Response
June 30, 1992
June
30, 1992
XXXXX
Re:
Sales Tax on Drop Shipments
Dear
XXXXX:
This
letter is in response to your recent request for a Tax Commission ruling to determine
the taxability of third party drop shipment sales and the documentation the
seller is required to keep.
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:
Company
A is making an exempt sale for resale to Company B, and should have a sales tax
exemption certificate from Company B, using Company B's home state tax number.
Company C is the final consumer and would be responsible to pay use tax
directly to the Utah State Tax Commission unless they were an exempt
organization.
Based
upon the facts presented in your letter, we are in agreement with the Auditing
Division's recommendation. 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
R.H.
Hansen, Chairman
State
Tax Commission
Heber
M. Wells Bldg.
160
East 300 South
Salt
Lake City, UT 84134
Att:
Sales and Use Tax Dept.
Re:
Drop-Shipments Sales Tax Responsibility
Dear
Sir/Madam:
We
would appreciate your written advice as to the procedure for the proper
treatment of drop-shipment transactions subject to sales and use taxes in the
following situations.
Company
(A), a Pennsylvania distributor of Computer Equipment is registered for sales
tax in your state. (A) is requested by their customer Company (B), to ship to
(B's) customer, Company (C), in your state. The shipment is made primarily from
inventory in Pennsylvania to (C) by (A) using common carriers. Billing is by
(A) to (B) showing ship to as (C). (B) informs (A) that they do not have
sufficient nexus in your state to require them to register for sales tax. They
do not have any offices or salespeople in your state. Their only contact with
(C) is by mail or by telephone.
(1)
What is the responsibility of (A) relative to sales tax in this situation?
(2)
For audit purposes what should (A) have in their files to prove that this is a
non-taxable resale transaction?
(3)
If (A) is required to collect sales tax, what if (C) is an exempt organization
(Charitable, religious, municipality)?
We
would appreciate your response to insure that we are in compliance with the
sales and use tax laws of your state when confronted with these situations.
Thank you for your cooperation.
Very
truly yours,
XXXXX
Tax
Manager
92-022DJ
Responses
October 19, 1992 and June 19, 1992
October
19, 1992
XXXXX
Dear
XXXXX:
On
behalf of the Commission, I have reviewed the issues we discussed in our
meeting at the Commission Office in July. My recollection is that the issues
discussed were outlined in your letter of July 14, 1992, and the following
questions were raised:
1.
What is the definition of the word "reorganization", and does the
liquidation of a corporation qualify as a business reorganization.
2.
What is the definition of the word "substantially" as it relates to
the rule R865-19-38S.
3.
Applying the above to the transaction described in your letter, how do they
relate to the exemption from sales tax under rule R865-19-38S.
I
have reviewed the Internal Revenue Code to determine if a complete liquidation
of a corporation qualifies as a business reorganization and found that it does
not meet the criteria found in the code. I also reviewed the past practice of
the Tax Commission as it relates to complete liquidations. Our past practice
has been that we treat complete liquidations as a business reorganization. Our
answer to your advisory opinion request does state that the transaction
qualified as a business reorganization for purposes of satisfying rule
R865-19-38S.
In
order to meet the test for "substantially the same" it is our long
standing policy that there must be 80 percent ownership of both the transferee
and the transferor organizations. That is, there must be 80 percent of the
ownership retained by the transferee organization as there was in the
transferor organization. It is our opinion that the transaction you described
in your letter is a taxable transaction because it does not meet the
"substantially the same" test since shareholder A and C, who were
each 49 percent owners, are not 80 percent owners of the transferor
organization.
Please
advise me how you would like to proceed with your appeal or if you have further
questions.
Very
truly yours,
Joe
B. Pacheco
Commissioner
July
14, 1992
Commissioner
Roger Tew
Utah
State Tax Commission
Heber
M. Wells Building
Salt
Lake City, Utah 84114
Dear
Commissioner Tew:
I
am requesting a reconsideration of the Advisory Opinion dated XXXXX which I
received XXXXX, signed by Commissioner Joe B. Pacheco. Enclosed with this
letter is my original letter dated XXXXX, requesting the Advisory Opinion and the
response dated XXXXX, bearing our time stamp receipt of XXXXX.
In
summary, we believe that there is a major distinction between the treatment of
two entities forming a new entity, such as discussed in XXXXX, (wherein the
Supreme Court adopted the 80% Continuity of Interest Rule found in the Internal
Revenue Code), and the complete liquidation of a sole corporation to its
shareholders, as found in the facts out1ined in our opinion request. That
distinction is recognized throughout the Internal Revenue Code, in federal tax
cases and even in the Internal Revenue Service's own regulations. For the State
of Utah to treat a complete liquidation of a corporation as a taxable event for
sales tax purposes, abrogates the business reorganization provisions otherwise
found throughout the tax system.
I
would appreciate reconsideration of the Advisory Opinion under the facts as
exist in this case for a complete liquidation of a corporation, to-wit:
transfer of all its assets to its shareholders upon termination of its
corporate status. Incidentally, under the Internal Revenue Code continuity of
interest test, the attribution rules would apply; continuity of interest would
therefore be established, with 99.6% of the interest being contained in the two
shareholders who received the assets in question.
