REQUEST LETTER

 

01-029

Response: November 14, 2001

 

 

NAME

COMPANY

ADDRESS

PHONE

FAX

EMAIL

 

This letter is to request an expedited Advisory Opinion on whether or not we will have established nexus for purposes of the Utah Business franchise tax in a situation we have with a customer in Utah. We have already spoken with TAXPAYER REP and she recommended that we write you.

 

COMPANY (COMPANY) is a STATE based manufacturer of component parts supplied to other manufacturers. Our customer in this situation, Company A, is a Utah based manufacturing concern with plants in Utah and STATE. Company B is a Utah based subcontractor that would warehouse and process COMPANY product prior to delivery into Company A. The advisory opinion is necessary for COMPANY to finalize our pricing structure with Company A. Here are the facts:

 

1.                  COMPANY would produce components at our plant in STATE. These would be shipped to Company B in Utah for a washing operation that is required prior to shipment into Company A’s plants.

 

2.                  Company A would pay the freight from CITY, STATE to Company B via common carrier arranged by Company A.

 

3.                  COMPANY would maintain approximately one week of inventory at Company B. The value of one week of inventory is approximately $85,000. Company B would hold the parts in stock until a pull signal is received from our customer – Company A. Parts would be pulled from the COMPANY-owned inventory in the Company B facility, washed, and picked up in Company A-owned trucks and delivered to their manufacturing plants in both Utah and STATE. COMPANY would make weekly shipments to Company B to replenish what was pulled during the previous week.

 

 

4.                  Company B would generate a packing slip and send an electronic shipping notice (ASN) to Company A. A copy of the packing slip would be e-mailed or faxed to COMPANY who would then invoice Company A for that day’s shipment.

 

5.                  Ownership of the parts will transfer at the time a shipment is made from Utah-based Company B to Company A. An invoice would be prepared in STATE on the day that the inventory leaves Company B, based upon notification provided by Company B.

 

6.                  COMPANY has no ties to Company B through ownership, employment, equipment, etc.

 

7.                  COMPANY’s selling price to Company A includes the cost per piece that Company B charges COMPANY. However, this cost will be directly passed to Company A, with no markup or profit to be made by COMPANY on the cost of warehousing and washing.

 

8.                  Final destinations of the parts are Company A owned plants in STATE and Utah.

 

Representatives from Company A and Company B have spoken with various people and have the understanding that COMPANY is exempt from the franchise tax because of Utah’s Free Port Law. COMPANY’s inquiries lead us to conclude that we are not exempt because we will maintain inventory in Utah and because ownership does not transfer to Company A until parts are picked up at Company B (within the State of Utah).

 

COMPANY requests an advisory opinion as to whether or not COMPANY, and any other supplier involved in a similar situation, would be required to file annual Utah corporate income tax returns. Also, we request an explanation of how Utah’s Free Port Law applies or does not apply to this situation.

 

There is a need for a prompt written response. Please call me if there is any additional information that might aid in expediting this request.

 

Thank you for your kind assistance.

 

NAME

COMPANY

 

 

RESPONSE LETTER

 

DATE

NAME

COMPANY

ADDRESS

 

 

RE: Advisory Opinion – Does COMPANY (“COMPANY”) have nexus with Utah for franchise tax purposes?

 

Dear NAME

You have requested the Tax Commission to determine if COMPANY will have established franchise tax nexus with Utah because of a proposed relationship with a Utah customer. COMPANY would sell component parts to this Utah customer, Company A, but not before the parts are delivered to another Utah company, Company B, for temporary warehousing and “washing.”

 

The storage of tangible personal property in Utah is usually sufficient to warrant the imposition of Utah’s franchise tax on an entity. In COMPANY v. COMPANY, 483 U.S. 232 (1987), the Supreme Court held that a taxpayer establishes nexus with a state if its activities there “are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” Maintaining a stock of goods in Utah would enable COMPANY to establish and maintain a market in Utah for its goods. Of course, ones activities in Utah must be more than minimal to be “significantly associated” with the establishment and maintenance of a market. In our opinion, the maintenance of a constant inventory in Utah is more than minimal and is “significantly associated” with the maintenance of a Utah market. Accordingly, COMPANY will incur franchise tax nexus with Utah if its product is stored at Company B prior to its delivery to Company A.

 

The “Free Port” law you ask about is an exemption from Utah’s property tax, as provided in Utah Code Ann. §59-2-1114, but is not an exemption from Utah’s franchise tax. Accordingly, it would have no effect on the franchise tax nexus issue. Should you have any other questions, please contact us.

 

For the Commission,

 

 

 

Marc B. Johnson

Commissioner

 

MBJ/KC

01-029