Response
September 17, 1993
Request
July
21, 1993
XXXXX
Re:
Request for Advisory Letter
Dear
XXXXX:
An
advisory opinion of the Utah State Tax Commission is hereby requested for our
client based upon the facts outlined below:
Factual
Background
Our
client is in the business of designing and installing sophisticated computerized
heating, ventilating and air conditioning systems. These are installed in
large, industrial and institutional applications. They have recently expanded
their operations and are in the process of putting together several jobs that
will be installed in the XXXXX. Specifically what will happen is that the large
refrigeration and ventilation components will be custom ordered from the
manufacturer thereof and built to the specifications of the XXXXX installation.
These will then be shipped by the manufacturer to our client's facility in Salt
Lake County, Utah. The client will then add to those components the necessary
computerized control equipment, peripheral equipment and supplies to make up
the total system. The total package will then be placed into sea-worthy
shipping containers and shipped by the client via truck to California and then
via ship to the XXXXX. Once in the XXXXX they will be shipped by truck to the
job site and will there be installed by our client's XXXXX affiliate (same
ownership as client). The equipment will become a component of the real
property once it is installed on the job site in XXXXX.
This
client purchases all of its equipment and supplies tax free on the basis of the
resale exemption because another major part of their business is sales of such
supplies and equipment to other contractors whom they charge the sales tax to.
When they use equipment and supplies out of their general resale inventory on a
real property job on which they are the contractor, they accrue the applicable
sales or use tax and remit it on their quarterly report.
Several
questions arise as to the applicability of sales and use tax on these
transactions. We have formulated what we believe are the correct tax treatments
of this equipment both for sales tax and use tax purposes. We are herein
requesting your advisory letter that the taxability of these items as outlined
below is correct. If you do not agree, please outline for us what in your
opinion is the proper tax treatment for both sales and use taxes.
Use
Taxes
Use
tax rule R865-21-12U provides that tangible, personal property which comes into
the State of Utah and which remains in the interstate commerce channel is not
subject to use tax. It further provides that the use tax does not apply if the
property is brought into Utah for some purpose other than the storage, use or
consumption in Utah. Under this rule it appears that the items of equipment
which are custom ordered for the jobs in XXXXX, and are shipped to Utah, and
then are combined with other components, are not subject to use tax because
they remain in the interstate commerce channel. Further, it appears they are
not subject to use tax because they are not brought into Utah for storage, use
or consumption in Utah, but are brought in to be added to and then shipped out
of the State of Utah. In either case such items are not subject to use tax.
What
of items purchased out of state and placed into the resale inventory which are
subsequently taken out immediately to be used on the XXXXX jobs? Clearly if
these items were used by the Client in a job within the State of Utah they
would be subject to use tax because they would be consumed by the Client in the
State of Utah. However, it is not clear that they are taxable under rule
R865-21-12U when they are used in the XXXXX components.
Rule
R865-21-12U provides that the use tax does not apply “if the property is
brought into Utah for some purpose other than storage, use or consumption in
Utah.” These items of property are brought into the State of Utah for the
purpose of resale. They are subsequently pulled out of the resale inventory and
bundled with other components for use in the XXXXX jobs. They are sent to the
Client's XXXXX affiliate and are installed and become part of the real property
in the XXXXX. They are not brought into the State of Utah for storage, use or
consumption in the State of Utah.
Such
items are “brought into Utah for some purpose other than storage, use or
consumption in Utah.” Such items should therefore not be subject to use tax
under the provisions of Rule R865-21-12U.
Sales
Tax
Section
59-12-104(33) exempts from sales and use taxes sales of tangible, personal
property to persons within this state that are subsequently shipped outside the
state and incorporated pursuant to contract into and become a part of real
property located outside of this state. There is a specific exception that
provides the exemption does not apply if the other state or political entity
imposes a sales, use or gross receipts tax and allows a credit against such tax
for any taxes paid pursuant to Section 59, Chapter 12 of the Utah Code
Annotated.
All
of the installations made in the XXXXX are made in facilities which belong to
political subdivisions of the XXXXX and hence no sales, use, gross receipts or
other similar transaction excise tax is imposed by the XXXXX on the equipment
which is installed in such facilities. Since no such tax is “imposed” the
exception to the statutory exemption is not applicable. It would thus appear
that the sales of personal property to this client in this state which are
subsequently shipped outside of the state and incorporated pursuant to contract
and become part of real property in the XXXXX are exempt from sales tax.
Therefore, the client should not accrue sales tax on the items of personal
property which are purchased in the State of Utah and are subsequently
incorporated into the XXXXX contract.
As
our client is actively pursuing this market in the XXXXX and desires to
correctly accrue and remit sales and use tax on all of equipment incorporated
into these XXXXX real property contracts, we would appreciate it if you could
expedite your reply to this request as much as possible. If you need any
further information or clarification, please do not hesitate to contact the
undersigned at once.
Respectfully
Submitted,
XXXXX
XXXXX
Re:
Advisory Opinion - Sales Tax Exemption for Purchases of Materials to be
Incorporated into Real Estate in the XXXXX
Dear
XXXXX:
Your
request for an advisory opinion (copy attached) as to whether certain
exemptions apply to various purchases of items to be converted to realty
outside of the United States was referred to the Auditing Division for their
analysis.
The
division's staff recommendations are as follows:
1. Rule R865-21-12U does allow for exemption of
those items delivered to your client from outside Utah which are specifically
ordered and identified as for use outside Utah and are in Utah for purposes
other than use, storage or other consumption. Further fabrication, combining
several components, and similar activities would meet the qualification of
being here for other than the taxable purposes.
2. Items which were originally purchased into a
resale inventory and subsequently used outside Utah do not qualify for the
above treatment. In the final analysis (not that which may have been planned,
contemplated or intended originally), the items were purchased for use, storage
or consumption. The purchase transaction is what is taxable, even though the
taxability and disposition of the item is not determined until later, when it
is either resold as tangible personal property or put into a real property job.
This is, in fact, the situational treatment as contemplated in the writing of
R865-21-12U and its included example.
3. We agree that, under the provisions of
U.C.A. 59-12-104(33), your client should not pay or accrue sales tax on items
of personal property which are purchased in the State of Utah and are
subsequently incorporated into realty in the XXXXX.
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,
Alice
Shearer
Commissioner