Sincerely,
XXXXX
XXXXX
Re:
Advisory Opinion - Corporate Liquidation
Dear
XXXXX:
This
letter is in response to your recent request for a Tax Commission ruling on whether
sales tax is due on the transfer of vehicles to shareholders after a complete
liquidation of corporate assets.
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.
A complete liquidation of all corporate assets and discontinuation of business
activities does qualify as a business reorganization for the purpose of
satisfying Sales Tax Rule R865-19-38S.
2.
A sale as defined in § 59-12-102(10) does take place in the transfer of a
vehicle from a corporation to a shareholder in exchange for shares of capital
stock. The shares of stock had value equal to the net value of the assets. The
corporation does receive "consideration" which is the value of the
shares.
3.
The transfer of vehicles to shareholder "A" who was a 49.7% owner and
to shareholder "C" who was a 49.9% owner is taxable because neither
shareholder owned 80% or more of the shares of stock.
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
Heber
M. Wells Building
Salt
lake City, Utah 84114
Attn:XXXXX
Dear
Members of the Commission:
I
am writing to you to seek an advisory opinion regarding the sales tax liability
due on distribution of vehicles owned by a corporation to its shareholders
incident to a complete dissolution and secession of its affairs.
FACTS
We
have a client which has been a corporation for over 30 years. It is owned by
four shareholders with the following shares:
Shareholder
"A" XXXXX
Shareholder
"B" XXXXX
Shareholder
"C" XXXXX
Shareholder
"D" XXXXX
The
corporation has been winding down for a number of years as Shareholder
"A" and "C" were approaching age. On XXXXX, 1991, they
elected to cease activity entirely and liquidate the corporation under Section
331 of the Internal Revenue Code. A copy of the plan of liquidation is enclosed
herewith.
Pursuant
to the plan of liquidation, all assets were required to be distributed to the
shareholders within 30 days of June 1, 1992. There are several motor vehicles
owned by the corporation, which pursuant to the plan of liquidation are to be
distributed to the shareholders. Since Shareholder "B" and
"D" own very minor shares, their shares are being redeemed by cash.
Shareholders "A" and "C" are being redeemed in exchange for
the assets owned by the corporation.
ISSUE
The
issue upon which an advisory opinion is sought is whether the transfer of the
vehicles by the corporation to its shareholders as part of a complete
liquidation of the corporation is a taxable event for sales tax purposes?
LEGAL
ANALYSIS
Sales
tax is imposed by Section 59-12-103(1)(a) U.C.A., on retail sales of tangible
personal property made within the State. A sale includes any transfer of title,
but it must be for "a consideration" Section 59-12-102(10) U.C.A.
Certain sales are exempt, including "isolated or occasional sales by
persons not regularly engaged in business, except the sale of vehicles or
vessels required to be titled or registered under the laws of this State".
Section 59-12-104(14) U.C.A. The Commission, by rule, has continued the pre-1987
provisions of the sales tax code dealing with business reorganizations by
providing as follows:
C.
Sales of vehicles required to be titled or registered under the laws of this
state are not isolated or occasional sales, except that any transfer of a vehicle
in a business reorganization where the ownership of the tansferee organization
is substantially the same as the ownership of the transferor organization shall
be coded an isolated or occasional sale.
Finally,
the Utah Supreme Court in a recent case, addressed the predecessor statute on
some of these issues. In BJ-Titan Services v. State Tax Commission, 183 Utah
Adv. Rpt. 20 (Utah 1992), the Utah Supreme Court addressed the issues of both
consideration and reorganization. The taxpayer was unsuccessful in asserting
reorganization treatment. The Court found that a venture between two entities
forming a new general partnership was not a continuation of the old
organizations, since 80% of the ownership was not retained by the corporation
which previously owned the vehicles in question. The Court cited with approval,
however, 19 Am. Jur. 2d Corporations § 2514, finding that the general rule for
a reorganization" . . is not ordinarily the combination of several
existing corporations, but is simply the carrying out by proper agreement and
legal proceedings of a business plan for winding up the affairs of . . . [a
corporation] XXXXZX, at 26.
The
Court further addressed three cases raised by the taxpayer in footnote 7. The
cases cited by the taxpayer, dealt with the threshold issue of consideration
under the definition of a retail sale. The Court observed: "These cases
necessarily turn on a question of fact was there consideration for the transfer
of assets? To make this determination, the terms and circumstances of the
transaction must be examined. Because this argument was not presented to the
Commission below, a finding of fact on consideration has not been made, and we
will not indulge in such evidentiary endeavors." Supra at 26.
ARGUMENT
There
are two basis that the taxpayer can assert non-taxability of the above
transaction:
1.
A complete liquidation of the corporation under Section 331 of the Internal
Revenue Code is a business organization under Rule 865-19-38S since the
shareholders who previously owned the bulk of the stock of the corporation are
the same who are receiving the assets in the complete liquidation of the
corporation.
2.
As observed by the Utah Supreme Court in XXXXX, the exchange of stock in a
complete liquidation of corporation may not be for consideration as required by
the definition of a sale found in § 59-12-102(10), U.C.A.
I
appreciated your expeditious handling of this request for advisory opinion
since the Internal Revenue Code
requires the liquidation to be completed within 30 days of XXXXX. Thank you for
your assistance regarding this request.
Sincerely,
XXXXX