REQUEST LETTER

01-12

NAME

COMPANY

ADDRESS

PHONE

This letter is to request a letter ruling regarding the taxability of certain COMPANY (hereafter CO) sales to customers who are reselling our products to their customers in your State.

We request advice regarding the taxability of third-party drop shipments made by CO into your State on behalf of resellers claiming to have no presence or nexus and are not registered or licensed to collect tax in your State. It has come to our attention that you have investigated this issue and responded to survey questions posted by the Institute for Professionals in Taxation. Based on the information provided in their publications, the State will accept a resale certificate or a similar document from our customers for sales of tangible personal property even if our customer is not a registered taxpayer within your State. However, we have questions regarding the taxability of transactions between CO and its customers that involve the sale for resale of services within your State.

Facts:

CO is a manufacturer of computer equipment, software, printers and related supplies. CO also sells various computer related repair services on a per-incident or contractual basis. We also sell optional software support agreements providing software users phone-in support capabilities and access to software updates, if any.

CO is registered in your State to collect sales and/or use taxes. We sell our products to both end-users and resellers.

For the purpose of this request, our customer is a retailer of computer goods and software solutions. Our customer claims to have no presence or nexus in your State and is not registered to collect sales and use taxes in your State.

An end-user located in your State contracts with the retailer, our customer, for the purchase of certain computer equipment and related software applications. Our reseller customer contracts with CO to purchase and resell CO manufactured computers and software applications CO has developed.

Our reseller customer requests that CO ship the computer products directly from our manufacturing site, which is located outside of your State, to their customer in your State. The products are shipped via common carrier.

Our customer has provided CO with a valid resale exemption certificate for the home State.

Questions:

Question 1. Given that our reseller customer is neither registered in nor has nexus with your State, will you recognize CO’s sales as a tax-exempt sale for resale? (Yes or No)

If yes, what documentation must CO retain from our customer to support this exempt sale for resale? As stated above, our reseller customers cannot provide a valid resale certification from your State.

If no, would the answer be different if the end-user in your State is exempt

from sales (e.g. government agencies, non-profit organizations, etc…)?

If given the facts cited below, how will the taxability of these transactions change for CO?

Question 2. The end-user customer in your State purchases from our reseller customer an optional hardware maintenance agreement. Our reseller customer contracts with CO to provide these services to their customer and the services are performed by CO employees or CO contractors at the end-users site in your State.

The end-user customer in your State purchases the same hardware maintenance agreement, but rather than having technicians come to their site, the products are shipped to CO outside of your State for service or repair.

Question 3. Without regard to question 2, if given the facts cited below, how will the taxability of these transactions change for HP?

The end-user in your State purchases from our reseller customer an optional software support agreement which provides technical software consulting services and access to software applications updates in the event they are released during the contract period. Our reseller customer contracts with CO for the delivery of these services; however, our technical software consulting service is provided via telephone by an CO software expert located in another State. Any software updates or manuals are shipped from an CO site located outside of your State to the end-user customer in your State.

Question 4. Without regard to question 2 or 3, if given the facts cited below, how will the taxability of these transactions change for CO?

CO not only ships the products to the end-user, but also sends an CO employee or CO contractor to install the computer equipment and software at the end-users site in your State?

Question 5. Lastly, if CO is required to charge sales and/or use tax on any of these types of transactions, what base is to be used to calculate the tax? Please keep in mind that CO has no knowledge of the purchase price paid by the end-user customer in your State for any products or services sold through a third party.

For each of your responses, please provide the State statute or regulation reference upon which your response is based.

We thank you in advance for your response to this request for a letter ruling. Should you have any questions regarding the facts or questions, please contact me directly.

RESPONSE LETTER

DATE

NAME

COMPANY

ADDRESS

PHONE

RE: Advisory Opinion – Taxability of certain COMPANY (“CO”) sales to customers who are reselling CO products to their customers in Utah.

Dear NAME,

You have requested information regarding the sale of computers, software and maintenance agreements from CO to a reseller and whether CO incurs any tax liability from these transactions. Your letter raised several issues from Utah’s application of nexus to the use of exemption certificates. We will address each of the issues in the order you raised them.

QUESTION 1. You describe a situation where your company, CO, sells an item of tangible personal property to another company, (“Company A”). Company A then sells this item to its customer, (“Customer B”), who is located in Utah. CO then ships the item directly to Customer B. Both CO and Company A are companies located outside of Utah, and while CO is registered with Utah to collect and remit sales tax to Utah, Company A is not. We assume for purposes of this question that Company A has no sales tax nexus with Utah and, thus, is not required to be registered to collect and remit sales tax.

