97-029

Response May 12, 1997

REQUEST LETTER

RE: Advisory Opinion Request:

Sales Tax For "Contributions In Aid Of Construction" Set Up As A "Take-Or-Pay" Contract.

Dear Ms. Rees:

It has come to my attention that COMPANY A has been charging sales tax, to the COMPANY B, on the difference between our actual monthly power usage and the contractually required minimum monthly payment of $$$$$ feel strongly that this is incorrect. It appears to me that this is similar to a "take or pay contract" deficiency payment to a vendor where you pay for a minimum amount of product even though you did not purchase it.

I am faxing to you a copy of a prior monthly billing, a copy of Section 59-12-103 of the Utah sales tax rules provided by your Auditing Department and a copy the contract. The contract appears to be a standard COMPANY A, with the addition of Exhibit B which contains the minimum payment language.

Please provide your opinion as to whether COMPANY A is correct in charging sales tax on the difference between actual usage and the minimum payment.

Please call me at ##### if you need additional information. My fax number is #####.

Sincerely,

NAME

RESPONSE LETTER

May 12, 1997

NAME

ADDRESS

CITY STATE ZIP

Advisory Opinion - Sales tax on charges by COMPANY A

Dear NAME,

We have received your request for sales tax guidance pertaining to the minimum demand agreement between COMPANY B and COMPANY A. We offer the following:

Under Utah Code section 59-12-103 (1) (c), electricity sold for commercial use is subject to sales tax. Your question pertains to amounts charged under the minimum demand agreement that exceed your actual usage. That amount is taxable.

COMPANY B has contracted to purchase a set amount of electricity each month at a discounted rate. The fact that COMPANY B does not use the full amount each month is immaterial from a sales tax perspective because sales tax is a tax on the transaction, not the underlying item sold. Tax is due, then, on the full amount that COMPANY A each month to purchase electricity.

Please let us know if you have other questions.

For the Commission,

Joe B. Pacheco,

Commissioner