96-053
Response
April 23, 1996
Request
Dear
XXXXX
The
XXXXX is contacting your state in an attempt to secure written advice on how it
treats “use” as it applies to taxpayers who incorporate tangible personal
property into real property and also whether and under what conditions it
recognizes tax paid to the state of XXXXX. Your reply will assist us
significantly in our efforts to administer XXXXX sales and use tax law when our
statutes definition of use and allowance for credit overlaps that of another
taxing jurisdiction.
Five
years ago, XXXXX repealed its sales and use tax exemption on the purchase or
use of tangible personal property or services in this state for incorporation
into real property outside this state. The repeal of this exemption has now
become an important issue in current sales and use tax audits. We are faced
with applying XXXXX's sales or use tax to all purchases and/or “first use” of
tangible personal property in this state and determining whether to allow
credit for similar taxes paid to other jurisdictions, including yours.
XXXXX's
use tax statute 5741.02© O.RC. provides that:
“The
tax does not apply to the storage, use or other consumption in this state of
the following described tangible personal property or services:
5.
Tangible personal property or services rendered upon which taxes have been paid
to another jurisdiction to the extent of the amount of the tax paid to such
other jurisdiction. Where the amount of the tax imposed ... exceeds the amount
paid to another jurisdiction, the difference shall be allocated ... in
proportion to the respective rates of such taxes.
As used in this subdivision, “taxes paid to another
jurisdiction” means the total amount of retail sales or use tax or similar tax
based on the sale, purchase, or use of tangible personal property or services
rendered legally levied by and paid to another state or political subdivision
thereof, or the XXXXX, where the payment of such tax does not entitle the
taxpayer to any refund or credit for such payment.”
Please
consider the following scenario in addressing your state's refund credit
provisions for sales, use, or a similar tax levied and paid to or assessed by
another jurisdiction.
Situation:
Company A, an XXXXX construction contractor, builds components at its XXXXX
facility. Some material is purchased from XXXXX suppliers and a portion is
purchased from out-of-state suppliers. Eventually, Company A takes some
materials out of XXXXX and incorporates it into real property in your state
either as original construction, an addition to or replacement in existing
property, or as a repair to existing real property.
Question
l)
a. Does your state distinguish between one type of
construction contract versus another in terms of one where the contractor is the
consumer versus one where the contractor is a retailer of either the materials
or both the materials and labor to install?
b. Does your state distinguish between original
installation (construction) and repairs to real property?
c. If yes to either a or b, briefly explain the
distinctions and the tax implications.
Question
2) If Company A pays XXXXX sales or use* tax on the material at the time of
purchase to its XXXXX vendor or out-of-state supplier and your state considers
Company A to be a consumer if the materials is installed in your state, would
your state allow credit for XXXXX tax paid?
* XXXXX's out-of-state sellers collect “use” tax at the
time of sale.
Question
3) If Company A did not pay tax to its suppliers at the time of purchase but
accrued and paid the XXXXX sales/use tax on the cost of materials directly to
XXXXX under a Consumer's Use or Direct Payment authority, would your state
allow credit for the tax paid to XXXXX?
Question
4) If Company A did not pay tax either to its suppliers or to the state of
XXXXX directly, and subsequently was audited by XXXXX and assessed for the tax
due, would your state allow credit for the tax assessed by XXXXX?
Question
5) If Company A did not pay the tax to its suppliers or to the state of XXXXX
directly but properly reported and paid the use tax due to your state, would
your state recognize a “first use” in XXXXX and refund or credit the tax paid
to your state if XXXXX issued an assessment or other collection procedure to recover
the tax that had erroneously not been paid to XXXXX?
Question
6) If your state permits a credit or refund in Q's 4 and 5, must Company A pay
the tax due to the state of XXXXX before your state would be willing to refund
or credit Company A for tax paid to your state?
Question
7) What information or documentation is required of Company A and/or the state
of XXXXX to substantiate a claim for refund or permit the taking of a credit in
your state?
Please
cite any statutory authority, administrative rule, or other determination upon
which your advice is based. Any additional information, directives, etc.
provided to taxpayers regarding construction contracts, contractors, or
materials incorporated into real property that you feel might be applicable
would also be greatly appreciated
For
your information, XXXXX treats the incorporation of materials into real
property for a consideration as a construction contract and the contractor is
liable for the tax on the purchase/use of such materials. XXXXX makes no distinction
between new construction or capital improvement and remodeling or repair for
sales and use tax purposes.
Please
address your response to my attention at:
XXXXX
A
prompt response would be most valued. Thank you for your assistance in this matter.
Sincerely,
XXXXX
XXXXX
RE: Advisory opinion - credits for sales and use
tax paid to other states.
Dear
XXXXX
In
order to properly answer your request, it is first necessary to discuss the
manner in which the Utah State Sales and Use Tax is administered.
The
relevant code, Utah Code Ann. § 59-12-103 - Sales and use tax Base & Rate,
states:
(1)
There is levied a tax on the purchaser for the amount paid or charged for the
following:
(a)
retail sales or tangible personal property made within the state; . . .
(i)
services for repairs or renovations of tangible personal property or services
to install tangible personal property in connection with other tangible
personal property; . . .
(n)
tangible personal property stored, used, or consumed in this state.
The
determining factor for the State Sales and Use Tax, therefore, is the actual
transaction. Whether or not a
transaction falls within the State Sales and Use Tax depends on the content, nature,
and location of the transaction.
Transactions that involve the sale of tangible personal property are
subject to the State Sales and Use Tax, while transactions that involve real
personal property are not. Transactions
from a manufacturer to a retailer or from a distributor to a retailer are not
subject to the tax. Only retail sales
to the consumer are subject to the tax.
