00-006

Response March 27, 2000

REQUEST LETTER

February 5, 2000

Dear Irene,

I was referred to you by NAME of your office to submit a letter requesting an official opinion on tax questions involving our company. Apparently we are in a lot of gray areas and no one has been able at this point to give us a definitive answer.

COMPANY, is a wholesale manufacturer of custom‑made plastic fingernails. They have sometimes been compared to a product known as "Lee Press On Nails" (which can be bought at any grocery or variety store), however the main difference is that ours are custom made using independent nail technicians who work out of their own salons. The nail technician takes impressions of the clients fingers, and fashions a model of how the client wants her fingernails to look. This model is then sent to our manufacturing facility where the finished product is made out of plastic. The NAILS are then sent back to the nail technician to deliver to the client.

We sell the finished product (NAILS), to the nail technicians at a wholesale price. They then mark up the nails and charge their clients a retail price that reflects the labor and time involved in making the model.

I had inquired at the state tax commission previously about who was suppose to collect the sales tax, because as a company only selling wholesale, we didn't want to collect it, but wanted to pass that responsibility onto the retailers. In order to do this I was told that we needed to require the nail technicians to give us an exemption certificate.

Here is the confusing issue. One of our new technicians went to the tax commission and spoke with NAME, who told her that she didn't have to personally pay, or charge the client sales tax because what she did was a service. I guess the gray area here is the fact that, the client is sold 3 sets of nails at the same time. They can choose to have the nails applied by the nail technician or they can do it themselves at home. At any rate, only one set can be applied and the other two sets go out the door in a container and not applied to the person. It should also be noted that this product is designed to be so user friendly that the customer may elect to have their nails applied only once and then continue using them on their own without requiring a nail technician to apply them.

When we asked our CPA about this issue we were told that if we paid sales tax for the plastic then no one had to pay sales tax on the finished product. At this point we need an official answer as to whom or if anyone pays tax on the NAILS. If you need any additional information, you can reach me at #####. I look forward to hearing from you as soon as possible.

Sincerely,

NAME

RESPONSE LETTER

March 27, 2000

RE: Collecting Sales Tax on NAILS

Dear NAME,

You have requested an advisory opinion concerning the application of sales tax on custom-made plastic fingernails. From information obtained in your letter and from recent telephone conversations with you, we understand that your company (ANAILS@) produces custom-made plastic fingernails and markets them at wholesale to nail technicians. At issue is whether NAILS should charge sales tax to the nail technicians on its wholesale price or whether the nail technicians should charge sales tax to their customers on the retail price for the nails. To answer this, we must first determine whether the nail technician is selling his or her customers tangible personal property, which is taxable, or a service, which is nontaxable.

To buy these custom nails, a customer must first have the nail technician take a mold of her fingers. Then, the mold is sent to NAILS, from which is produced three sets of custom-fitted nails. NAILS sells the three sets of nails to the nail technician at wholesale. The customer then purchases the three sets of nails from the nail technician, with the nail technician usually applying one of the sets of nails to the customer=s own fingernails. Including the time to take the mold and apply the one set of nails, the nail technician may spend up to two hours with a customer. The nail technician=s retail price to the customer is $$$$$, a single price that includes the three sets of nails and the nail technician=s services. You have informed us that as much as $$$$$ of the total charge may represent the nail technician=s services.

In, BJ-Titan Services v. Utah State Tax Comm=n, 842 P.2d 822 (Utah 1992), the Utah Supreme Court addressed a sale that included both tangible personal property and services. To determine whether services or tangible personal property had been sold, the Court focused on the nature of what was sold and whether it primarily entailed tangible personal property. Critical to this analysis was Ato determine if the essence of the transaction is one for services or for tangible personal property. The analysis typically requires a determination either that the services provided are merely incidental to an essentially personal property transaction or that the property provided is

merely incidental to an essentially service transaction. Since the law imposes a tax only on the sale of tangible personal property, transactions that are essentially services are not taxable@ while transactions that are primarily for tangible personal property are taxable. Ibid.

The Court relied on several factors to determine whether Athe object of the transaction constitutes tangible personal property or services. These factors include (1) the value of the tangible property to the customer in relation to that of the services; (2) the cost of the property to the seller; (3) the customer's rights to possession or ownership of the property; (4) the ability to separately itemize charges for the property and services; (5) the extent to which the services increase the value of the property or to which the property increases the value of the services; and (6) the extent that such services are rendered in similar transactions.@ Ibid.

Let us apply these criteria to the sale of the custom nails at issue here. In so doing, we find that the customer=s purchase of three sets of nails where only one set is applied indicates that the nails themselves, not the services, are the primary purpose of the transaction. In addition, the customer obtains ownership and possession of the three sets of nails. Also, the cost of the services is, at the most, less than a third of the total price for the nails. All these facts would indicate that, under these specific circumstances, the purchase of the custom nails is a transaction that is primarily for tangible personal property. Accordingly, the transaction is taxable and the nail technician should collect and remit sales tax on the total retail price of $$$$$. In this situation, NAILS would not charge sale tax when selling the nails at wholesale to the nail technicians, nor would it incur tax liability on these transactions as long as it obtained an exemption certificate indicating that the purchase was for resale.

Please contact us if you have any other questions.

For the Commission,

Marc B. Johnson

Commissioner

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