Opinion ID: 1205197
Heading Depth: 2
Heading Rank: 3

Heading: Application of the Utah Sales and Use Tax Act

Text: Union Pacific purchased raw logs from various vendors located outside Utah and paid sales taxes on these purchases. After acquiring title, the railroad shipped these logs to an independent contractor in Oregon for creosote treatment and milling and drilling services in preparation for their use as cross ties. The railroad held title to the ties at all times after the initial purchase of the raw logs. [8] Union Pacific paid use tax based on the cost of the raw logs plus the creosote treatment. However, Union Pacific did not include the cost of drilling and milling services in calculating the basis of the use tax. The Act permits the state to tax retail sales of tangible personal property made within the state, certain enumerated services rendered within the state, and in-state storage, use, or consumption of tangible property purchased outside the state. Utah Code Ann. § 59-12-103. The basis for the taxation of personal property and certain services rendered in connection therewith is calculated on the amount paid or charged for the sale or service. Id. The use tax, as discussed in section A above, mirrors the sales tax in its application. Accordingly, the use tax should also be based on the amount paid for the raw logs and the amount paid for those services that are taxable under the terms of the statute. The only provisions that could conceivably apply to the milling and drilling services performed on the cross ties are the following: (g) services for repairs or renovations of tangible personal property or services to install tangible personal property in connection with other tangible personal property; (h) cleaning or washing of tangible personal property. Utah Code Ann. § 59-12-103. Union Pacific argues that drilling and milling are not the same as washing, cleaning, repairing, or renovating. The Commission found that the cost[s] involved in creating the installed products, such as milling costs, represent services rendered in the repair or renovation of tangible personal property and are taxable. It is the addition of those costs to the total cost of the cross ties that truly represent[s] the taxable value of the ties. The notion of taxable value applied by the Commission implies that the Commission included the amount paid for the services performed on the ties because those services added to the value of the ties. The value of the ties, however, is not the proper basis for calculating use tax. The basis for calculating use tax in the instant case is the amount paid for the raw logs when purchased plus the amount paid for services that fall into one of the specified categories of taxable services. The Commission has attempted to classify the milling and drilling services as repairs or renovations. Because we conclude that the Commission has discretion to interpret the terms repairs and renovations, we review the Commission action for reasonableness and rationality. Utah Administrative Rule 865-19-78S (rule 78S), guides the taxation of services pursuant to Utah Code Ann. § 59-12-103: A. Persons who wash, clean, repair, or renovate tangible personal property, whether material is furnished by the seller or not, are required to collect the sales tax upon the total charge made for the rendition of such services. B. Amounts paid or charged for installing tangible personal property in connection with other tangible personal property are subject to tax. The Commission found that the categories of taxable services contained in rule 78S provide for the taxation of the creosote treatment and the drilling and milling services. The creosote treatment involved applying tangible personal property, the creosote, to other tangible personal property, the cross ties. The creosote treatment is thus taxable. [9] See BJ-Titan Servs. v. State Tax Comm'n, 842 P.2d 822 (Utah 1992). Rule 78S, however, does not support taxing the drilling and milling services on logs Union Pacific had previously purchased. Milling logs into uniform size and drilling spike holes do not involve the installation of tangible personal property. Furthermore, drilling and milling do not suggest the same type of activity as washing or cleaning. The Commission appears to view drilling and milling as equivalent to repair or renovation. Repair and renovation, however, suggest activities that fix an already manufactured product. To repair is to restore by replacing a part or putting together what is torn or broken. To renovate is to restore to a former better state. Webster's Ninth New Collegiate Dictionary 998 (1984). Drilling and milling the cross ties did not involve repairing existing cross ties or restoring the existing cross ties to a former better state. [10] Thus, even under a deferential standard of review, we agree with Union Pacific that the drilling and milling services are not repairs or renovations within the meaning of section 59-12-103(1)(g). We note that the witness for the Auditing Division admitted as much at the hearing before the Tax Commission, and this admission went uncontested. The proper focus is not on what Union Pacific imported into this state, i.e., finished railroad ties, but rather on the transactions that actually took place, whether inside or outside Utah, and the taxability of each transaction. The Commission erroneously adopted the former approach in concluding that the drilling and milling services were taxable because they contributed to the taxable value of the ties. Union Pacific separately purchased raw logs, drilling and milling services, and creosoting services. Union Pacific paid taxes on the purchase of raw logs and the purchase of creosoting services. But none of the provisions in the Sales and Use Tax Act permit the taxation of the drilling and milling services when performed independently from the sale of the ties themselves. We therefore hold that the Commission erred in requiring Union Pacific to pay use tax for the amount paid for these services.