00-005

Response August 11, 2000

REQUEST LETTER

February 3, 2000

On behalf of our client ("Client") we are writing to request a written confirmation of the proper application of sales and use taxes. Below are the facts of our Client's contract, related issues and our conclusions. We request your written response to this letter, either concurring with our conclusions or offering a rationale for a differing conclusion.

The Client's contract is written so that any applicable state taxes are part of the contract responsibilities of the food service vendor ("Vendor"). However, based on a review of Utah law, the transaction described below is exempt from Utah sales tax. Consequently, there are no Utah sales and use tax responsibilities arising from the transaction described below.

FACTS

Client owns and operates correctional facilities in Utah. Client enters into contracts with a food service vendor ("Vendor") to perform food services at Client's facilities. In turn, Client packages the food contract services with other functions and sells them to governmental correctional authorities in Utah. Client bills the government agencies for reimbursement of costs.

The contract provides Vendor, as an independent contractor with the exclusive right to serve food products, non‑alcoholic beverages and other related articles to inmates, staff and other persons at its correctional facilities. Client and Vendor have agreed upon the following terms to operate on Client's correctional facilities:

1. Vendor agrees to pay all Federal, state, and local taxes that may be assessed against its equipment or merchandise while on the correctional authority facilities grounds, as well as all Federal, state and local taxes assessed in connection with the operation of its food contracts on the grounds.

2. Vendor will hire all employees necessary for the fulfillment of the contract. As an independent contractor, the food vendor will retain control over its employees and agents. Neither the Vendor nor its employees shall be entitled to any deductions from any payments owed to the Vendor for state and federal tax purposes. The Vendor will be responsible for any and all taxes and other payments due on payments received by it from Client.

3. Vendor will clean the food service equipment and preparation area floors in the agreed upon areas.

4. Vendor will keep all records on file for a three‑year period from the date the record is made.

5. Client will provide Vendor with the necessary space for the operation of the food contract and will furnish all utilities and facilities reasonable and necessary for the efficient performance of its contract.

6. Client will provide all food equipment and floor space as is mutually agreed upon by both Vendor and Client.

7. Client will pay all real estate taxes with respect to the correctional facilities and will pay personal property taxes and similar taxes related to the equipment on the facility grounds.

8. Financial Arrangements:

‑ In consideration of the Vendor's contract, Client will pay the food vendor an amount based on the average number of meals served, calculated on a weekly basis plus applicable sales tax. Client then bills the government entities for reimbursement of all costs billed by Vendor.

- The weekly average will be calculated by adding the number of meals served per meal per day for the seven‑day week.

- The total number of meals will be divided by 21 meals to determine the average number of inmates served that week.

- The price per meal scale will correspond to the average number of inmates served. The scale will begin with an average of 500 inmates being served, and will increase in increments of $50 per additional inmate. If the average number of inmates decreases below 500, Vendor and Client will agree to new financial arrangements.

ISSUES

We request a written response to the following issues:

1. Is the Vendor's food services contract with Client within the Utah sale for resale exemption, and consequently exempt from sales tax?

2. Does Client's sale of correctional services (including food services) to state and local correctional authorities qualify as a taxable service in Utah, and if so does the sale of these services qualify as an exempt sale to a governmental agency?

CONCLUSIONS

Based on these facts, both the transaction between Client and Vendor and the transaction between Client and the governmental correctional authorities are exempt under the following theories:

1. The contract between Vendor and Client can be characterized as a taxable sale of meals that would be exempt from sales tax as an exempt sale for resale of these services or excluded as a sale of non‑taxable services.

2. The subsequent sale of correctional services by Client to governmental correctional authorities is exempt from sales tax as a sale of non‑taxable services.

3. In the alternative, the sale of these services to governmental correctional authorities would be exempt from sales tax as a sale to a government entity.

DISCUSSION

Issue One

Vendor Sale to Client

A) Sale for Resale of Taxable Services

As mentioned above, the contract between Client and Vendor can be characterized as a sale for resale of taxable goods and services. The furnishing of meals by any restaurant, cafeteria, eating house, hotel, drug store, diner, private club, boarding house, or other place is considered a taxable service under Utah's sales and use tax regulations. [UTAH ADMIN. R. 865‑19S‑61.] The statute that contains Utah's resale exemption does not specifically address whether the sale for resale exemption applies to sales of services. [UTAH CODE ANNOTATED ' 59‑12‑104(24).] However, in prior discussions with representatives of the Utah State Tax Commission, these representatives indicated that the resale exemption applies to services as well as tangible personal property.

