97-037
Response
June 24,1 997
May
30, 1997
Re: Request for advisory opinion.
Dear
Ms. Rees:
I talked with Commissioner McKeown
today regarding a sales tax issue and he suggested that the best way to get my
concerns addressed is to request an advisory opinion.
A group of investors, of which I am
one, has just opened a COMPANY A here
in CITY. I thought that certain items
-we purchased for the use of our guests in their rooms would be tax exempt to
us because our guest is the ultimate consumer of the items. Among those items would be bar soap,
shampoo, hot chocolate, coffee, cups, shower caps, toilet paper, Kleenex, and
the continental breakfast that is served (including paper products associated
with it).
However, when I checked with the Tax
Commission to see if this was correct, I was told that items that are given
away are considered taxable to the motel, which is considered the ultimate
consumer. I disagree.
One of my clients, an autobody
repair shop, went through a sales tax audit several years ago. The concept addressed in this situation was
that if an item is used up by the body shop in doing the repair work, it is
taxed to the shop (rags, cleaning solvent, etc.), if an item becomes part of
the finished product, it is exempt (paint, wax, etc.).
My view is that the items I have
listed for our motel guests use are part -of our finished product, consumed by
our guest and not used' up -by the- -motel. The items are part of the service
we- charge for and taxed by the room rate we charge.
If our business should pay sales tax
on items that we give away as part of our service, then I see inconsistencies
in the application of that line of reasoning.
What about the restaurant the “gives away'' napkins, paper cups, after
dinner mints, etc. The grocery store that has multiple items in the store buy
one, get one free." The free item
is not taxed unless a coupon is necessary.
If our motel gave away a free
“bear" (the ##### mascot) as part of a promotion, then I could see having to
pay sales tax on those. But where the
items I have listed are for our guests and will be “consumed by them'' I view
those items as included in the room rate we charge, even though not separately
stated (just like the restaurant doesn't list the paper products separately).
Some of this information is a bit
hit and miss but it gives you my general view on the issue. I will be looking forward to your advisory
opinion on the matter.
Sincerely,
NAME
June
24, 1997
NAME
ADDRESS
CITY
STATE ZIP
Advisory
Opinion - Application of sales tax to items given to hotel or motel guests.
Dear
NAME,
We have received your request for
tax advice concerning purchases by your motel of items that are given to motel
guests. We offer the following:
Purchases of items that are given
away to motel guests taxable at the time of purchase by the motel. Under Utah Administrative Rule R865-19S-68,
the person who purchases an item of tangible personal property and gives that
item away is the consumer of the item for tax purposes.
The motel undoubtedly sets its room
rates to absorb for all of its business overhead, but it is not selling soap,
shampoo or other disposable items to its guests. Instead, it is making these items available to guests with the
room at no additional charge. With
regard to these items, there is no sales transaction between the motel and the
guest; hence no taxable transaction.
The taxable transaction takes place when the motel purchases these items
from the vendor.
The motel industry is not treated
differently in this regard than other business. For instance, a grocery store must pay tax on items that it
consumes in the operation of the store or gives away as premiums or free
samples to draw shoppers to the store.
A sports arena must pay tax on its purchase of the t-shirts that it
gives away to the first 500 fans through the gate.
We disagree that there is any
comparison between a motel’s business of renting lodging and an auto body shop or any operation that
manufacturers or compounds an item of tangible personal property. In fact, that argument was addressed to the
Utah Supreme Court more than 30 years ago.
In Sine v. State Tax Commission, 390 P.2d 130 (Utah 1964), the
court stated that one who deals in housing accommodations is not a fabricator
or manufacturer for purposes of the ingredient or component part exemption.
In conclusion, the COMPANY A is liable for sales tax on all items that it
purchases and consumes in the operation of the motel or that it gives to
customers at no charge. Please let us
know if you have other questions.
For
the Commission,
Joe
B. Pacheco,
Commissioner