that calibration services do not qualify as either a repair or renovation under that law.

The Utah State Supreme Court has addressed the definition of "renovate" for purposes of this statute before. In Union Pacific Railroad Co. V. Utah State Tax Comm'n., 842 P.2d 876 (Utah 1992), the court determined that "renovate" means to "restore to a former better state." In the Petition for Redetermination, Petitioner states that the equipment must be calibrated "to certain parameters of accuracy," which implies that, over time, the equipment tends to lose the accuracy required. Calibration is, thus, necessary to return the equipment to its former, better state, one that meets the "certain parameters of accuracy." For this reason, the services at issue here would appear to be among those services contemplated by the Legislature in Section 59-12-103(1)(g) as taxable.

As we have determined that the services are taxable under Utah law, Petitioner is liable for sales tax unless an applicable exemption exists. Petitioner contends that an exemption does exist, offering a variety of exemption arguments. Each argument is discussed below.

First, the Petitioner claims that the services purchased from XXXXX are exempt from sales tax under Utah Code Ann. §59-12-104(16). This section exempts those sales of special test equipment used in the performance of an aerospace or electronics industry contract with the United States government when title to the equipment is vested in the United States government. Although the statute exempts from taxation the purchase of the equipment on which the calibration services are performed, the issue here is whether the transaction for the services are taxable. Though the word "services" is not specifically included in either Section 59-12-104(16) or its accompanying rule, Utah Administrative Rule R865-19S-87, Petitioner contends that"services" are included in this exemption because of related definitions found in the same Part of the Utah Code.

Petitioner's argument is as follows. Section 59-12-104(16) exempts "sales" of test equipment and other tangible personal property. In order to determine what is meant by the word "sales", Utah Code Ann. §59-12-102(20) defines the word as "any transfer of title, exchange, or barter, conditional or otherwise, in any manner, or any other taxable item or service under Section 59-12-103(1) for a consideration..." Under Section 59-12-103(1), the "services for repairs or renovations of tangible personal property..." is included. Petitioner thus concludes that services performed on tangible personal property is a sale that is exempted under Section 59-12-104(16).

We do not agree with Petitioner's argument. Section 59-12-104(16) does exempt "sales", but the items exempted are clearly specified in that particular subsection and further defined in Utah Admin. Rule R865-19S-87. One need go no further than this statute and rule to determine the items that are exempt, and neither exempts services. What Section 59-12-102(20) clarifies are the elements necessary to designate a particular transaction a "sale", as opposed to, for example, a gift. Under these statutes, "sale" is defined as a transfer of title, exchange or barter, not an item or service that can be "sold."

Furthermore, several of the exemptions listed under Section 59-12-104 specifically exempt "services". Should Petitioner's argument be valid, the word "services" could have been omitted from these exemptions, and yet services still would qualify for an exemption because it would be a "sale". The general rules of statutory construction do not permit an interpretation, such as Petitioner's, that renders a portion of a law meaningless, failing to give effect to all parts of the statute. County Bd. of Equalization of Salt Lake County V. Utah State Tax Comm'n and Evans and Sutherland Computer Corp., 927 P.2d 976 (Utah 1996). The Legislature specifically exempted services from sales tax in several of the exemptions found in Section 59-12-104. Accordingly, the absence of an exemption for services in Section 59-12-104(16) leads us to conclude that the Legislature did not intend for this particular exemption to include services for repair and renovation.

Next, the Petitioner asserts that the calibration services are exempt from sales tax because they are performed on equipment which is owned by the United States government, thus making the purchase of the services tax exempt also. However, tax is based on the transaction and not the property involved. The transaction at issue here is the sale of services, not the sale of exempt equipment. As previously discussed, the transaction for services on tax exempt equipment is not itself exempt under Utah law. However, should the transaction be considered a purchase by the federal government as provided under Utah Admin. Rules R865-19S-41 and R865-19S-91, it would not be taxable.

Rule R865-19S-41 states that sales made directly to the United States government are not taxable, if the sale is ordered on a prescribed governmental purchase order form and paid for directly to the seller by warrant on government funds. Petitioner's contract with the United States government requires Petitioner to provide the calibration services, which it performs by contracting with XXXXX. Petitioner does present evidence that the services are procured pursuant to a government contract, but has not shown that the United States government directly pays for COMPANY B's services by warrant on government funds or orders the services on the prescribed forms. Without this evidence, the charges appear to be paid for by Petitioner or by the United States government in an indirect manner. In either case, the exemption afforded by the rule is not available.

Rule R865-19S-91 provides that sales of tangible personal property or services made to a government facilities manager or supply contractor are subject to sales tax if the manager or contractor uses or consumes the property. Petitioner's contract calls for it to maintain the government's equipment. It is Petitioner's use of the government's equipment that necessitates the maintenance and calibration services. Petitioner must consume these services to meet its contractual obligations and thereby incurs sales tax liability. Furthermore, for a contractor's purchase to be exempt, the rule requires that the contractor be so closely aligned with the federal entity that it can only be viewed as operating as an arm of that entity or as its agent. The rule was amended in 1997[ii]² to clarify what constitutes governmental agency for purposes of the sales tax exemption. Added to the rule were the following ##### conditions that must exist before Petitioner can be deemed an agent of the federal government and thereby purchase the services tax free.

