Response
May 15, 1992
May
15, 1992
XXXXX
Re:
Sales Tax on Mineral Extraction
Dear
XXXXX:
This
letter is in response to your recent request for a Tax Commission ruling on
whether sales tax is due on minerals extracted from real estate where XXXXX has
a contract with the owner and pays for the extracted minerals (sand, gravel,
soil) under a mineral rights agreement.
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 recommendations. The division's recommendations are as follows:
1. Sales Tax Rule R865-19-26S defines tangible
personal property to include property severed from real estate. The minerals
extracted become personal property at the instant of extraction. XXXXX has not
entered into a contract to purchase or own real estate. Title to the severed
property passes after the severance; therefore, there is an acquisition of
tangible personal property.
2. The content of an agreement or the method of
determining a price do not change the fact that there is a sale of tangible
personal property even though the contract refers to the transaction as payment
for mineral rights.
3. This very issue was decided by the Tax
Commission in a decision made on XXXXX, and again in a decision made on XXXXX.
4. Since the sale of the minerals takes place
in Utah, the purchaser is ultimately liable for payment of the tax, but the
seller is required to collect and remit the tax.
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 judgment 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
Commissioner
Utah
State Tax Commission
160
East 300 South
Salt
Lake City, Utah 84134
RE:
Request for an Advisory Opinion on Request
Gentlemen:
XXXXX
(XXXXX), request an advisory opinion regarding their sales tax liability on
royalty payments.
The
facts that should be used in determining this liability are outlined as
follows:
1.
XXXXX is a Utah Corporation with it's principal place of business located in
XXXXX, Utah.
2.
XXXXX is a General Contractor in the State of Utah, which regularly obtains work
with the Utah Department of Transportation (UDOT).XXXXX obtains this work
through the normal bidding procedures established by UDOT. The work normally
obtained is for heavy highway construction ranging from new construction, to
reconstruction or any combination of the two.
3. On occasion, when there is not a state or
bureau of land management (B.L.M.) mineral source, XXXXX contracts with private
owners of mineral sources for the acquisition of those mineral rights.
4. When XXXXX contracts with private owners for
the mineral rights the method of payment varies.
A. Payment for mineral rights may be made in a
lump sum for a specific job, regardless of the quantity of mineral extracted.
B. Payment for mineral rights may be made for a
specified amount per month regardless of the quantity of mineral extracted.
C. Payment for mineral rights may be made in a
lump sum for the right to extract mineral for a specified time. The specified
time may be longer than one year and not related to any specific job. The
payment may not reflect the quantity of mineral extracted.
D. Payment for mineral rights may be made at
the time when the actual mineral is removed from the pit. This usually means
that the payment is made based on a per ton of mineral that has left the pit.
This method of payment does not reflect the actual mineral extracted.
These
are the typical methods of payment, but in all cases regardless of payment the
contract is for the mineral rights.
5. In all cases after obtaining the mineral
rights, XXXXX or an authorized agent is responsible for extracting the
minerals. The seller is never involved in the severance of the mineral from
reality.
6. The mineral that is extracted is not
tangible personal property until after it has been severed according to the
Utah administrative code R865-19-26S.
7.
XXXXX has contracted with the owner and obtained the mineral rights prior to
any severance of the mineral.
8.
XXXXX takes the severed reality and the converts it back to reality while
constructing the road.
9. If for some reason, XXXXX re-sold the
severed mineral XXXXX would then collect tax and remit the tax to the state.
In
conclusion, for a sales tax to be imposed a sell of tangible personal property
must take place. Since, XXXXX was the only owner of the minerals while the
minerals were considered tangible personal property; there could have be no
sale of tangible personal property. Since no sale of tangible personal property
took place, there should be no sales tax liability.
Your
opinion on the above mentioned facts would be greatly appreciated. If further
information or clarification is required, please let me know.
Sincerely,
XXXXX
Accountant