96-052
Responses
January 9, 1996 and April 10, 1996
Request
November
11, 1995
Dear
Mr. Oveson:
I am writing on behalf of a client
(“Company”) to determine the tax consequences to the Company and its customers
in your State of certain business activities carried on by the Company both
within and outside your State.
Company offers services related to
the sale of manufacturers' products to end users. Company, operating
exclusively by telephone, through the mail or via common carrier, accepts
orders for manufacturers' products, ships products to purchasers, collects
payment, provides customer service and technical support and handles returns
and reorders. The Company will perform some or all of these services for
individual manufacturers. The Company does not solicit orders on behalf of
these manufacturers. Manufacturers generally provide their products to Company
on consignment, but occasionally a buy/sell arrangement is used.
Under a typical fact pattern, a
manufacturing client of the Company sends a letter to customers in your State
or places an ad in a national publication soliciting its products and
encouraging customers to place an order by telephoning or faxing an “800"
number or by sending an order form to a post office box outside your state.
Customers located in your State then respond by calling or faxing the
“800" number or writing to the post office box. Company, acting on behalf
of the manufacturer, receives the call or written inquiry. The Company remains
“invisible” to the manufacturer's customer by using the appropriate
manufacturer's name when answering a communication from that particular
manufacturer's customer. Company accepts the order to purchase a product and
subsequently ships the product via U.S. mail or common carrier with appropriate
billing and receives all payments and returns, which are addressed to the
manufacturer at the Company's address.
Company maintains two offices,
neither of which is in your State, from which all of the above activities are
conducted. Company employees or an independent contractor in the Company's
employ may occasionally travel to your State to solicit clients to use the
Company's services. For example, assume XXXXX is a manufacturer headquartered
in your State. Company's representatives may call on XXXXX to solicit XXXXX to
use Company's services. These representatives may also, or instead, attend trade
shows on the Company's behalf in your State. At this time, the independent
contractor has no other client but Company.
Company seeks to determine, on the
basis of the facts presented, the sales and income tax consequences for Company
and its manufacturing clients that result from Company's activity in your
State. As stated, Company's only physical presence in your State
consists of salespeople soliciting business for the Company from manufacturers
or occasional attendance at trade shows. Further, for purposes of your
response, assume none of Company's manufacturing clients have any physical
presence in your State.
ISSUES
1)
Under the foregoing facts, would Company be subject to state income or
franchise tax in your State?
2)
Would Company's manufacturing clients be subject to state income or franchise
tax in your State as a result of Company's activities?
3)
Would Company be subject to sales or use tax in your State?
4)
Would Company's manufacturing clients be subject to sales or use tax in your State
as a result of Company's activities?
In addition, please identify, if
they exist, other sales, income or business tax consequences that arise for
Company or its clients because of Company's activities in your State.
If you have any questions or require
additional information, please call me at XXXXX or my associate XXXXX at XXXXX.
Very
truly yours,
XXXXX
XXXXX
RE:
Advisory Opinion Request
Dear
XXXXX,
The Commission has received your
request for an advisory opinion regarding sales and corporate tax issues as
they apply to your client, who markets items for manufacturers, and to your
client's manufacturing customers. The situation that you have described raises
questions that bear on the Commission's opinion. Please provide us with
additional detail as follows:
1.
Does your client represent both
Utah manufacturers and manufacturers located outside of Utah?
2.
What is a "buy/sell"
arrangement? Does your client occasionally buy a manufacturer's product
outright for resale to customers in Utah? What are the terms of the consignment
arrangements between your client and its manufacturing customers?
3
. Is the product always shipped
from outside of Utah, or is the product sometimes shipped from inventories in
Utah? Are shipments made only by U. S. mail or common carrier to Utah
Customers? Are products ever shipped to a third party who, acting as an agent
for your client or the manufacturer, makes delivery in Utah?
4.
What are your client's activities
at Utah trade shows? Is your client soliciting services from Utah manufacturers
at the trade show, or is your client selling a manufacturer' s product?
5.