1. The person is officially designated as the government entity's purchasing agent by resolution of the government entity;

2. The person identifies himself as a purchasing agent for the government entity;

3. The purchase is made on purchase orders that indicate the purchase is made by or on behalf of the government entity and the government entity is responsible for the purchase price;

4. The transaction is approved by the government entity; and

5. Title passes directly to the government entity upon purchase.

Petitioner does not present evidence that these five conditions are present in the contract or have been performed. Therefore, Petitioner has not established that it qualifies as an agent of the federal government and does not qualify for an exemption under Rule R865-19S-91.

We next consider whether Petitioner’s purchase of services qualifies for the resale exemption set out in Utah Code §59-12-104 (27). Under this exemption, property may be purchased tax free if it is purchased in the regular course of business for resale or for use as an ingredient or component part of an item manufactured for resale. In Nucor Corp. V. Utah State Tax Comm'n, 832 P.2d 1294 (Utah 1992), the Utah Supreme Court examined this specific exemption and determined that a purchase for resale "implies that a company's purpose in buying an item must be to resell that item." Thus, if the primary purpose of the purchase is to incorporate that purchase into an item that will be sold, it is a purchase for resale. See also Broadcast Int'l, Inc. V. Utah State Tax Comm'n, 882 P.2d 691(Utah Ct. App. 1994). Petitioner's purchase of calibration services is primarily to fulfill a contract provision to maintain equipment already owned by the federal government. The Petitioner is not producing the test equipment to resell, and services purchased to maintain such equipment do not qualify for the exemption. Even assuming that any of the purchases at issue here were exempt from taxation under Section 59-12-104(27), Petitioner has the burden of providing documentation to support its claim for exemption. It has not done so. For all these reasons, the transaction is presumed to be a taxable transaction and not a purchase for resale.

Next, the Petitioner argues that Utah Code Ann. §59-12-104(21) is relevant to the issue because it specifically exempts certain farming equipment, whether installed by a farmer, contractor, or subcontractor. As this statute exempts property installed by a subcontractor, the Petitioner asserts that services provided by its subcontractor, COMPANY B, are also exempt. We do not agree. This exemption only concerns farming operations, and the Petitioner does not qualify as a farming operator. Also, the exemption is for sales of tangible personal property, not services. This exemption has no application to the Petitioner.

Tax exemptions are strictly construed against those seeking the exemptions, Gull Labs., Inc. V. Utah State Tax Comm'n., 936 P.2d 1082 (Ct. App. 1997), and the burden of establishing the exemption lies with the party claiming it. Corporation of the Episcopal Church V. Utah State Tax Comm'n., 919 P.2d 556 (Utah 1996). Petitioner, therefore, has the burden of affirmatively demonstrating that the purchases in question were entitled to be treated as exempt under any of the provisions of Utah law. Because Petitioner has not supplied sufficient evidence to warrant an exemption, we conclude that the purchase of these calibration services are taxable.

One final issue concerns an apparent 1974 agreement between the Petitioner and Auditing Division, in which the two parties agreed that Petitioner would only pay sales tax on 35% of the maintenance and calibration services purchased from COMPANY B. [iii]³ Though an actual agreement document is not available, Petitioner presents an internal memorandum from 1974 outlining these terms. Auditing Division does not deny that this arrangement existed and confirms that sales tax was only collected on 35% of the transactions at issue from 1974 through the audit period. However, the division now contends that the transaction is 100% taxable and petitions for the collection for the unpaid portion that resulted during the audit period.

We agree that sales tax should have been assessed and collected on 100% of the maintenance and calibration services during the audit period. However, we also realize that Petitioner relied upon its agreement with the Auditing Division and did pay the amount of sales tax contemplated under it. On transactions prior to the issuance of this order, we believe it would be inequitable to require Petitioner to pay sales tax above the 35% called for under the agreement. Prospective to this order, however, sales tax shall be due on 100% of the transaction charges.

DECISION AND ORDER

The Commission finds that Petitioner failed to meet its burden in showing that it is entitled to an exemption from sales tax on its purchase of maintenance and calibration services. The Commission also finds that, prior to this order, the Petitioner shall not be liable for more sales tax than the amounts due under the 1974 agreement between the Petitioner and Auditing Division and that, prospective to this order, the Petitioner is liable for sales tax on 100% of the maintenance and calibration charges.

This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:

Utah State Tax Commission

Appeals Division

210 North 1950 West

Salt Lake City, Utah 84134

Failure to request a Formal Hearing will preclude any further appeal rights in this matter.

DATED this _____ day of ____________, 1998.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

_____________________

Joe B. Pacheco

Commissioner

The agency has reviewed this case and the undersigned concur in this decision.

DATED this 26 day of January, 1998.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Richard B. McKeown

Chairman Commissioner

Joe B. Pacheco Pam Hendrickson

Commissioner Commissioner