We also assume that Customer B is the final consumer. Under these circumstances neither CO nor Company A would be required to collect and remit Utah sales tax on this transaction. ^[1] However, because CO is registered with Utah for sales and use tax purposes, it must document its exempt sale to Company A. Otherwise, it can be held liable for Utah sales tax on the transaction. Utah Code Ann.§59-12-106(2); Utah Admin. Rule R865-19S-23 (“Rule 23”) (copy attached).

To document your exempt sale to Company A, our current policy requires that you have Company A complete a Utah sales tax exemption certificate (Form TC-721, copy attached) indicating that its purchases from CO are for resale. In the space that asks for the Utah sales tax number on the Form TC-721, Company A would instead use its home-state sales tax number, as Company A is not registered in Utah. CO should retain this document in its records as evidence of the exempt sale. In historical practice, however, the TC-721 was designed to be used when both parties are Utah corporations. In this instance, the companies are not Utah corporations so CO may keep on record a letter from Company A stating that Company A has no nexus with Utah for sales tax purposes under Utah Code Ann. §59-12-107 (copy attached) and that items purchased by Company A from CO are intended for resale. The advantage to this alternative is that it documents Company A’s position that it has no sales tax nexus with Utah. In addition to the exemption certificate, Rule 23 also requires that you keep a copy of the sales invoice showing the name and identity of Company A.

QUESTION 2. Under this scenario the Utah end-user, Customer B, purchases an optional hardware maintenance agreement from Company A. Although the maintenance agreement is purchased from Company A, Company A contracts with CO to provide or perform the services and repairs to its customers. CO employees or CO contractors perform the maintenance agreement services on-site in Utah. Such an arrangement raises the issue of whether Company A now has nexus with Utah for sales and use tax purposes.

Under a similar circumstance in Tyler Pipe Industries, Inc. v. Washington Dept. of Rev., 483 U.S. 232 (1987), the court held that an out-of-state retailer acquired sales and use tax nexus in a state where it had a sales representative/independent contractor. The critical test in the Tyler Pipe case was whether the activities performed in that State on behalf of the taxpayer were significantly associated with the taxpayer’s ability to establish and maintain a market in the State for its sales. Id. at 250. From your description, Company A’s actions allow it to establish and maintain a market in Utah from the presence of its CO representative in Utah. Accordingly, we conclude Company A has sales and use tax nexus with Utah under these circumstances, and, thus, it would need to collect and remit sales tax on its Utah sales.

If CO performs the hardware maintenance services out-of-state, then Company A, through its representative, would not have a significant presence in the state of Utah. Because there would be no activity performed in Utah to establish and maintain Company A’s market in Utah for its sales, Company A would not have sales and use tax nexus with Utah. As before, CO would need to maintain the documentation outlined in question 1 to avoid tax liability. Accordingly, Company A may purchase CO’s product tax-free by providing HP with its home state exemption certificate as described in question 1 and would not be required to collect and remit sales tax on its Utah sales.

You should also be aware that maintenance agreements themselves are subject to Utah sales and use tax. The tax treatment of such contracts is discussed in Utah Admin. Rule R865-19S-80 (D), a copy of which is attached for your convenience.

QUESTION 3. For purposes of this question, the Commission assumes that Company A does not have nexus with Utah prior to selling the software support agreement you have described. You indicate that CO will perform all services, covered by the software support agreement, outside of Utah. Because these activities are performed outside of Utah, they are not significant for Company A to establish and maintain a market in Utah for its sales. Accordingly, under these circumstances, Company A would not be deemed to have sales and use tax nexus with Utah and would not be required to collect sales tax on the original sale, nor on the optional software support agreement. However, as in question 1, Customer B would be responsible for paying use tax on products shipped and services sold by Company A. Again, CO would not have sales and use tax liability in this instance, as long as it maintained the exemption certificate from Company A on file as described in question 1.

QUESTION 4. This question addresses whether CO’s installation of the equipment and software on-site in Utah constitutes nexus for Company A in the state of Utah. Applying the Tyler Pipe criteria referred to in Question 2, CO’s installation of the equipment and software are significantly associated with Company A’s ability to establish and maintain a market in the State for its sales. Id. at 250. CO’s actions on behalf of Company A are necessary for Company A to remain competitive in the computer market and maintain good customer relations. Accordingly, Company A has nexus with the state of Utah and would be required to collect and remit tax in this scenario. While CO would not be required to collect tax on sales made by Company A, Company A will be required to obtain a Utah Sales Tax License and collect the tax.

QUESTION 5. The last question addressed what tax base should be used by CO if it was required to collect tax. Since CO does not sell directly to Customer B, it would not be required to collect any tax. If tax collection responsibility exists as set forth in questions 2, 3, or 4, Company A would be responsible to collect and pay the tax. If it is determined that Company A has no nexus with the state of Utah either independently or through its independent contractor, CO, then it would not be responsible for collecting tax. The responsibility for tax would then shift to Customer B.

Please contact us if you have any further questions.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/PL

01-012