REQUEST LETTER

02-017

NAME

COMPANY

ADDRESS

The ASSOCIATION, was enlisted by the DIVISION, to administer a program designed to assist DIVISION clients in becoming self-employed. We have administered the program for approximately eight months. It has come to our attention that we may have incurred a sales tax liability. My purpose in writing is to obtain a ruling from the Utah Tax Commission on this matter.

Our program is called the INVESTMENT FUND. Funding for the program is conveyed via contract from DIVISION to ASSOCIATION. ASSOCIATION has established an advisory board made up of agency representatives and a funding review board to review business plans and recommend funding.

Program clients must successfully complete the Small Business Administration NxLevel business training course which this Association provides. Upon successful completion of the training and submission of a viable business plan to the INVESTMENT FUND funding review board, the client may receive up to $10,000 in grant funds for the inauguration or expansion of the business enterprise set forth in the business plan.

Awards from INVESTMENT FUND vary in their use. Awards may be for operating capital, inventory and other purposes as approved by INVESTMENT FUND. To date, all remittances by INVESTMENT FUND have been grants with certain reversionary provisions in the event of failure to comply with program guidelines.

We believe that we may have a sales tax liability problem when certain INVESTMENT FUND funds are expended by ASSOCATION on behalf of program clients to purchase durable goods for uses in client businesses for purposes other than resale. One example would be as follows. A INVESTMENT FUND client requires an inexpensive truck to expand a dry wall business. The client locates a suitable vehicle and notifies ASSOCIATION. ASSOCIATION then remits funds up to the amount authorized by the review board to the vendor. The client takes possession of the truck. ASSOCIATION maintains a lien on the truck for a period of time in which the business is reviewed for progress and viability. If the business is meeting plan objectives within the review period, the lien is removed and the vehicle becomes property of the client.

Our question for the Tax Commission is whether the scenario outlined above entails a sales tax liability? If it does, our estimate is that approximately $7,000 may be owed. If taxes are owed, we are in a position to make payment. We need only to know what we must do.

Also, from this point forward, it is our intent that all purchase orders and invoices received from the INVESTMENT FUND clients will include sales tax unless the items are purchased with the intent to resell them.

For purposes of further correspondence you or your designee may communicate with the INVESTMENT FUND program managers, NAME or NAME at the address above. We appreciate your guidance on how we must proceed in this matter.

RESPONSE LETTER

June 27, 2002

NAME

COMPANY

ADDRESS

Re: Sales Tax Exemption for Purchases by State Political Subdivisions

Dear NAME,

You have inquired whether a sales tax liability exists when the ASSOCIATION in making a grant to one of its clients (grantee), makes a payment directly to a vendor for the purchase of property, ownership of which transfers to the grantee.

Under Utah law, a tax is imposed on the purchaser for amounts paid or charged in a transaction for retail sales of tangible personal property made within the state. (Utah Code Ann. §59-12-103 (1) (a)). “Sale” refers to any transfer of title, conditional or otherwise, in any manner, of tangible personal property. (Utah Code Ann. §59-12-102 (25)). Sales to the state, its institutions, and its political subdivisions are exempt from this tax. (Utah Code Ann. §59-12-104 (2)).

As you described in your letter and in phone conversations, when ASSOCIATION awards a grant for the purchase of property, the grantee selects a vendor and negotiates the terms of purchase. The grantee delivers the vendor’s written purchase price offer to ASSOCIATION. ASSOCIATION then makes payment directly to the vendor and the grantee takes title to the property, with ASSOCIATION retaining a lien for a period of time. The grantee has sole possession and use of the property. Generally, the only interaction between ASSOCIATION and the vendor is the payment for the property. ASSOCITION does not take title to or use the property. Under these circumstances, the transaction occurs between the grantee and the vendor for sales and use tax purposes. As ASSOCIATION is not the purchaser in such a transaction, the exemption for purchases by the state, its institutions and political subdivisions does not apply.

To reiterate, a sales tax liability does exist for the grantee, and sales tax should be paid to the vendor so that it may correct its records and remit the tax to the Tax Commission for any such transactions that have occurred as described above. In the future, sales taxes should be paid on such transactions. Should you have any other questions, please contact us.

For the Commission,

Marc B. Johnson

Commissioner

MBJ/KC

02-017