December
6, 1991 Response from Tax Commission
October
30, 1991 Letter from XXXXX of XXXXX
XXXXX,
CPA
XXXXX
Re: Whether sale of gold and silver bullion
constitutes a Utah sale for purposes of the Utah apportionment fraction when
sold to a third party not doing business in Utah from refiners Utah location.
Dear
Mr. XXXXX:
This
letter is in response to your recent request for a Tax Commission ruling on
whether XXXXX's sale of gold and silver bullion constitutes a Utah sale for
Utah corporation franchise tax purposes when sold to a third party not doing
business in Utah from the refiners Utah location and if so, whether such sale
would be excluded under U.C.A. 59-7-318 if XXXXX does not file on a XXXXX.
The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your request was referred to the
Tax Commission's Auditing Division for their analysis and recommendation. The division's recommendation is as follows:
QUESTION
#1. Under the Utah Code Annotated,
1953, Title 59, Revenue and Taxation 59-7-318, does the sale of gold and silver
bullion constitute a Utah sale if the bullion is sold to a third party from the
refiners Utah location by XXXXX and the third party accepts delivery outside of
Utah by terms of the sale agreement itself?
RESPONSE: The Utah statute governing the assignment of
sales to Utah in the Sales Factor is U.C.A.
59-7-318 which states:
"(1) Sales of tangible personal property are in
this state if:
(a) the property is delivered or shipped to a
purchaser, other than the United States Government within this state regardless
of the f.o.b. point or other conditions of the sale; or
(b)
the property is shipped form an office, store, warehouse, factory, or other
place of storage in this state and:
(i)
the purchaser is the United States Government; or
(ii) the taxpayer is not taxable in the state of
the purchaser.
(2) Sales of tangible personal property are not
in this state if the seller and the purchaser would be members of the same
unitary business group but for the fact that either the seller or the purchaser
is a foreign operating company, and the property is purchased for resale
outside of the United States."
The
sales of bullion are assigned to Utah under (1)(a) above if the sale is to the
refiner or other Utah purchaser. The
sale would be assignable to Utah under (1)(b)(i) above if the purchaser is the
U.S. Government. Finally the sale would
be assignable to Utah as a throwback sale under (1)(b)(ii) above if XXXXX is
not taxable in the destination state or foreign jurisdiction. The answer to your question is that the sale would be a Utah sale under the
throwback rule only if XXXXX is not taxable in the state of destination. If XXXXX is taxable in the destination state
or foreign jurisdiction, it would not be a Utah sale.
It
is important to remember that the intent of the UDITPA statute from which the
above section is taken is that each dollar of sales be assignable to one and
only one state or foreign jurisdiction.
There should be neither "double taxation" through inclusion of
the sales in more than one state or foreign jurisdiction's factor nor
"nowhere income" through exclusion from any state's factor. In the case of XXXXX, the refiner is also
the transportation carrier whether the gold or silver bullion is physically
shipped at the time of the sale or not.
The end result is that the gold and/or silver bullion is given to the
refiner (carrier) in Utah and delivered to the purchaser outside of Utah. If XXXXX is taxable in the delivery state or
foreign jurisdiction, the sale is assignable to that state or foreign
jurisdiction. If XXXXX in not taxable
in the destination location, then the sale is thrown back to the Utah sales
factor pursuant to the throwback rule as outlined above.
QUESTION
#2 If (1) above is yes, does the sale
to the third party not doing business in the United States constitute an
excluded sale for apportionment factor purposes under 59-7-318, if the taxpayer
does not elect XXXXX under 59-7-303(2) is conducted outside of the United
States.
RESPONSE: U.C.A. 59-7-318(2) is the paragraph referred
to in this question. As stated in the
above statute, this paragraph excludes a sale from the Utah sales factor if
either the seller or purchaser is a foreign operating company. "Foreign Operating Company" is
defined in U.C.A. 59-7-302(6) and means an affiliated corporation incorporated
in the United State, 80% or more of whose business activity as measured
according to Subsection 59-7-303(2) is conducted outside of the United States.
Foreign
Operating Companies in the context of a "waters edge combined report"
are given certain tax benefits by including only fifty percent of their income
and factor attributes in the combined report.
[See U.C.A. 59-7-304 (1)]. The
intent of the above paragraph is to exclude all intercompany sales between a
company and an affiliated foreign operating company for purposes of the sales
factor, even though only fifty percent of the foreign operating company's
income is being included in the water's edge combined report.
