Response
July 10, 1992
July
10, 1992
XXXXX
Re:
Advisory Opinion - Real Property Contractor
Dear
XXXXX:
This
letter is in response to your recent request for a Tax Commission ruling on how
to impose sales or use tax on a firm who precasts concrete and then performs
site erection of the materials.
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.
Administrative Rule R865-19-58S explains the sales and use tax treatment of
real property contractors. A copy is attached.
2.
The person who converts personal property into real property is the final
consumer of the personal property and is taxable on the "cost" of the
materials used. If a precaster does not perform the erection, the precaster is
a retailer of the products sold and collects tax on the sale price. The same
person cannot be a retailer and a consumer for the same transaction.
3.
The charge to haul materials from a precaster's plant to a job site is taxable
as part of the sale when the precaster does not install the materials. Title to
the goods doesn't pass until after the delivery when the seller's truck is
used. If the precaster is also the real property contractor, no tax is due on
hauling his own product.
Based
upon the facts presented in your letter, we agree 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
Director
Sales
and Use Tax Section
Utah
State Tax Commission
Heber
N. Wells Bldg.
160
East 300 South
Salt
Lake City, Utah 84134
Re:
XXXXX
Dear
Director:
As
counsel for the corporate-taxpayer in the above-captioned action, I am writing
to you, as the official of the State of Utah who is charged with the duty to
administer your state's Sales Tax and Use Tax laws, to request written
confirmation of how your state applies its Sales Taxes and Use Taxes to
contractors who construct large architecturally designed or specially
engineered concrete structures (e.g. parking decks, bridges, warehouses, etc.)
on real property located in Utah.
Supreme
Court Action
XXXXX
has filed a Petition for Certiorari with the United States Supreme Court in the
above-captioned case requesting that the Supreme Court review the decision by
the Arkansas Supreme Court in the case of Pledger v. Featherlite Precast
Corporation, 308 Ark. 124, 823 S.W.2d 852 (Ark., 1992). In this Featherlite
case, the Arkansas Supreme Court upheld the XXXXX's "administrative
practice" which held that Featherlite, as a "precaster" of the
components of large specially designed concrete structures (who also erected
the entire structure on job sites in Arkansas, as a licensed contractor
operating under a "lump sum" contract from a general contractor), was
liable for Arkansas' Use Tax on a tax base that was composed of (1) the entire
"plant price" (including costs of direct labor, overhead and profit)
of the component parts (at the time they were delivered to the Arkansas job
sites), plus (2) the cost of transportation from XXXXX's XXXXX, Tennessee,
plant to the Arkansas job sites. The court determined that the "precaster"
was operating in two (2) separate activities (i.e. as a manufacturer and a
contractor) and that the "precaster" (as the manufacturer) sold to
itself (as subcontractor) when the components for the entire structure were
delivered to the Arkansas job sites.
Arkansas'
XXXXX stipulated in this suit that a construction contractor who constructs the
same large concrete structures on an Arkansas job site by using the
"poured-in-place" or "tilt-up" methods of construction
would be liable for Arkansas' Sales Tax or Use Tax only upon a tax base that
was composed of the cost of the raw materials (e.g. sand, gravel, cement,
reinforcing steel, etc.), and that the cost of direct labor, overhead and
profit incurred in constructing the concrete structure would not be included in
the "on-site" contractor's Sales or Use Tax base.
Discriminatory
Tax Results
As
a result of this decision, a construction contractor who (under a "lump
sum" contract) performs part of the construction process by fabricating
the component parts of the large concrete structure "off site," and
then erects the entire structure "on site," is put in a position
where it incurs Arkansas Sales Tax or Use Tax in an amount that is
approximately 400% greater than the Sales Tax or Use Tax liability of the construction
contractor that performs all of its construction activities by building the
entire concrete structure "on-site" using the
"poured-in-place" method of construction.
Featherlite
maintains that this "administrative practice" adopted by the Arkansas
XXXXX violates its constitutional rights under: (1) the Commerce Clause of the
Federal Constitution (see, Halliburton Oil Well Cementing Co. v. Reily, 375
U.S. 64 (1963)), because the tax is discriminatorily applied to it as a
contractor engaged in interstate commerce; and (2) the Equal Protection Clause
of the Federal Constitution (see, Williams v. Vermont, 472 U.S. 14 (1985)),
because the classification made by the XXXXX's "administrative
practice" serves no legitimate state purpose and its classification of
contractors has no rational basis. The Arkansas Supreme Court determined that
the Arkansas XXXXX's "administrative practice" in this regard does
not violate the Commerce Clause, because all precasters of concrete structures
(whether their plants are located within or without Arkansas) are treated the
same for Sales Tax or Use Tax purposes. The court determined that there was no
violation of the Equal Protection Clause because it found that there was a
rational basis for classifying precasters, as vendors, and subcontractors, as
purchasers.
Other
States' Administrative Practices
Since
we believe this is an important question that may eventually affect large
numbers of construction contractors and state taxing agencies throughout the United
States, we are attempting to provide the members of the Supreme Court with a
definitive compilation of the "administrative practices" adopted by
the various states, like Utah, that impose their Sales Taxes and Use Taxes only
upon the cost of raw materials (i.e. tangible personal property) consumed by
contractors in the construction of these large concrete structures (and not
upon the amount of the entire contract price). We have examined the current
1990-1991 Edition of the ABA Sales and Use Tax Desk Book, and several loose
leaf state tax services, but we find that, though there is usually a general
discussion of contractors, there is no further breakdown of contractors who
also partially fabricate the component parts of the structure "off-site"
and then erect the entire structure "on-site."
Information
Requested
Therefore,
I respectfully request that you, as the official charged with administering
Utah's Sales Taxes and Use Taxes, supply me with a written response to the
following questions:
1.
How does Utah treat a contractor who uses the "precast" method of
constructing large concrete structures for Sales Tax and Use Tax purposes?
2.
Does it make any difference for (1) Sales Tax and Use Tax purposes whether the
"precaster" (a) erects or (b) does not erect the concrete structure
on the job site in Utah? If it makes a difference, please explain why and what
is the difference in the treatment of such "precasters"?
3.
Does Utah apply its Sales Tax or Use Tax to the cost of "hauling" the
components from the "precaster's" plant to the job site? Does it make
any difference whether the precaster (a) erects or (b) does not erect the
concrete structure on the job site, as to whether their "hauling"
charges are taxed or not?
4.
Please provide me with a citation (or a copy, if possible) to the statute,
regulation, ruling, decided case or administrative manual where Utah's
treatment of "precasters" in these types of situations is published
and discussed and guidelines are laid out for both taxpayers and tax administrators.
Since
a Reply Brief will have to be filed with the United States Supreme Court in
this case in mid-July, 1992, I would greatly appreciate receiving a written
response from you on these matters at your earliest possible convenience. If
you have any questions, please do not hesitate to contact the undersigned at
your convenience.
I
want to thank you, in advance, for your positive consideration of these
requests for information on these important Sales Tax and Use Tax issues.
Sincerely,
XXXXX