98-0593

Income Tax

Signed 11/15/99

 

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

 

PETITIONERS, ) FINDINGS OF FACT,

) CONCLUSIONS OF LAW,

Petitioners, ) AND FINAL DECISION

)

v. ) Appeal No. 98-0593

) .

AUDITING DIVISION OF )

THE UTAH STATE TAX ) Tax Type: Income Tax

COMMISSION, )

) Judge: Phan

Respondent. )

_____________________________________

 

Presiding:

Jane Phan, Administrative Law Judge

Appearances:

For Petitioner: PETITIONERS REP., CPA

For Respondent: Mark Wainwright, Assistant Attorney General

Dan Engh, Manager, Income Tax Auditing

Angie Hillas, Audit Senior, Income Tax Auditing

 

STATEMENT OF THE CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on July 29, 1999. Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. Petitioners are appealing the assessment of additional Utah individual income tax and as well as the interest accrued thereon for the 1995 and 1996 tax years.

2. Petitioners are Utah residents.

3. Petitioners filed Utah resident returns for the years at issue.

4. Petitioners are shareholders in COMPANY, an S-corporation ("S-Corp), that operates in several states including the state of STATE.

5. The S-Corp paid STATE Single Business Tax. Petitioners claimed a credit for the amount paid to STATE on their Utah Individual Income Tax Returns.

6. The STATE Single Business Tax is a value added tax or VAT. One of the components considered in determining the tax base under this tax is federal taxable income. However, other components are given consideration including the total compensation paid to the employees of the business, as well as depreciation, dividends and interest paid on loans.

7. On their 1995 STATE Single Business Tax Return, Petitioners claimed $$$$$ in business income. However, after the other components were added or subtracted for the Single Business Tax, the tax base for that year was $$$$$. For 1996 Petitioners claimed $$$$$ in business income and the total tax base on the STATE return was $$$$$.

APPLICABLE LAW

A resident individual shall be allowed a credit against the tax otherwise due under this chapter equal to the amount of the tax imposed on him for the taxable year by another state of the Untied States, the District of Columbia, or a possession of the United States, on income derived from sources therein which is also subject to tax under this chapter. (Utah Code Ann.'59-10-106(1).

 

 

ANALYSIS

The issue presented to the Commission in this appeal is whether Petitioners are entitled to a credit, under Utah Code Ann. '59-10-106(1), on their Utah Individual Income Tax for the taxes paid by the S-Corp as STATE Single Business Tax. This issue is one of first impression before the Utah Tax Commission.

The United States Supreme Court and other jurisdictions have looked at the STATE Single Business Tax. In Trinova Corp. v. Michigan, 498 U.S. 358, 112 L.Ed.2d 884 (1991), the Supreme Court described STATE's tax as an addition method value added tax. In that case the Court stated "[COMPANY] would dissect the tax base as if the [Single Business Tax] were three separate and independent taxes: a tax on compensation, a tax on depreciation, and a tax on income, . . . The STATE [Single Business Tax], however, is not three separate and independent taxes . . ." 112 L.Ed.2d at 905.

Three other states have considered the issue of whether or not a resident of that state would be entitled a credit on their income tax for taxes paid to STATE as the Single Business Tax. In all three cases the courts held that STATE's Single Business Tax was either not a tax on income, or not a tax measured by income, or both.[1]


Petitioners argue that the issue is double taxation. Petitioners are paying tax to both Utah and STATE and are not being given the credit provided in Utah Code Ann. '59-10-106(1). Petitioners' representative pointed out that the STATE Single Business tax starts with federal taxable income and that other states with an income tax allow significant adjustments to federal taxable income in calculating the state income tax.

CONCLUSIONS OF LAW

1. From the information presented by the parties the Commission determines that the STATE Single Business Tax is not a tax imposed on income.

2. As STATE's Single Business Tax is not a tax imposed on income, Petitioners are not entitled to the credit provided in Utah Code Ann. '59-10-106(1)for the taxes paid to STATE by the S-corporation of which Petitioners are shareholders.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission sustains the audit assessment against Petitioners of additional tax and interest for the tax years 1995 and 1996. It is so ordered.

DATED this 15th day of November , 1999.

 

_____________________

Jane Phan

Administrative Law Judge

 

 

 

 

BY ORDER OF THE UTAH STATE TAX COMMISSION:

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

DATED this 15th day of November , 1999.

 

 

 

Richard B. McKeown Pam Hendrickson

Chairman Commissioner

 

 

 

 

 

R. Bruce Johnson Palmer DePaulis

Commissioner Commissioner

 


[1]See Gillette Company v. Department of Treasury, 497 N.W.2d 595 (Mich. App. 1993); Ardire v. Tracy, 674 N.E.2d 1155 (Ohio 1997); First Chicago NBD Corp. v. Dept. State Revenue, 708 N.E.2d 631(Ind. Tax Ct. 1999).