Describe your client's collection activities
in Utah. Does your client merely accept payment by mail from Utah companies, or
does your client contract with a party in Utah to collect delinquent accounts?
6.
Describe “customer service” and
“technical support.” Does your client or your client's manufacturing customer
contract with a third party to provide service in Utah?
7. How does your client handle returns
and reorders?
Thank
you for taking time to respond to these questions. The information that you
provide will enable the Commission to better respond to your request.
Sincerely,
XXXXX
Tax-Policy
Analyst
Dear
XXXXX:
Re:
Your January 9 reply to XXXXX’s request for advisory opinion dated November
11
This is in response to your January
9 request for additional information, a copy of which is enclosed.
1. The Company represents
Manufacturers located both within and without Utah.
2. By “buy-sell
arrangement” we mean that the Company occasionally purchases (i.e., takes
possession and title to) goods outright and resells such goods to customers,
some of which may be located in Utah.
A buy-sell arrangement would be an
exception to the Company's general mode of selling goods “on consignment” from the
Manufacturers. In a consignment sale, a Manufacturer typically transfers
possession of goods to the Company and the goods are then stored in the
Company's facilities until they are sold. Title to the goods remains in the
Manufacturer until they are sold.
For consignment sales, a purchaser
orders a product from the Company, the Company accepts payment for the product
and ships the product via U.S. Mail or common carrier to the purchaser. Credit card
payments may be either deposited into a Company cash account and then
transferred net of the Company's fee to the manufacturer's account, or they may
be deposited directly into the Manufacturer's account. The same is true for
payments by check. The Company has a signed power of attorney and may deposit
checks into its cash account as above or it may bundle and send checks directly
to the Manufacturer. One or both methods may be employed, depending on the
arrangement between the parties.
3. No product is ever
stored in Utah. Products are always shipped from outside of Utah, and all
deliveries are by U.S. Mail or by common carrier. Products are never
shipped by the Company to a third party who, acting as agent for the Company or
a Manufacturer, then makes delivery in Utah.
4. The Company
occasionally attends trade shows in Utah to solicit Manufacturers to purchase
the Company's sales and customer support services. The Company does not sell,
or solicit orders for, Manufacturers' products at such trade shows.
5. The Company has no
collection activities in Utah. The Company merely accepts payment by mail.
6. All customer service
and technical support is conducted via telephone from a point outside of Utah.
The Company generally bills a Manufacturer on a per minute or per-call basis
for handling such service and support calls, depending on the arrangement
between the parties. The Company does not contract with any third parties to
provide services in Utah. It is unknown whether any Manufacturer contracts with
third parties to provide service in Utah.
7. All returns and
reorders are handled outside of Utah via U.S. Mail or by common carrier.
If
you have any further questions or need additional information, please do not
hesitate to call. My direct dial number is XXXXX. Thank you for your kind
attention to this matter.
Yours
truly,
XXXXX
XXXXX
RE:
Advisory Opinion - Use tax and Income Tax Nexus Issues
Dear
XXXXX,
We
have received your request for information pertaining to the Utah sales and
income tax implications of your client’s transactions with Utah customers. We address the sales tax questions
separately from the income tax questions.
1. Sales and Use Tax
Use
tax is a tax on the storage, use or consumption of tangible personal property
in Utah. When tangible personal
property is sold in interstate commerce for use or consumption in this state,
the sale is subject to Utah use tax.
Although use tax is the liability of the purchaser, the retail vendor is
responsible for collecting and remitting the tax to the State of Utah if the
vendor has an office, warehouse, salesperson, or other physical presence in
Utah. Utah Code Section 59-12-107 (5)
states, in pertinent part:
(1) (a) Each vendor shall pay or collect and remit the
sales and use taxes imposed by this chapter if within this state the vendor:
(i) has or
utilizes an office, distribution house, sales house, warehouse, service
enterprise, or other place of business;
(ii) maintains a stock of goods;
. . .
(iv) regularly
engages in the delivery of property in this state other than by common carrier
or United States mail; or
(v) regularly
engages in any activity in connection with the leasing or servicing of property
located within this state.
