Opinion ID: 1205197
Heading Depth: 2
Heading Rank: 1

Heading: Use Tax Based on Services Performed Out of State

Text: Union Pacific claims that Utah oversteps the constitutional boundaries drawn by the commerce clause by levying a sales tax on services rendered in Oregon. In order to analyze this claim, we must first examine the Utah Sales and Use Tax Act (the Act) and distinguish between the sales tax component and the use tax component of the Act. The Commission's rules differentiate the two: A. The sales tax is imposed upon sales of tangible personal property made within the state of Utah, regardless of where such property is intended to be used, and on the amount paid or charged for all services for repairs and renovations of tangible personal property or for installation of tangible personal property rendered in connection with other tangible personal property. B. The use tax is imposed upon the use, storage or other consumption of tangible personal property, and upon the amount paid or charged for the services for repairs or renovations of tangible personal property or installation of tangible personal property in connection with other tangible personal property, if the tangible personal property is for use, storage, or consumption in Utah; and, ordinarily, if the transaction does not take place within the state of Utah. C. The two taxes are compensating taxes, one supplementing the other, but both cannot be applicable to the same transaction. The rate of tax is the same. D. The distinguishing factor in determining which tax is applicable is normally the place where the sale or service takes place. If the sale is made in Utah, the sales tax applies. If the sale is made elsewhere, the use tax applies. Utah Admin.R. 865-19-1S. To recapitulate, the sales tax imposes a transaction tax on certain sales and certain services that occur in Utah. Complementing the sales tax, the use tax imposes an excise tax on tangible property and certain services performed in connection with that property, where the property is stored or used in Utah but is not subject to Utah sales tax because it was purchased or the service was performed outside of Utah. See Barrett Inv. Co. v. State Tax Comm'n, 387 P.2d 998, 999 (Utah 1964). If the owner of property used in Utah paid sales or use tax in another state, that tax is credited to offset the use tax levied in Utah. [5] Because of the use tax, items used in Utah but purchased elsewhere share the same tax burden as those items purchased in Utah. The use tax, therefore, helps Utah merchants compete on equal terms with merchants in other states by removing the incentive for purchasers to search for states with lower sales tax in which to purchase items for use in Utah. See id.; Henneford v. Silas Mason Co., 300 U.S. 577, 581, 57 S.Ct. 524, 526, 81 L.Ed. 814 (1937) ( Silas Mason ); Paul J. Hartman, Federal Limitations on State and Local Taxation § 10:7 (1981). Union Pacific claims that Utah violated the commerce clause by levying a sales tax on services rendered in Oregon. In so claiming, Union Pacific misapprehends the nature of the tax imposed and how it relates to the commerce clause. Utah levied a use tax, not a sales tax. Utah did not levy a tax on the sale of the raw logs and the services performed out of state; instead, Utah taxed Union Pacific's use of cross ties within the state. For over fifty years, the United States Supreme Court has upheld the nondiscriminatory application of a tax on the use of property that has come to rest in a state. See, e.g., Silas Mason; Wiloil Corp. v. Pennsylvania, 294 U.S. 169, 55 S.Ct. 358, 79 L.Ed. 838 (1935). In Silas Mason, contractors working on Grand Coulee Dam on the Columbia River objected to the state of Washington's imposition of a use tax. Washington taxed equipment the contractors used in Washington but had purchased out of state. The Washington tax scheme levied a tax or excise for the privilege of using within this state any article of tangible personal property, including the cost of transportation from the place of purchase. 300 U.S. at 580. The tax scheme also provided credit against the use tax for sales or use tax paid in Washington or in some other state. Writing for the Court, Justice Cardozo noted that items obtained through interstate commerce do not necessarily remain in interstate commerce. Furthermore, he recognized that because states can levy a tax on property within the state, they can levy a tax on the use or enjoyment of property: The tax is not upon the operations of interstate commerce, but upon the privilege of use after commerce is at an end. Things acquired or transported in interstate commerce may be subjected to a property tax, non-discriminatory in its operation, when they have become part of the common mass of property within the state of destination.... For like reasons they may be subjected, when once they are at rest, to a non-discriminatory tax upon use or enjoyment. Id. 300 U.S. at 582, 57 S.Ct. at 526. Hence, the commerce clause permits a state to tax property which has become part of the common mass of property within the state. Moreover, it does not prohibit the state from including the price of services performed in the manufacture of tangible property in calculating the basis for the use tax levy. This is implicit in the nature of tangible personal property. Both raw materials and the services performed in transforming those raw materials into a finished article contribute to the value of an item of tangible property. Consequently, when a state bases a use tax on the selling price of an item of tangible property, the basis necessarily includes the cost of services because the seller incorporates the cost of the services into the selling price. The Court in Silas Mason, for example, upheld the Washington tax, which based the use tax on the total retail price of the construction equipment, not merely on the price of the unassembled component parts of the equipment. Id. at 579, 57 S.Ct. at 525. A state may also include the cost of services performed in connection with tangible personal property that the taxpayer already owns in calculating the basis for the use tax. The basis of the Washington tax approved in Silas Mason included the service of transporting goods already owned by the taxpayer. Id. at 580, 57 S.Ct. at 525. In Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64, 83 S.Ct. 1201, 10 L.Ed.2d 202 (1963), the Court again considered a state use tax that included the cost of services in the basis for calculating the tax. Halliburton involved a use tax levied by the state of Louisiana that included the out-of-state costs of labor and shop overhead incurred in the manufacture of specialized equipment. The taxpayer manufactured oil well cementing trucks and electrical well logging trucks in Oklahoma, some of which the taxpayer used in Louisiana. Id. at 66, 83 S.Ct. at 1202. In examining the Louisiana use tax, the Halliburton Court did not object to inclusion of labor costs the taxpayer incurred in Oklahoma in the basis for calculating the Louisiana use tax. [6] We therefore hold that including the costs of services performed in Oregon in the basis of the Utah use tax imposed on Union Pacific's cross ties does not in itself impose a burden on interstate commerce.