August
20, 1992
Hal
Hansen
Chairman
Utah
State Tax Commission
Heber
M. Wells Bldg., 5th Floor
160
East 300 South
Salt
Lake City, Utah 84134
Re:
Request for Advisory Ruling
On
behalf of XXXXX, I request the Utah State Tax Commission issue an advisory
ruling ("Request") that the facts set forth below describe the
performance of non-taxable services pursuant to the Sales and Use Tax Act.
I.
FACTS.
A
Utah business represented by XXXXX (the "Company") has developed a
method which allows for the conversion of blueprints, drawings, designs, maps,
schematics and other such documents from their physical form into a computer
format. Conversion into computer format is desirable because the customers are
then able to modify the documents without physically re-creating them. Computer
format also allows for more efficient storage and use of the information
contained therein. In a typical transaction, a customer delivers originals or
copies of documents to the Company for conversion into computer format. After
conversion, the Company delivers the converted documents to the customers on
computer disk or magnetic tape; or electronically transmits the converted
documents to the customer via computer modem.
The
cost of the conversion varies depending on the size and complexity of the
customer's document. Nonetheless, the cost of any tangible property transmitted
to the customer is de minimis in comparison to the cost of the services
rendered. Although the number of disks or tapes required for any particular
project will vary, a customer will be charged between $$$$$ for the personal
services rendered in connection with each disk or tape containing converted
documents. Of this amount, less than $$$$$$ comprises items of tangible
personal property such as a computer disk magnetic tape. For example, the
Company recently completed conversion project for an out-of-state customer
wherein the personal services rendered exceeded one million dollars and the
value of the tangible personal property (computer disks) delivered to the
customer was less than $500.
More
than ninety percent of the Company's work is performed outside of Utah and/or
outside the United States. Less than ten percent of the Company's customers are
located in Utah. The Company currently pays sales tax upon the purchase of any
disks or magnetic tapes used in the conversion process.
Utah
Code Ann. Section 59-12-103(1) (hereafter, "U.C.A.") imposes a tax on
a purchaser for the amount paid or charged for the retail sale, use, storage,
or consumption of tangible personal property and for the performance of certain
enumerated services. Utah Code Ann. Section 59-12-102(8)(a) defines the term
"retail sale" to mean "any sale within the state of tangible
personal property or any other taxable item or service . . .."(Emphasis
added.) The taxability of services was recently considered by the Utah Supreme
Court in Mark 0. Haroldsen. Inc. v. State Tax Commission, 805 P.2d 176 (Utah
1990) and BJ-Titan Services v. State Tax Commission, 183 Utah Adv. Rep. 20
(Utah 1992).
In
XXXXX, the petitioner challenged a tax audit imposing a use tax deficiency
based upon the alleged lease of magnetic tapes and printed sheets containing
customer mailing list information. Under the facts of the case, the petitioner
contracted with various owners and brokers of mailing lists for the use of the
lists. The petitioner received the information on either printed sheets of
paper which were then converted into gum labels, or on magnetic tape from which
petitioner could generate computer printouts which were convertible into gummed
mailing labels. Although the mailing list information was somewhat tailored to
meet certain demographic characteristics, petitioner never held title to the
information and was authorized to use each list only one time under the terms
of the lease.
In
deciding the case, the Supreme Court applied the "essence of the
transaction" analysis under which a court determines whether a transaction
is a personal service transaction by comparing the personal services and
tangible personal property components of a transaction. Applying this analysis,
the Utah Supreme Court affirmed the Tax Commission decision, holding that the
"real object" of the transaction was the tangible mailing lists and
that the personal services rendered were incidental.
In
XXXXX, the taxpayer challenged the imposition of a sales and use tax upon
certain well stimulation services including, cementing, hydraulic fracturing,
and acidizing. The facts of the case reflect that approximately 30 percent of
an average project was comprised of tangible personal property upon which the
taxpayer collected sales tax.
