Did an out-of-state manufacturer create Utah franchise-tax nexus by keeping a constant stock of its components at a Utah subcontractor before sale to a Utah customer?
Apply this to your situation
This page answers the general question as of 2001. Ask about yours and see what current Utah tax law says, with citations.
Plain-English summary
Utah Private Letter Ruling 01-029 said an out-of-state manufacturer created Utah franchise-tax nexus by maintaining a constant inventory of component parts at an unrelated Utah subcontractor.
The inventory was held before washing and delivery to the manufacturer's Utah customer.
The Commission viewed the Utah stock of goods as more than a minimal activity and as significantly associated with the manufacturer's ability to establish and maintain a Utah market.
It also said Utah's Free Port law did not provide a franchise-tax exemption because that law exempted qualifying property from property tax.
The proposed arrangement
The manufacturer produced components outside Utah and shipped them to a Utah subcontractor.
The subcontractor would:
- Keep about one week of manufacturer-owned inventory, valued at approximately $85,000.
- Hold the parts until the Utah customer sent a pull signal.
- Wash the parts.
- Prepare shipping information.
- Release the parts for pickup by the customer's trucks.
The manufacturer replenished the Utah inventory weekly.
Ownership passed when the parts left the subcontractor for the customer. The manufacturer had no ownership or employment ties to the subcontractor.
Constant Utah inventory created nexus
The Commission said storing tangible personal property in Utah was usually enough to support Utah franchise tax.
It cited a redacted U.S. Supreme Court case reported at 483 U.S. 232 (1987) for the principle that in-state activities create nexus when they are significantly associated with establishing and maintaining a market in the state.
In the Commission's view, maintaining a constant Utah inventory enabled the manufacturer to establish and maintain a Utah market.
The activity was more than minimal. The manufacturer therefore incurred franchise-tax nexus while its product was stored at the Utah subcontractor before delivery.
Free Port law did not exempt franchise tax
The manufacturer asked whether Utah's Free Port law protected it.
The Commission said Utah Code Ann. § 59-2-1114 provided a property-tax exemption.
It was not an exemption from Utah franchise tax and had no effect on the franchise-tax nexus conclusion.
Holding
Under the proposed facts:
- The manufacturer continuously owned and replenished inventory in Utah.
- The Utah subcontractor stored and washed the parts before delivery.
- Constant inventory was more than a minimal Utah activity.
- That inventory was significantly associated with maintaining the manufacturer's Utah market.
- The manufacturer incurred Utah franchise-tax nexus.
- The Free Port property-tax exemption did not eliminate franchise-tax nexus.
What this means for you
Manufacturers and wholesalers
Inventory held at an unrelated warehouse or processor can create in-state tax nexus even when the business has no employees, owned facility, or affiliated company in the state.
Businesses using Utah subcontractors
Review who owns goods during storage, how much inventory is maintained, what processing occurs, and when title passes.
Accountants and tax professionals
Do not treat a property-tax exemption as a broad business-tax exemption. Analyze each tax separately and verify current law.
Common questions
Q: Did the Utah inventory create franchise-tax nexus?
A: Yes. The Commission considered the constant stock of goods more than minimal and connected to maintaining the Utah market.
Q: Did it matter that the Utah warehouse was unrelated?
A: The ruling still found nexus even though the manufacturer had no ownership, employment, or equipment ties to the subcontractor.
Q: Did the Free Port law eliminate nexus?
A: No. The Commission said it was a property-tax exemption, not a franchise-tax exemption.
Q: What happened to the parts in Utah?
A: They were stored, pulled when requested, washed, and then picked up for delivery to the customer's plants.
Key source language
- Inventory activity: “the maintenance of a constant inventory in Utah is more than minimal and is ‘significantly associated’ with the maintenance of a Utah market.”
- Nexus result: “COMPANY will incur franchise tax nexus with Utah if its product is stored at Company B prior to its delivery to Company A.”
- Free Port limit: “the ‘Free Port’ law you ask about is an exemption from Utah’s property tax ... but is not an exemption from Utah’s franchise tax.”
Citations and references
- Utah Code Ann. § 59-2-1114
- Redacted U.S. Supreme Court case reported at 483 U.S. 232 (1987)
Source
- Landing page: Utah Private Letter Rulings
- Official ruling: Utah PLR 01-029
- Date note: the source header identifies the response as November 14, 2001; the response dateline itself is redacted as “DATE.”
- Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.