Mail-order
or direct mail retailers are not required to collect Utah use tax if they have
no physical presence in Utah, but merely accept orders via telephone, fax or
mail and deliver the property to the Utah customer by way of the US mail or
common carrier.
Whether
your client or your client’s manufacturing customers are required to collect
Utah sales and use tax depends upon two things: (1) which of them is the vendor, and (2) whether the vendor has a
sufficient presence in Utah. The first
issue arises because your client apparently stands between the manufacturer and
the manufacturer’s customer. That is,
a manufacturer either consigns property to your client for sale or your client
enters a “buy/sell” arrangement with the manufacturer.
Under
a consignment arrangement, your client acts as an agent for the manufacturer,
who is the vendor. As the vendor’s
agent, your client must collect use tax if either the manufacturer or your
client, as the manufacturer’s sales force, has a sufficient a physical presence
in Utah to create nexus as described above.
Therefore, it is important that your client understand the
manufacturer’s activities in Utah. For
instance, if a manufacturer sends service technicians into Utah to repair or
maintain an item, or if it conducts collections or repossession activities
here, it has nexus for sales tax purposes.
In that case, the vendor (or your client as the manufacturer’s
representative) must obtain a Utah sales tax license and collect and remit
sales tax on sales to customers in Utah.
Of course, if the manufacturer is located in Utah, it has nexus for
sales tax purposes in terms of its sales to Utah customers.
Under
a “buy/sell” arrangement, your client is the vendor. As the vendor, your client is responsible for collecting and
remitting the tax if your client has a physical presence in Utah as described
here.
2. Corporate Franchise and Income Tax
Every
business that is incorporated in Utah or qualified to do business in Utah is
subject to Utah corporate franchise tax.
Any business which is not incorporated in or qualified to do business in
Utah may still be subject to Utah corporate income tax provisions if that
company has sufficient contact with this state to create nexus, and if it
derives income from Utah sources.
Your
client is engaged in two activities which may subject it to taxation in Utah.
First, your client derives income from contracts with Utah manufacturers. Second, your client makes sales of its own
tangible personal property to customers in Utah. To determine if these activities are sufficient to subject your
client to Utah’s corporate income tax provisions, we resort to a two- step analysis: (1) whether your client has nexus with this
state for income tax purposes, and (2) if there is nexus, whether your client
derives income from Utah sources.
Public
Law 86-272 prohibits Utah from imposing a net income tax on income derived in
Utah from interstate commerce if the company’s only business activity in Utah
consists of soliciting sales orders that will be approved and filled from a
point outside the state. Your client’s
activities to sell products on its own behalf or on behalf of a manufacturer do
not, by themselves, subject your client to Utah income tax provisions. However, your client’s in-state activities
related to contracts with Utah manufacturers may be enough to create nexus for
your client if it performs the necessary duties to fulfill the contracts in
Utah. See §59-7-101 (10) Utah Code
Ann., and Utah Admin. R. R865-6F-6 (E).
From your description, it appears that your client’s activities in performance
of the contracts take place outside Utah.
Therefore, there is no nexus and it is unnecessary to proceed through
the second part of the analysis.
You
asked us to address the tax consequences to the manufacturers that contract
with your client. Whether those
manufacturers are subject to Utah income tax provisions depends upon their
individual situations. If a
manufacturer is incorporated here or authorized to do business here, it is subject to franchise tax. An out-of-state manufacturer may be subject
to Utah corporate income tax if it has a business office, stock of inventory,
property, or sales staff in Utah. Additionally, a manufacturer may be subject
to Utah income tax provisions if it collects delinquent accounts, repossesses
property, checks customer credit, provides service or technical support, or
picks up or replaces damaged or returned property in Utah itself or through an
agent. We suggest that your client
alert the manufacturers of the possibility of tax consequences, but the
manufacturers should be referred to us for assistance if they have questions
about their particular tax situations.
Thank
you for taking the time to provide us with additional information. We know that our request delayed this
opinion, but your response provided valuable insight into your client’s
operations. If you have addition
questions, please let us know.
For the Commission,
Alice Shearer
Commissioner