Response February 22, 1995
Request
February 7, 1995
Val Oveson
Chairman, Utah State Tax
Commission
210 North 1950 West
Salt Lake City UT 84134
Re: Advisory Opinion
Background
XXXXX develops and manages private
satellite networks primarily for large retail and wholesale chain stores and
organizations. After a contract
("Service Agreement") is negotiated and executed with a customer,
XXXXX places purchase orders with various manufacturers of satellite equipment. A complete satellite system installed at
each customer location consists of an audio receiver, video receiver, satellite
antenna, LNB, satellite mount and miscellaneous cabling and connectors. This equipment is purchased from different
manufacturers and suppliers located primarily out of state but certain of the
receivers have been purchased, in the past, from in-state manufacturers.
The equipment is usually
shipped to XXXXX Utah warehouse in large lots and then the various items of
equipment needed for a complete system are shipped out-of-state for
installation at the customers' locations.
Use tax is then paid to the jurisdiction in which the equipment is used,
installed, and consumed.
In XXXXX, XXXXX was audited
by the Sales and Use Tax Auditing division which determined that Sales Tax was
due in Utah because the satellite equipment had been stored in Utah for a
period of time prior to shipment to its ultimate destination pursuant to Utah
Code Annotated ("UCA") 59-12-103(n).
XXXXX position was that the
storage of the satellite equipment was exempt from taxation under UCA
59-12-1()4(25) because it was stored for "resale." As the term "sale" is defined
under UCA 59-12-1()2(1 I)(e) transfer of title is not required for there to
have been a "sale." All that
is required is that possession of the property must be transferred under a
contract which occurs pursuant to XXXXX Service Agreement with its
customers. However, on appeal, the Utah
State Court of Appeals ruled that under UCA 59-12-102(11)(e) "possession"
had to be "permanent possession" for such a transfer to be deemed a
"sale." (This may in fact
narrow the State's ability to tax transactions otherwise clearly taxable, but
is not applicable to this request.)
Before the Court of Appeals
decision was rendered, but after the sales tax assessment, XXXXX changed its
form of doing business in purchasing equipment for its customers'
networks. All purchasing of satellite
equipment is currently accomplished by a wholly-owned subsidiary of XXXXX, XXXXX,
XXXXX. As systems are shipped to the
installation sites around the country, they are invoiced to XXXXX from the
subsidiary for transfer of title to take place at the customer site. The intent of utilizing an intermediate,
wholly owned subsidiary as the purchasing agent and subsequently selling the
equipment to the parent, is to qualify the transaction as a "sale"
under the UCA 59-12-104(25) such that the incidence of taxation is in those
jurisdictions where the property is actually used and consumed. The subsidiary has no employees who perform
services only for it, but rather it shares the employees, officers and
directors with XXXXX who provides common paymaster services.
ISSUE
The sole issue of this
advisory opinion request is:
Does the sale of personal
property to a parent by a subsidiary qualify as a "resale" under UCA
59-12-104(25), thereby exempting the temporary storage of the personal property
from Sales and Use taxation in the State of Utah?
DISCUSSION
Attached is a research memorandum
prepared by my law clerk dealing with this specific issue.
CONCLUSION
Based on the foregoing,
XXXXX requests a favorable advisory opinion to the effect that purchases of
satellite equipment by its wholly-owned subsidiary and subsequent sales of such
equipment to XXXXX qualify as "resales" for purposes of UCA
59-12-104(25), thereby exempting from Utah State Sales Tax the storage of the
satellite equipment in Utah prior to the resale out of state.
Thank you for your help in
this matter.
Sincerely,
XXXXX
General Counsel
DISCUSSION
1. Would a Court Consider
XXXXX a Mere Instrumentality of XXXXX and View the Sales Between the Two as
Intercorporate Transfers?
If a court were to find that
XXXXX was merely an instrumentality or alter ego of XXXXX, XXXXX should pay
Utah sales taxes when XXXXX purchases equipment, since XXXXX's later sales to
XXXXX would merely be a transfer within XXXXX's corporate structure, not an
interstate resale. XXXXX, however, does not meet Utah's judicial requirements
for disregarding a corporation's separate identity. In Colman v. Colman, 743 P.2d 782, 786 (Utah App. 1987)
the following test was set forth by the Supreme Court.
"To disregard the
corporate entity under the equitable alter ego doctrine, two circumstances must
be shown: (1) Such a unity of interest and ownership that the separate
personalities of the corporation and the individual no longer exist, but the
corporation is, instead, the alter ego of one or a few individuals; and (2) if
observed, the corporate form would sanction a fraud, promote injustice, or
result in an inequity."
And later affirmed in Envirotech
Corp. v. Callahan, 872 P.2d 487, 499 (Utah App. 1994).
Even if XXXXX's existence
confers a different tax treatment on XXXXX, it does not "sanction a fraud,
promote injustice, or result in an inequity.”
Additionally, XXXXX has observed the statutory and structural
requirements of a "real" corporation. Finally, the Tax Commission has at least twice, as explained
below, urged the Utah Supreme Court to find that subsidiaries similar to XXXXX,
should, for sales tax purposes, be treated separately from their parent
companies.
a. Respecting XXXXX's separate existence doesn't promote injustice
or sanction fraud.
Even if the Tax Commission feels
that XXXXX has created XXXXX solely for the purpose of avoiding Utah sales tax,
this does not create the kind of fraud necessary to pierce XXXXX's corporate
veil. XXXXX ultimately has to pay sales
taxes in the jurisdiction where it receives equipment from XXXXX, so XXXXX
isn't avoiding sales taxes. Corporate
veils are usually pierced when an individual or parent corporation is
manipulating a corporate shell to accomplish fraudulent or unjust purposes. For
example, inadequately funding a corporation engaged in activities likely to
produce tort victims is a typical reason to find a subsidiary the alter ego of
a parent. Merely shifting the
jurisdiction in which tax is paid does not rise to the level of "fraud,
injustice or inequity" required by Utah law.
An empirical study by
Professor XXXXX at XXXXX supports the conclusion that XXXXX's actions are not
the fraudulent kind which justify piercing a subsidiary's corporate veil. XXXXX's study indicates that even though
piercing a corporation occurs much more frequently with closely held
corporations or parent/subsidiary groups than with public corporations, XXXXX, Piercing
the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036,
1039 (1991), courts seem to require something more egregious than even giving
the parent favorable tax treatment.
Thompson's analysis of 552 cases between XXXXX and XXXXX indicated that
courts pierced the corporate veil of 9 of the 11 cases dealing with fraud, or
82 of the reported cases, but only 41 of the 133 cases dealing with tax
avoidance, or 31 of the reported cases.
Thompson, supra at 1062.
In view of the fact that XXXXX is not avoiding taxation, these
statistics are even more compelling in determining whether XXXXX should be recognized
for purposes described herein.
b. XXXXX satisfies the structural requirements of a separate
corporation.
In addition to the lack of
fraud in its incorporation, XXXXX satisfies most of the structural requirements
necessary to maintain its status separate from XXXXX.
Certain factors which are
deemed significant, although not conclusive, in determining whether [the
injustice test] has been met include: (1) undercapitalization of a one-man
corporation; (2) failure to observe corporate formalities; (3) nonpayment of
dividends; (4) siphoning of corporate funds by the dominant stockholder; (5)
nonfunctioning of other officers or directors; (6) absence of corporate
records; (7) the use of the corporation as a facade for operations of the
dominant stockholder or stockholders; and (8) the use of the corporate entity
in promoting injustice or fraud.
Colman v. Colman, 743 P.2d 782, 786 (Utah
App. 1987).
XXXXX has sufficient revenue
to be self-supporting, although it is not making a profit. Additionally, it maintains corporate records
distinct from XXXXX's, and has observed the corporate formalities required by
the state of Utah, including the formal requirements of incorporation and
registration with the Division of Corporations and Commercial Code.
c. The Tax Commission has twice successfully
urged the Utah Supreme Court to find that subsidiaries and parents are
separate.
The Tax Court has argued
that a subsidiary like XXXXX should be considered a separate taxable
entity. In Ogden Union Railway and
Depot Co. v. State Tax Comm'n, 395 P2d 57 (1964) and Institutional
Laundry, Inc. v. Utah State Tax Comm'n, 706 P2d 1066 (Utah 1985), the Tax
Commission urged the Utah Supreme Court to hold that the subsidiaries in
question were separate taxable entities from their parent corporations.
In the first case, the Tax
Commission asserted that a subsidiary does not have to be known by the public
before instate sales between the parent and the subsidiary are subject to sales
taxes due to their status as two distinct corporations. The Utah Supreme Court agreed. Ogden Union Railway and Depot at
60. In the second case, the Supreme
Court found that non-profit in-state sales between a parent corporation and its
subsidiary laundry company were subject to sales taxes, even though the laundry
company (called Institutional Laundry) was clearly not an entity separate from
the parent's control."
Institutional owned no property and kept no separate corporate records .
. . Institution existed only for the
administrative convenience of ~the parent corporation], providing laundry
services for the parent on a nonprofit basis." Institutional Laundry at 1067. The Supreme Court found that transactions between the two were
taxable since the subsidiary had made the conscious choice to
incorporate." Having elected to
operate as a corporation, for whatever benefits that separate status conferred
upon Institutional and its parent, Institutional must also accept the tax
burden and responsibility attendant to its corporate form" The presumption of these cases is clearly
that Utah subsidiaries are separate from their parent corporations for sales
tax assessment purposes when they are involved in-state, taxable transactions,
and should similarly be so recognized when the parents and subsidiaries are
involved in interstate, exempt transactions.
2. Do XXXXX's Purchases
Quality for the "Purchased for Resale" Statutory Exemption from Sales Tax Liability?
Assuming that XXXXX is not
merely an instrumentality of XXXXX, its purchase of equipment in Utah (the
first step upon which Utah could attempt to impose a sales tax) qualifies for
the Utah Code's "purchased for resale" exemption. The Code exempts
from sales tax "property purchased for resale in this state, in the
regular course of business. Utah Code
Ann. 59-12-104(27) ( Supp. 1994 ).
Unlike XXXXX, XXXXX can
easily show that it releases title to the equipment it sells.
In Broadcast
International v. Utah State Tax Commission, 882 that XXXXX did not purchase
equipment for resale. The Court found that "Broadcast only transfers use
or possession . . . for the length of the service. Id. at 698. In contrast, XXXXX releases all claims to
the equipment upon its sale to XXXXX and title passes completely.
TO: XXXXX, Director
FROM: XXXXX, Secretary
DATE: February
10, 1995
SUBJECT: Request for Advisory Opinion - No.
95-006DJ
Attached is a request for an
advisory opinion from XXXXX of XXXXX.
Will you please review the request of XXXXX for an advisory opinion
regarding purchases of satellite equipment.
Please expedite this request
as quickly as possible. They need an answer before the XXXXX Legislative
Session is over.
Please prepare the response
for signature by the Commission as per the guidelines established by them.
Thank you.
XXXXX
Dear XXXXX:
In response to your letter of
XXXXX (copy attached), I am providing you with the following
Information.
The questions, concerns and situations which are the subject of your inquiry
are at issue before the Auditing Division in an audit of XXXXX. The issues of concern should be resolved in
the audit process and, if necessary, available appeal processes resulting from
the audit. It would not be appropriate
for the Commission to circumvent the audit and appeal process be issuing an
opinion based on the relatively limited information at hand. The audit function provides a more efficient
method of reviewing the details of the situation as basis for a determination.
Any information you feel will be of import to the audit determination
should be provided to the auditors working with your company.
Respectfully,
Alice Shearer
Commissioner