Original ruling text
REQUEST LETTER
01-029
Response: November 14, 2001
NAME
COMPANY
ADDRESS
PHONE
FAX
This letter is to request an expedited Advisory Opinion on whether or not we will have established nexus for purposes of the Utah Business franchise tax in a situation we have with a customer in Utah. We have already spoken with TAXPAYER REP and she recommended that we write you.
COMPANY (COMPANY) is a STATE based manufacturer of component parts supplied to other manufacturers. Our customer in this situation, Company A, is a Utah based manufacturing concern with plants in Utah and STATE. Company B is a Utah based subcontractor that would warehouse and process COMPANY product prior to delivery into Company A. The advisory opinion is necessary for COMPANY to finalize our pricing structure with Company A. Here are the facts:
-
COMPANY would produce components at our plant in STATE. These would be shipped to Company B in Utah for a washing operation that is required prior to shipment into Company A�s plants.
-
Company A would pay the freight from CITY, STATE to Company B via common carrier arranged by Company A.
-
COMPANY would maintain approximately one week of inventory at Company B. The value of one week of inventory is approximately $85,000. Company B would hold the parts in stock until a pull signal is received from our customer Company A. Parts would be pulled from the COMPANY-owned inventory in the Company B facility, washed, and picked up in Company A-owned trucks and delivered to their manufacturing plants in both Utah and STATE. COMPANY would make weekly shipments to Company B to replenish what was pulled during the previous week.
-
Company B would generate a packing slip and send an electronic shipping notice (ASN) to Company A. A copy of the packing slip would be e-mailed or faxed to COMPANY who would then invoice Company A for that day�s shipment.
-
Ownership of the parts will transfer at the time a shipment is made from Utah-based Company B to Company A. An invoice would be prepared in STATE on the day that the inventory leaves Company B, based upon notification provided by Company B.
-
COMPANY has no ties to Company B through ownership, employment, equipment, etc.
-
COMPANY�s selling price to Company A includes the cost per piece that Company B charges COMPANY. However, this cost will be directly passed to Company A, with no markup or profit to be made by COMPANY on the cost of warehousing and washing.
-
Final destinations of the parts are Company A owned plants in STATE and Utah.
Representatives from Company A and Company B have spoken with various people and have the understanding that COMPANY is exempt from the franchise tax because of Utah�s Free Port Law. COMPANY�s inquiries lead us to conclude that we are not exempt because we will maintain inventory in Utah and because ownership does not transfer to Company A until parts are picked up at Company B (within the State of Utah).
COMPANY requests an advisory opinion as to whether or not COMPANY, and any other supplier involved in a similar situation, would be required to file annual Utah corporate income tax returns. Also, we request an explanation of how Utah�s Free Port Law applies or does not apply to this situation.
There is a need for a prompt written response. Please call me if there is any additional information that might aid in expediting this request.
Thank you for your kind assistance.
NAME
COMPANY
RESPONSE LETTER
DATE
NAME
COMPANY
ADDRESS
RE: Advisory Opinion Does COMPANY (�COMPANY�) have nexus with Utah for franchise tax purposes?
Dear NAME
You have requested the Tax Commission to determine if COMPANY will have established franchise tax nexus with Utah because of a proposed relationship with a Utah customer. COMPANY would sell component parts to this Utah customer, Company A, but not before the parts are delivered to another Utah company, Company B, for temporary warehousing and �washing.�
The storage of tangible personal property in Utah is usually sufficient to warrant the imposition of Utah�s franchise tax on an entity. In COMPANY v. COMPANY , 483 U.S. 232 (1987), the Supreme Court held that a taxpayer establishes nexus with a state if its activities there �are significantly associated with the taxpayer�s ability to establish and maintain a market in this state for the sales.� Maintaining a stock of goods in Utah would enable COMPANY to establish and maintain a market in Utah for its goods. Of course, ones activities in Utah must be more than minimal to be �significantly associated� with the establishment and maintenance of a market. In our opinion, the maintenance of a constant inventory in Utah is more than minimal and is �significantly associated� with the maintenance of a Utah market. Accordingly, COMPANY will incur franchise tax nexus with Utah if its product is stored at Company B prior to its delivery to Company A.
The �Free Port� law you ask about is an exemption from Utah�s property tax, as provided in Utah Code Ann. �59-2-1114, but is not an exemption from Utah�s franchise tax. Accordingly, it would have no effect on the franchise tax nexus issue. Should you have any other questions, please contact us.
For the Commission,
Marc B. Johnson
Commissioner
MBJ/KC
01-029
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