Applying
the "essence of the transaction" analysis, the Utah Supreme Court
affirmed the Tax Commission's decision to tax the cementing, but reversed the
Tax Commission's decision to tax the fracturing and acidizing. In applying this
analysis, the Court articulated six factors to apply in analyzing such cases:
(1) the value of the tangible property to the customer in relation to that of
the services; (2) the cost of the property to the seller; (3) the customer's
rights to possession or ownership of the property; (4) the ability to
separately itemize charges for property and services; (5) the extent to which
the services increase the value of the property or to which the property
increases the value of the services; and (6) the extent that such services are
rendered in similar transactions.
III.
DISCUSSION.
The
Company's document conversion activities should be characterized as the
performance of a non-taxable service. XXXXX's assertion begins with the premise
frequently applied by courts nationwide that taxing statutes, as opposed to tax
exemption statutes, are to be strictly construed against a taxing authority and
in favor of a taxpayer. The rationale for this rule is obvious. The authority
to tax is derived from a constitutional or statutory source. Until the
appropriate legislative body exercises its taxing authority over a particular
transaction, an administrative body is powerless to tax that transaction.
The
Tax Commission's authority to impose a sales and use tax derives from Art.
XIII, Sec. 12 of Utah's Constitution which authorizes the Legislature to impose
any "other tax as provided by law." The Utah Legislature
"provided by law" for the taxation of sales and use transactions in
1933 and 1937, respectively, by enacting sales tax and use tax statutes.
Subsequently, in 1987, the Legislature consolidated those provisions into the
current sales and use tax statutes found in Chapter 12, Title 59, Utah Code
Ann. which currently impose a sales and use tax upon the retail sale, use,
storage, or consumption of tangible personal property and upon certain
enumerated services.
The
Company renders no services enumerated in Utah law as taxable services. Under
the analysis followed in XXXXX and XXXXX, the essence of the transactions
engaged in by the Company is the performance of services rather than the sale
of tangible personal property. Any tangible personal property involved in the
transaction is purely incidental to the performance of the personal services.
In
XXXXX, the taxpayer leased information which was generated and owned by a third
person, e.g. mailing lists. The leased information was transmitted to the
taxpayer in either a tangible form, e.g. gummed labels, or in a computer format
that had to be converted into a tangible form before it could be used for the
purpose for which it was leased. In that case, the Court held that the mailing
lists were tangible personal property and were the "essence of the
transaction." Under the facts of this Request, the Company's customers,
unlike the taxpayer in XXXXX, generate and own the underlying information and
documents. Their contracts with the Company require the Company to convert the
customers' documents into an intangible format. The Company neither produces
tangible personal property nor acquires an ownership interest in the customer's
property. Furthermore, any tangible personal property involved in performing
the transaction, e.g. disks and magnetic tapes, is de minimis to the
transaction and, in any event, the Company pays sales tax on any such personal
property.
In
XXXXX, the Court identified six factors upon which it relies in determining the
"essence of a transaction." The Company's transactions qualify as
personal services under this analysis. The first inquiry is a comparison of the
value of the services to the value of the personal property. Under the facts of
this Request, the personal services account for more than 99 percent of the
value of the transaction. Second, the cost to the Company of any personal
property involved in the transaction is de minimis at most, representing less
than 1% of the conversion cost for one disk or tape. Third, the customer owns
the documents in their physical form prior to the Company's rendition of
personal services, retains ownership of the physical documents after the
personal services are performed, and acquires ownership of the converted information.
Fourth, the Company can easily separate and itemize its charges for property
and services. Fifth, the Company's services increase the value of any personal
property involved by more than a hundred fold. And sixth, the personal services
rendered by the Company are similar to those rendered in similar personal
service transactions. Pursuant to these factors, the Company asserts that like
the fracturing and acidizing services rendered in XXXXX, the essence of the
Company's transactions is the rendition of personal services and not the sale
of tangible personal property.
I
I I . CONCLUSION .
In
conclusion, XXXXX suggests there is sufficient facts and authority for the Tax
Commission to rule on this Request and to conclude that the described personal
service transactions are not taxable in the state of Utah.
Please
feel free to contact me should you have any questions.
Respectfully,
XXXXX