Opinion ID: 1205197
Heading Depth: 1
Heading Rank: 3

Heading: taxability of aar car repairs

Text: Federal law requires Union Pacific to inspect for safety defects all freight cars received from other railroads that travel on Union Pacific's lines. Pursuant to rules promulgated by the American Association of Railroads (AAR), Union Pacific repairs safety defects on freight cars and charges the railroad owning the defective freight car for services and materials. According to a formula created in an audit prior to 1959, Union Pacific charged and collected sales tax on only 9.82 percent of the total repair bill for AAR repairs it performed in Utah. The rationale behind the formula is that since Union Pacific had already paid sales or use tax on the repair materials stored in its warehouse, the taxing authority needed to adjust the amount of tax charged for repairs using those materials. The Auditing Division has audited Union Pacific several times since 1959 and has not instructed Union Pacific to discontinue the practice of collecting sales tax on only a fraction of the total AAR repair bill. In this most recent audit, however, the Auditing Division issued a sales tax deficiency assessment against Union Pacific, claiming that Union Pacific's use of the 9.82 percent formula was incorrect and that Union Pacific owed sales tax on the entire amount of the AAR repairs. On review, the Commission agreed with the Auditing Division that the 9.82 percent formula was incorrect and that Union Pacific should have collected sales tax on the full amount of AAR repairs. The Commission, however, overturned the tax deficiency assessed by the Auditing Division. Because the use of the formula was a longstanding practice left uncorrected by several audits, the Commission reasoned that imposing taxes for prior periods would constitute retroactive law making. Therefore, without assessing a deficiency, the Commission ordered Union Pacific to collect tax on the total bill for AAR repairs beginning five days after the date of the Commission's decision. Union Pacific seeks relief from the prospective compliance required by the Commission's decision. We decline to address this aspect of the Commission's order because the Commission has not yet audited or assessed a tax deficiency against Union Pacific in this matter, but has determined only that one hundred percent of the charge for the AAR repairs will be taxable in the future. Union Pacific does not appear to contest the abstract proposition that services and materials furnished in AAR repairs are taxable, but contends instead that it is entitled to credits or deductions against this tax liability to reflect taxes it has previously paid on materials for repairs. The Tax Commission, however, should determine in the first instance whether Union Pacific can validly claim to have satisfied a specific portion of its sales tax liability for AAR repair charges or in the alternative whether Union Pacific's initial purchases of inventory for use in repairs should be tax exempt. The parties themselves have not squarely confronted this issue in the proceedings below or in their briefs, and the practical effect of the Commission's order is not yet clear. Union Pacific's implicit suggestion that the Commission's order creates an abuse of the state's power to tax is purely hypothetical. Accordingly, we conclude that it would be inappropriate for us to treat this issue at this time.