In
your question, the sale was to a third party and not to a "foreign
operating company". Therefore, the
sale would not be excludable under U.C.A. 59-7-318(2).
Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously,
if there are deviations from these facts, this opinion may be negated.
If
you do not agree with this determination, you may appeal to the Tax Commission
for a formal hearing. The results of
that hearing would constitute a declaratory judgement and be appealable to the
Utah State Supreme Court. A Notice of
Appeal rights and a copy of the Utah Taxpayer Bill of Rights are attached.
For
the Commission,
Joe
B. Pacheco
Mr.
XXXXX
Managing
Corporate Auditor
Utah
State Tax Commission
160
E. 300 South
Salt
Lake City, Utah
81434-2300
Dear
Mr. XXXXX:
This
letter is to formally request a ruling from the Utah State Tax Commission as to
whether the ownership of precious metals within the State, while they are being
refined by an unrelated Utah refinery, and subsequently sold to a third party
not doing business in Utah constitute a Utah sale for income tax purposes.
Facts
All
the related entities mentioned below use the corporate address located at XXXXX
for official correspondence.
XXXXX,
EIN XXXXX, ("XXXXX"), a XXXXX e corporation, provides management services
and acts as a marketing/sales agent (outside the state of Utah) for its wholly
owned subsidiaries whose principal business activity is precious metals mining.
Currently, three subsidiaries, all XXXXX corporations, operate producing gold
mines:XXXXX, EIN XXXXX, ("XXXXX"), located in XXXXX;XXXXX, EIN XXXXX,
("XXXXX") in XXXXX, and XXXXX., EIN XXXXX, ("XXXXX") in
XXXXX.
XXXXX
has entered into a contract whereby a significant portion of the mine
production of XXXXX ,XXXXX, and XXXXX is shipped to and refined by an unrelated
company in Utah. As neither XXXXX nor its subsidiaries have any refinement
capabilities, the use of an outside refinery to get its mine production to a
saleable form is essential.
At
the time of shipment to the Utah refinery, the mine production would be in the
form of XXXXX bars which are in excess of 75 % pure as to precious metal content. At this point, approximately 99% of
the cost of the product ultimately sold has been incurred. The dore bars are
shipped to the refinery where they are weighed, melted, sampled and assayed.
Occasionally material may be accumulated at the refinery over several weeks in
order to make up a saleable quantity. Title to the dore bars, however, remains
with the mining subsidiary throughout the refining process and does not pass
until its final sale to the customer. The final refined product is 99.5% pure
and is usually available within 15 working days after receipt of the dore bars
by the refinery. At this point the bullion will be sold to a commercial buyer
which may be either the Refiner or a third party and title will be passed. The
Refiner has offered to deliver the bullion FOB at either the refiners location
in Utah, London, Zurich or any other major gold trading centre were the Refiner
has a place of business. The common commercial practice of precious metal
refiners is to offer various points of delivery since the bullion is a fungible
commodity. The cost to XXXXX for a delivery outside the Refiner's plant
facility in Utah is approximately $.10 per ounce built into the original
refining terms plus the Refiner's ability to make additional profit on ounces
the Refiner currently holds at various worldwide locations. Under the refining
agreement with the Refiner, XXXXX maintains that title transfers at the point
of delivery by the terms of the sale agreement itself.
Neither
XXXXX nor any of its subsidiaries will own/rent property, maintain an office or
conduct any other business in Utah other than to hold title to the dore bars
during the refining process. XXXXX and
its subsidiaries which have Utah nexus are qualified to do business in Utah and
are currently filing Utah Corporate Income Tax Returns. XXXXX and its subsidiaries hereby attest
that to the best of its knowledge this issue is not being considered by the
Department in connection with an active examination or audit of previously
filed returns.
Questions
(1) Under the Utah Code Annotated, 1953, Title
59, Revenue and Taxation §59-7-318, does the sale of gold and silver bullion
constitute a Utah sale if the bullion is sold to a third party from the
refiners Utah location by XXXXX and the third party accepts delivery outside of
Utah by the terms of the sale agreement itself.
(2)
If (1) above is yes, does the sale to the third party not doing business in the
United States constitute an excluded sale for apportionment factor purposes
under 59-7-318, if the taxpayer does not elect Worldwide Unitary Reporting
under 59-7-304(3).
We
appreciate your attention in this matter and request a response as soon as
possible. If you have any questions please call XXXXX, Manager International
Taxation or myself at XXXXX.
Very
truly yours,
XXXXX,
CPA