96-101

WITHDRAWN BY COMMISSION, NOVEMBER 16, 2004

Response July 17, 1996

Request

XXXXX

Utah Tax Commission

210 N. 1959 West

Salt Lake City, Utah 84134

RE: Advisory Opinion

Please provide me with an advisory opinion as to whether the XXXXX we design and install, are deemed to be personal property or real property.

I have inclosed a pamphlet for your review which shows and describes our systems. The electrical controls we build and install are permanent. The rest of the consists of the heater (the orange colored “wire” taped to the pipe, shown in two of the pictures in our pamphlet), the insulation, and the aluminum outer jacket. These systems are designed and installed to be permanent, and to last as long as the pipe. However, it is physically possible to remove them, but it would be a lot of work and in the winter the pipe would be non-functional without them.

Thank you for your help in this matter. If you require any additional information, please call me.

Thank you,

XXXXX

July 17, 1996

XXXXX

Re: Taxable Status of XXXXX

Dear XXXXX:

We received your letter requesting information on whether the that your company installs are deemed personal or real property. The following information should answer your request.

In Utah, there is levied a sales tax on, among other things, retail sales of tangible personal property and services for repairs, renovations, or installations of tangible personal property in connection with other tangible personal property. See Utah Code Section 59-12-103. Utah law also provides that the sale of real property and the labor performed on real property, however, is not subject to sales tax. See Utah Administrative Rule R865-19S-58(B).

A large number of items begin as tangible personal property, and end up as real property. For example, the sale of a completed home or building is not subject to sales tax because it is real property, but the contractors must pay sales tax on their purchases of materials and supplies (tangible personal property) that they use in building the home. The sales tax applies to the ultimate or final consumer of the tangible personal property. With regards to items that become affixed to real property, the person who is liable for the sales tax, or the person who is the final consumer, is the last person to own the items as tangible personal property.

If your company sells and installs an item that they convert to real property upon installation, your company is the last consumer of the item before its conversion to real property. As the last consumer of the item before its conversion, your company must accrue and remit sales tax on its purchases of the installed materials. Also, your company would not charge or collect sales tax from its customers for the installation. On the other hand, if the heater, materials and controls retain their character as tangible personal property once installed, your purchases are exempt because they qualify for the wholesale exemption. When your company resales these materials as a final product to its customers, you must collect sales tax from the customers and remit the tax to the Commission.

The heater itself is not the sort of item that is normally converted to real property. Under Utah Administrative Rule R865-19S-58, however, if the heater, insulation, and aluminum sleeve become an integral part of real property, then these materials will take on the character of real property for sales tax purposes. Two factors, then, are determinative of whether the system is treated as real property. First, is the pipe or pipeline to which your system is attached real property, and second, if so, is your system an integral part of that real property?

Besides these two factors, if an item is attached to real property so that it is treated as real property, its accessories are also treated as real property if the accessories are essential to the operation of the item and installed solely to serve the operation of the item. See Utah Administrative Rule R865-19S-78(B)(2)(d). Therefore, if your systems installed on the pipes are deemed to be real property, then the control instruments and other equipment necessary for the operation of your system are also deemed real property.

Pipes that are installed and part of a pipeline, either underground or permanently attached over ground, are generally considered real property once affixed. Assume, for example, that the XXXXX is installed on an over ground gas pipeline owned by an oil company. If the XXXXX is considered an integral part of the pipeline, the system takes on the character of real property, and must accrue and remit sales or use tax on its purchase of the items installed. With regard to pipelines, make note of an exception. Public utility pipelines are considered personal property of the public utility company. Therefore, if a XXXXX is attached to a public utility pipeline which is owned and maintained by a public utility company or a public entity, your system is treated as tangible personal property when attached and XXXXX must collect sales tax on the sale to its customer. Likewise, if the system is sold and attached to a pipe before the pipe is converted to real property, the sale is considered to be a sale of tangible personal property and taxable to customer.

The question of the pipe’s status as real or personal property also comes into play with regard to charges for installation and charges for repair. Charges to install an item to real property are not taxable if separately stated. Charges to install an item in connection with other tangible personal property are taxable. Charges for labor to repair an item that is considered real property are not taxable, but charges for labor to repair an item of tangible personal property are taxable.

I am enclosing copies of tax rules R865-19S-58 and R865-19S-78 to further explain taxation of the charges generally associated with the sale, installation and repair of items like the XXXXX. If you have further questions, or if you have other types of transactions that have not been considered in this opinion, please feel free to contract us for additional information.

For the Commission,

Alice Shearer,

Commissioner