Most states generally view their resale exemptions as including the sale for resale of services. Utah would hold a particularly anomalous position if it did not include services in its resale exemption. Therefore, Utah's resale exemption includes both the sale of goods and the sale of services.

Client purchases goods and services from the Vendor without the intent of consuming these items. Client intends to resell these items to governmental agencies. Therefore, the sale of goods and services encompassed by the Vendor's contract is exempt from Utah sales tax under the Utah's resale exemption.

Issue Two

Client sale of services to State and Local Correctional Authorities

Sale of Non‑Taxable Services

As discussed above, the contract between Vendor and Client will not be subject to sales and use tax. The final issue to be addressed therefore is whether the contract between Client and the correctional authorities is taxable. Utah's sales tax on services is limited to specific enumerated transactions. [UTAH CODE ANNOTATED ' 59-12‑103.] Correctional services such as those provided by Client are not among those listed as taxable services. Consequently, the sale of these services to governmental correctional agencies should not be subject to tax.

Exempt sale to Governmental Agency

In the alternative, if these services are taxable, they would be exempt from tax as a sale to a government entity. Utah provides an exemption from sales tax for sales to governmental entities if the product or services is for use in the exercise of an essential governmental purpose [UTAH ADMIN. R. 865‑19S-61(A).] Client sells its services to various state and local correctional facility authorities. The correctional authorities that Client sells its services to are governmental entities, and the correctional functions they are engaged in are clearly essential to the government's function. Therefore, the subsequent sales of correctional services from Client to the Utah correctional authorities are exempt from sales tax under the Utah governmental sale exemption. [UTAH ADMIN. R. 865-19S‑61(A).]

SUMMATION

Based on the law and rules cited above and the facts presented, the food service contracts between Vendor and Client are not subject to Utah sales and use tax. Furthermore, the contract between Client and the Utah correctional authorities is exempt from sales tax as a non‑taxable service or in the alternative sale to a government entity.

Thank you for your prompt attention to this matter. Please send a written response indicating your agreement with our conclusions. Or if you are not in agreement please call NAME #####.

Very truly yours,

RESPONSE LETTER

August 11, 2000

RE: Application of Sales Tax on Food Sales

Dear NAME,

You have requested an advisory opinion concerning the sales tax liability arising from correctional services provided by your client (AClient@) in Utah. Your Client contracts with the State of Utah to incarcerate inmates in Utah, then subcontracts with a vendor (AVendor@) to provide the food served to these inmates. You ask whether correctional services are subject to sales tax in Utah and whether the Client may purchase food from its (Avendor@) tax-free because of the resale exemption.

In Utah, the sale of correctional services is a nontaxable transaction, while the sale of meals is a taxable transaction under Utah Code Ann. '59-12-103(1)(e) unless a specific exemption applies. For purposes of this opinion, we assume that the contract between your Client and the State of Utah either explicitly or implicitly requires your Client to supply meals to inmates in addition to or as part of the correctional services provided. If this is the case, the State of Utah is considered to have purchased both meals and correctional services from the Client. See Heritage Convalescent Ctr. v. Utah State Tax Comm=, 328 Utah Adv. Rep. 20, 953 P.2d 445, (Utah 1997). While the sale of meals is usually a taxable transaction, the sale of correctional services is a nontaxable transaction.

Although the sale of meals is ordinarily a taxable transaction, sales to the State of Utah, its institutions, and its political subdivisions are exempt under Utah Code Ann. '59-12-104(2). Accordingly, your Client=s sale of meals to the State of Utah is exempt from sales tax, provided the purchase is paid for directly by the State of Utah. Utah Admin. Rule R865-19S-42. In addition, as your Client is selling meals to the State of Utah, your Client may purchase these meals from its Vendor tax-free because of the resale exemption under Utah Code Ann. 59-12-104(26).

Accordingly, neither the meals nor correctional services you provide to the State of Utah are subject to sales tax. Under the circumstances as described above, your Client=s purchase of meals from the Vendor are also exempt from sales tax. Should the facts or the assumptions be different from those found in your request letter or this response, our response may be different. Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner