95-051
Response
August 28, 1995
Request
Utah
State Tax Commission
210
North 1950 West
Salt
Lake City, UT 84134
Re:
Request by XXXXX, Utah for an Advisory Opinion
Dear
Commissioners:
XXXXX,
XXXXX, Utah (“XXXXX”), through the undersigned as legal council, submits this
letter to request an advisory opinion from the Utah State Tax Commission (the
“Commission”). XXXXX requests an
exemption from sales and use tax for the acquisition of XXXXX of certain items
of equipment to be used in an electric generation system and transmission
system to be acquired by XXXXX.
Documents Submitted
To
facilitate the Commission’s review of this matter, XXXXX submits copies of the
following documents:
1. XXXXX Contract
(text only) between XXXXX and XXXXX dated as of XXXXX (the “contract”). The contract has not yet been signed.
2. Appendix “A”
to the Contract.
3. Appendix “B”
to the Contract.
4. Appendix “C”
to the Contract.
5. Appendix “K”
to the Contract.
6. Appendix “O”
to the Contract.
7. Summary
description of Equipment (as defined below).
Factual Summary
In
XXXXX, XXXXX purchased from XXXXX (“XXXXX”) the electric distribution system
located within its boundaries. This
purchase was made at the same time that XXXXX, a community located adjacent to
XXXXX, acquired its electric distribution system. At the time XXXXX acquired the distribution system, it had plans
to construct an electric generation and transmission system to supply power and
energy to the distribution system.
Because the generation and transmission project was a new undertaking,
as opposed to the purchase of the existing distribution system, XXXXX was not
able to construct the generation and transmission system at the same time it
acquired the distribution system.
XXXXX
acquired its distribution system from XXXXX and planned to acquire the
generation and transmission system for three primary reasons. First, it was concerned about the
reliability of the distribution system and the transmission facilities that
supply power and energy to the distribution system. Second, it was concerned about the potential for substantial rate
increase for its residents due to uncertainties about XXXXX’s wholesale power
supply. Third, it wanted to provide
employment opportunities for its residents.
The
XXXXX distribution system has now been in operation for over a year. In the meantime, engineering and financing
work has been proceeding on the generation and transmission system. It is now anticipated that the financing
could be in place within the next sixty days.
Acquisition of the generation and transmission system would then
commence immediately.
The
generation and transmission system consists of three principal components. First is the generation facility, consisting
primarily of two natural gas-fired turbines.
Second is a natural gas pipeline that will be constructed from the generation
facility in XXXXX to the XXXXX gas transmission line in XXXXX, 21 miles to the
west. This line will deliver natural
gas to the generation facility. Third
is an electric transmission line that will be constructed from the generation
facility to a substation located in XXXXX.
This line will allow XXXXX to sell excess power capacity from the
generation facility and will also give XXXXX a more reliable line on which to
receive back up power in the event the generation facility is down.
The
acquisition of the generation and transmission system is divided into two
parts. The first part is the
acquisition of items of personal property.
These consist of the following items described in Appendix “K”:
Description Purchase
Price
XXXXX $$$$$
XXXXX $$$$$
XXXXX
$$$$$
XXXXX $$$$$
Total
$$$$$
All
of these items (referred to hereinafter as the “Equipment”) will be purchased
by XXXXX from XXXXX, which will purchase the tax-exempt from the manufacturers
or other suppliers. Enclosed with this
letter is a summary description of the equipment. It is further described in the Contract and appendices that are
also enclosed.
The
second part is the construction of certain improvements to real property,
including the natural gas pipeline and the facilities to hold generator sets
and the installation of the Equipment.
This is a balance of $$$$$ of the total contract of $$$$$.
The Issue
The
issue for which this opinion is requested is whether the purchase by XXXXX of
the Equipment from XXXXX under the Contract is exempt from sales and use tax under
Section 59-12-104(2), Utah Code Annotated (1953), as amended.
Legal Authorities
Section
59-12-104(2) provides that sales to political subdivisions of the state are
exempt from sales and use tax, “except sales of construction materials.”
Section
59-12-102(4) defines construction materials as “any tangible personal property
that will be converted into real property.”
Section
68-3-12 gives some definitions which are applicable to the entire Utah
Code. Section 68-3-12(k) says that
“real property” includes “land, tenements, hereditaments, water rights,
possessory rights, and claims.”