These distinctions become relevant in answering the questions that you
sent to us.
In your request letter, you asked us
to answer the following seven questions.
For convenience, we have included these questions.
Question
1) a. Does your state distinguish
between one type of construction contract versus another in terms of one where
the contractor is the consumer versus one where the contractor is a retailer of
either the materials or both the materials and labor to install?
Question
1) b. Does your state distinguish
between original installation (construction) and repairs to real property?
With regard to the sale of construction
materials, Utah does distinguish between a real property contractor and a
contractor who sells construction materials at retail. A real property contractor is one who
purchases construction materials and converts them to real property. In this sense the real property contractor
has become the final consumer of the construction materials and is therefore
liable for the sales or use tax on his or her cost of the materials. If the contractor does not convert the
materials to real property, the contractor must collect tax on the sale to his
or her customer. The following are two
examples of this distinction:
(a) Assume the contractor
(1) sells and then
installs doors and
(2) also sells doors to
customers who intend to install the doors themselves.
In
the first case, the contractor is responsible for the tax. In the second case, the contractor is a
retailer who is responsible for collecting tax from the customer.
(b) Assume the contractor supplies
and installs an item that is not converted to real property (e.g. manufacturing
equipment). In that case, the
contractor must collect sales tax on the sale from his customer.
Utah
also distinguishes between labor to install an item and labor to repair an
item:
(a) Labor to install an item of tangible
personal property to real property is not subject to sales tax, whether or not
the item is considered to be converted to real property once attached.
(b) Labor to repair an item of tangible personal
property is subject to tax, even if the item is attached. However, if the item is affixed to real
property so as to be considered part of the real property, labor for repairs is
not taxable. The difficulty lies in
distinguishing between items which are converted to real property and items
which remain personal property.
Generally, if the attachment is essential and permanent, the item is
considered real property once attached.
Question
2) If Company A pays XXXXX sales or use tax on the material at the time of
purchase to its XXXXX vendor or out-of-state supplier and your state considers
Company A to be a consumer if the materials are installed in your state, would
your state allow credit for XXXXX tax paid?
In general, we give a credit. Credit for sales/use tax paid to another
state is governed by Utah’s Multistate Tax Compact provisions (U.C.A. §
59-1-801), which states:
Each purchaser liable for a use tax
on tangible personal property shall be entitled to full credit for the combined
amount or amounts of legally imposed sales or use taxes paid by him with
respect to the same property to another state and any subdivision thereof. The
credit shall be applied first against the amount of any use tax due the state,
and any unused portion of the credit shall then be applied against the amount
of any use tax due a subdivision.
Also,
section 59-12-104 (29) states:
Property upon which a sales or use tax was paid to some
other state, or one of its subdivisions, except that the state shall be paid any
difference between the tax paid and the tax imposed by this part and Part 2,
and no adjustment is allowed if the tax paid was greater than the tax imposed
by this part and Part 2;
However,
Utah case law indicates that the tax had to be legally due first in the other
state. (See Niederhauser v. Tax
Comm’n, copy enclosed.) If the
XXXXX contractor bought materials from an XXXXX supplier, that is the first
instance of taxation. The use tax later
imposed by Utah would be subject to a credit.
On the other hand, if the sale of supplies to the XXXXX contractor
amounts to an interstate sales that is not legally taxable in XXXXX, the Utah
use tax applies, and the contractor must request a credit from XXXXX.
Question
3) If Company A did not pay tax to its suppliers at the time of purchase but
accrued and paid the XXXXX sales/use tax on the cost of materials directly to
XXXXX under a Consumer’s Use or Direct Payment authority, would your state
allow credit for the tax paid to XXXXX?
We require that the sales tax
actually be paid in the other state.
The contractor may use the invoice or other documentation in conjunction
with a sales tax return as evidence.
Question
4) If Company A did not pay tax either to its suppliers or to the state of
XXXXX directly, and subsequently was audited by XXXXX and assessed for the tax
due, would your state allow credit for the tax assessed by XXXXX?
Assuming the first instance of
taxation occurred in XXXXX, Utah allows a credit if the taxpayer actually paid
the tax to XXXXX and if the request for credit or refund of Utah taxes paid was
submitted within three years of the date the tax was paid in Utah.
Question
5) If Company A did not pay the tax to its suppliers or to the State of XXXXX
directly but properly reported and paid the use tax due to your state, would
your state recognize a “first use” in XXXXX and refund or credit the tax paid
to your state if XXXXX issued an assessment or other collection procedure to
recover the tax that had erroneously not been paid to XXXXX?
Utah does not recognize a theory of
“first use.” However, as described in
the response to question 4 above, the taxpayer may request a refund within the
statutory time limits.
Question
6) If your state permits a credit or refund in Questions 4 and 5, must Company
A pay the tax due to the state of XXXXX before your state would be willing to
refund or credit Company A for tax paid to your state?
The taxpayer must present evidence
that the tax was paid to another state and must submit a refund request within
Utah’s statute of limitations period.
Question
7) What information or documentation is required of Company A and/or the state
of XXXXX to substantiate a claim for refund or permit the taking of a credit in
your state?
If an out-of-state contractor is
doing business in Utah that subjects him to Utah sales and use tax, he must
apply for and obtain a Utah sales tax license and file sales tax returns. There are two ways to request the credit. One is to file an amended return within the
statute of limitations period which shows the credit adjustment and required
schedules or documentation. If the
contractor is currently filing sales tax returns in Utah, he can take the
credit on the current return (if within the statute of limitations).
Please
let us know if you have further questions.
For the
Commission,
Alice
Shearer,
Commissioner