We
cannot locate any rules adopted by the Commission that interpret the
“construction materials” exemption for political subdivisions, nor can we find
any Utah appellate opinions that directly addresses the provision.
Related Case Law
Though
there are no Commission rules or Utah case law directly relating to the issue,
there is some authority in the Commission’s rules and in the case law that
gives guidance and direction.
In
Chicago Bridge & Iron Company v. State Tax Commission, 839 P.2d 303
(Utah 1992), the Utah Supreme Court addressed the issue of whether or not
certain items of tangible personal property become “real property” when
installed, thus making the installer a “real property contractor” and not
exempt from sales tax on the materials it purchases.
XXXXX
(“XXXXX”) manufactured large steel tanks which were installed on its customers’
property. Because of the large size of
the tanks, they were frequently installed on site. The Commission had found that “XXXXX’s installation of the tanks
on a purchaser’s real estate made XXXXX a real property contractor.” XXXXX at
305. On appeal, XXXXX argued that the
Commission erred, claiming that it was a personal property manufacturer and
that the installation of the tanks on the real property did not make it a real
property contractor. The court affirmed
the Commission’s ruling. In its opinion,
the court said the following:
Whether
the subject matter of a sales transaction is deemed real property or tangible
property will depend on the facts of each case....
Under its sales contract, XXXXX fabricates, erects, and
installs its tanks on its customers’ real property for a lump sum. The assembly and installation of the tanks
are essential parts of each contract.
Because of the large size of the tanks, they are not readily removable
and it is not intended that they be movable or removed. The Commission’s ruling that the installed
tanks, once attached, are real property and that XXXXX is a real property
contractor is not unreasonable. (Italics added) Id. at 307.
In
the Chicago opinion, the Court cited from Nickerson Pump & Machinery Co.
V. State Tax Commission, 12 Utah 2d. 361 p.2d 520 (Utah 1961), which also
dealt with sales tax and real property contractors.
However,
in XXXXX, the Court found that an assembler and installer of large pumps was
not a real property contractor. The
court stated the issue as follows:
The question which we must determine, therefore, is do
the facts sustain a conclusion that the emplacement by plaintiff of the
assembled pumps change their nature from personality to reality, thereby making
it the ultimate consumer of personal property used in the assemblage of the
water pumps [and, therefore, subject to sales and use tax on the personal
property it purchases]. XXXXX at 33.
The
court in XXXXX went to find that the plaintiff was not the ultimate consumer of
the personal property it purchased to be assembled into the pumps, that it was
only selling the pumps at retail and that it was only for the collection of
sales tax from nonexempt purchasers.
Ironically, the purchasers from the plaintiff in the case were exempt
governmental units.
In
the opinion, the Court listed several factors it felt were important in
reaching its decision that the pumps remained personal property. They were as
follows:
1. The pumps were “readily removable without
harm to the structures in which they were placed.” Id. At 33.
2. Other pumps could have been placed at the
structures.
3. The pumps could have been used in other
locations, if the owner desired to move them.
4. It was contemplated that the pumps would not
always remain where they were placed, but would be moved elsewhere for repairs
or change in location.
5. The primary purposed of the transaction was
the sale of pumps; the placement of the pumps “was a mere convenience for the
purchaser because of the great weight of the pumps which required special
equipment to move them.” Id. At 33.
The
Court noted that the size of the pumps did not determine whether they were real
or personal property. It noted, for example, that a refrigerator built to
specifications for use in a building would not be changed from personal to real
property “without evidence that the parties to the agreements so intended.” Id.
At 33. The Court then noted that the XXXXX Supreme Court had determined that a
“gasoline engined water pump” that was placed in a structure built to house it
was not real property.
The
Commission has issued a rule that acknowledges that certain items of personal
property affixed to real property can remain personal property. R865-19-51S(E) provides that “[t]angible
personal property which is attached to real property, but remains personal
property, is subject to sales tax on the retail selling price of the personal
property...”
XXXXX’s Position
XXXXX
believes that the purchase of the equipment from XXXXX is exempt from sales and
use tax under Section 59-12-104 (2).
Specifically, XXXXX believes that the Equipment is not “construction
materials,” but is, and will remain, personal property at all times.
The
XXXXX appears to look at two principle factors in the cases sited above to determine
whether an item of personal property becomes real property. First, it looks to see whether the item can
be removed without damaging any remaining real property. Second, it looks to see whether there is an
intention that the item be moved. If the
answer is affirmative in both cases, the item remains personal property;
otherwise, the item becomes real property.
It
seems fairly clear that the generator sets remain personal property. They will be brought to the site on skids
and will be left on the skids. They can
be removed from the site for repair and sale within thirty days. If technology changes or other conditions
dictate, the generator sets could be removed from the site and replaced; or, if
XXXXX determines to change locations, it can move the generator sets.
The
remaining electrical equipment and the natural gas metering equipment, like the
generator sets, remain personal property.
They do not lose their characteristic by becoming affixed to real
estate. The can and will be removed for
maintenance, repair, relocation or sale.
Transmission
line materials may be a little closer in issue. They are clearly affixed to the real property. However, they are not like building
materials, which generally lose their value by being removed from the
structure. It is not uncommon to remove
power poles from one location to another.
The same is true of power lines.
If a portion of the transmission facility needs replacement, it can
easily be replaced without affecting the rest of the transmission facility. There is a market for used power poles and
transmission lines can be removed and used elsewhere. Based on the standards of removability and intention to move, the
transmission line materials, as installed, would qualify as personal
property.
Conclusion
XXXXX
concludes that, based on the standard enunciated by the Supreme Court, the
Equipment to be purchased by XXXXX from XXXXX for a total price of $$$$$ is,
and will remain, personal property and thus, respectfully requests that the
Commission issue an advisory opinion confirming this conclusion.
If
you have any questions or require clarification on any item, please contact the
undersigned.
Very
truly yours,
XXXXX
XXXXX
Re:
Advisory Opinion - Sales Tax Exemption for Electric Generating System
Dear
XXXXX,
You
requested an advisory opinion regarding the application of sales and use tax to
equipment purchased by the city of XXXXX, Utah to construct an electric
generation and transmission system. We
find as follows:
1. With the exemption of construction
materials, sales of tangible personal property to a government agency are
exempt from sales tax. §59-12-104(2) Utah Code Ann. and Utah Admin. Rule
R865-19S-42. To qualify for a sales tax
exemption, tangible personal property must be purchased directly by the City.
2. Section 59-12-104(2) subjects government
purchases of construction materials to sales tax unless the materials are
installed or converted to real property by the public entity’s employees. The term “construction materials” refers to
any tangible personal property that is or will be converted into real property.
§59-12-102(4) Utah Code Ann.
With
regard to the limited exemption for construction materials, we note that
Section 10.6 of the XXXXX provides that the City may purchase items of
Equipment. “Equipment is elsewhere
defined as the items listed in Appendix K.
Some of the items listed in Appendix K, such as concrete structural
steel, appear to be construction materials.
To qualify for exemption, construction materials must be purchased by
the City and installed by City employees.
However, the contract has no provision for installation of construction
materials by City employees. Articles
10 and 23 of the contract call for an independent contractor to hire and
supervise all workers and subcontractors.
Presumably, everyone working on the project will be considered an
employee of the contractor or a subcontractor while working on the project. Because all of the construction work appears
to be the work of the contractor, this limited exemption will not apply.
3. Sales of construction materials to an
outside contractor who will convert them to real property are taxable to the
contractor, even if the construction takes place on government owned land, Utah
Admin. Rule R865-19S-58 (A); and Chicago Bridge and Iron Co. V. State Tax
Commission, 839 P.2d 303 (Utah 1992) (when tangible personal property is
sold for incorporation into real property, the person who purchases the
property for such purposes is liable for taxes on the sales), and even if the
sales tax on these items is passed through to the city in the contractor’s
bid. Niederhauser Ornamental &
Iron Works Co. V. State Tax Commission, 858 P.2d 1034 (Ut. Ct. App. 1993).
Obviously,
the tax status of the items mentioned in your request hinges on the
characterization of the property as tangible personal property or construction
materials that will be converted to real
property. You correctly
acknowledge that various factors must be considered in determining whether
property is real or personal. For
instance, the Tax Commission’s administrative rule R865-19S-78 (F) states that
fixtures, or equipment which are attached to real property in a more or less
permanent manner are considered real property while so attached. Affixation, then, is a factor which
distinguishes real property from personal property. See, e.g., Valgardson Housing Sys., Inc. v. State Tax Comm’n,
849 P.2d 618 (Ut. Ct. App. 1993) and the cases cited therein. However, attachment alone is not
determinative. In distinguishing
between personal property which is merely affixed to real property and personal
property which has been converted to real property, the Tax Commission may look
behind the attachment to consider, as you suggest, the manner of attachment and
the apparent intention of the parties with regard to the attachment.
We
do not wholly agree with your assertion that an item is attached to real
property remains personal property unless its removal will damage the
property. A furnace installed in a
building is a fixture which is considered part of the real property while so
attached, yet it can be removed or replaced without damaging the building. Additionally, we do not constitute “intent”
as broadly as you suggest. By
“permanent” attachment, we do not require perpetual attachment. The intention that it remain until it is
worn out or superseded by new technology, or until the property is converted to
some other use is evidence of an intention that personal property will become
part of the realty. In our experience,
the design and construction of a power plant is unique to its purpose and
location. Although the component parts
installed there can be moved, they are not generally intended to be shifted to
other locations which are not especially suited to their use. Therefore, some of the items installed as
part of the plant or facilities may lose their character as personal tangible
property upon being affixed to the real property.
As
you can see, the determination of whether property is tangible personal
property or real property is a fact-specific one. This opinion offers you our best guidance based on the facts
provided in your letter and other materials.
Materials
used to construct buildings, foundations and other improvements.
The
sale of materials such as cement, structural steel, lumber, heating and air
conditioning systems, wiring and electrical systems, fire protection systems,
drainage and sewer systems, and plumbing materials used in the construction of
buildings or their foundations is taxable to the contractor if the contractor
purchases the items, or taxable to the City if the City purchases the items for
installation by the contractor.
Construction materials include materials used for pavements, foundations
and piers for machinery, docks and platforms, and other improvements on the
land.
Generator
Sets
The
generator sets, consisting of a gas turbine, attached hoses, control and
monitoring devices will remain on “skids.”
The “skids” themselves will welded or bolted to a concrete pad, perhaps
inside a building. The “skids” are
annexed to real property merely for stability and they do not service the
building. From these facts, the
generator sets appear to be specialized equipment that can retain the
characteristics of tangible personal property.
As such they may be purchased tax free.
The concrete pads, however, constitute real property if they are
incorporated into the building or the realty.
Transmission
Lines
Overhead
transmission lines, conductors and insulators appear to be personal property
because they are not affixed to real property.
The telephone poles, because of their rather permanent installation on
the land, pose a more difficult question.
However, their attachment to the land is incidental to their purpose of
providing support for the transmission lines.
The poles do not constitute construction materials “used to improve,
alter or repair real property.” Utah
Admin. Rule R865-19S-58 (A)(2). In
fact, the lines run along easements on property which may belong which may
belong to others. Their use, therefor,
is not appurtenant to the land, but appurtenant to the transmission lines and
other items of equipment that we have already described as personal
property. Therefore, we consider the
poles to be personal property as well.
Sales of the transmission wires and items used in connection with the
electrical transmission system constitute sales of personal property.
Natural
Gas Pipeline
We
understand that the natural gas pipeline will be an underground pipeline. The manner in which the pipeline is attached
is more intrusive on the land than the manner in which the transmission lines
are attached, but the pipeline remains personal property which is appurtenant
to the gas turbines, not appurtenant to the land. We do not consider the materials used to construct the pipeline
to be construction materials which will be incorporated into real property. Therefore, sales of the pipeline materials constitute
sales of personal property.
Although
we do not necessarily adopt the arguments proposed in your request, we have
arrived at the same conclusions about most of the property that will be used to
construct the power plant and related facilities. If you disagree with any portion of this opinion, you may appeal
to the tax Commission for a formal hearing.
The results of that hearing will constitute a declaratory judgement,
which is appealable to the Utah State Supreme Court. If you do not require a formal hearing, but require further
clarification based on the facts considered here, please feel free to contact
us.
For
the Commission,
Alice
Shearer
Commissioner