Does Utah sales/use tax apply when a company withdraws leased equipment from its resale/lease inventory and transfers it to a related company in a reorganization?

Plain-English summary

A company that had purchased equipment tax-free for its resale/leasing inventory wanted to transfer that leased equipment to a related company as part of a business reorganization, and asked the Commission to confirm no Utah sales or use tax would apply to the transfer.

The Commission's Auditing Division (whose recommendation the Commission adopted) disagreed with the taxpayer's position on every point raised:

• A transfer between related corporations can still be a taxable "sale." The taxpayer argued no sale occurs between related parties, or that no value is exchanged. The Commission relied on the Utah Supreme Court's decision in Institutional Laundry, Inc. v. Utah State Tax Commission, which rejected the idea that a sale requires unrelated parties, and found that value clearly changes hands even in a related-party transfer — the transferee's worth increases and the transferor's worth decreases by the equipment's value, regardless of whether cash changes hands.
• Tax is due when leased equipment is withdrawn from a resale/leasing inventory for a purpose other than resale. The Division reasoned this from the general principle that in every case where an isolated-or-occasional-sale exemption applied, tax had already been paid on the original purchase — meaning equipment can't permanently escape tax just because it started life in a tax-free leasing inventory.
• It's not the lease termination itself that triggers a taxable event — it's what happens to the equipment afterward. Ending a lease is not, by itself, taxable; withdrawing the equipment from the leasing/resale inventory for a non-resale purpose is what triggers the tax.
• Exemptions are construed narrowly against the taxpayer, even though the Commission acknowledged that Utah courts generally construe tax statutes liberally in the taxpayer's favor — the two principles cut in opposite directions, and exemptions get the narrower reading.

The Commission conditioned its answer on the specific facts presented and noted that any deviation could change the outcome; it also reminded the taxpayer that although it had framed the request as one for a "declaratory judgment," Commission policy treats such inquiries as advisory opinion requests instead, with a formal appeal available if the taxpayer disagreed. (Note: the source page for this ruling includes a lengthy attached petition/legal brief the taxpayer filed with the Commission — that attached material reflects the taxpayer's own arguments, not the Commission's reasoning, and isn't independently summarized here.)

What this means for you

Companies restructuring or reorganizing with leased/resale-inventory equipment

Don't assume moving leased equipment to an affiliated or related company escapes Utah tax just because the parties are related or no cash changes hands — the Commission treats a related-party transfer as a taxable withdrawal from your resale/leasing inventory if the equipment isn't going to another party for further resale. Plan for use tax liability on equipment that leaves your tax-free leasing inventory for any purpose other than resale, including intra-group reorganizations.

Leasing and equipment-rental companies generally

The core principle here — tax attaches when inventory purchased tax-free for resale/lease is withdrawn for a non-resale purpose — is a recurring theme; budget for it whenever equipment moves out of a resale/lease pool into some other use, even internally.

Accountants and tax professionals

Note that Utah courts construe tax-imposing statutes liberally in favor of the taxpayer but construe exemptions narrowly against the taxpayer — a useful two-part interpretive principle to keep straight when analyzing any Utah exemption claim.

Common questions

Q: Does transferring leased equipment between related/affiliated companies avoid Utah sales tax?
A: No — the Commission found that value still changes hands even between related parties, and Utah courts have rejected the idea that a taxable sale requires unrelated parties.

Q: Is ending a lease itself a taxable event?
A: No — it's what happens to the equipment after the lease ends (withdrawal from the resale/leasing inventory for a non-resale purpose) that triggers the tax, not the termination itself.

Q: Can I rely on this 1989/1990 ruling today?
A: Not directly — it binds the Commission only for the taxpayer and facts it addressed, and Utah's statutes and rules have been renumbered and amended repeatedly since. Verify current law before relying on it.

Citations and references

No specific Utah Code sections or numbered administrative rules are cited in the Commission's response letter itself; the ruling relies on Institutional Laundry, Inc. v. Utah State Tax Commission (Utah Supreme Court) for the related-party-sale holding, without a full citation given in the available text.

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/89-012.htm

Original ruling text

Response
February 26, 1990

February
26, 1990

Re:
XXXXX

Dear
XXXXX:

This
letter is in response to your December 28, 1989 request for a Tax Commission
ruling on whether sales or use tax would be due on the transfer of leased
assets in a business reorganization.

Although
your inquiry was framed as a request for declaratory judgement, Tax Commission
policy is to initially treat all such inquiries as requests for advisory
opinions. As such, it was referred to the Tax Commission's Auditing Division
for their analysis and recommendation. The division recommendation is as
follows:

1. The taxpayer states that no sale takes place
   when assets are transferred between related parties, but that such a transfer
   would constitute a sale if the transfer is between unrelated corporations and
   value is exchanged. In Institutional Laundry, Inc. v. The Utah State Tax
   Commission the Utah State Supreme Court disagrees that a sale has to be between
   unrelated parties. The Auditing Division disagrees that no value is exchanged.
   The value of the equipment has exchanged, increasing the worth of the
   transferee and decreasing the worth of the transferor.

2. The Division takes the position that tax is
   due from the lessor when equipment purchased tax-free is withdrawn from a
   resale or leasing inventory for a use other than resale. In all cases where a
   sale qualified as isolated or occasional, tax was paid on the original
   purchase. The Division is of the opinion that the Texas statute quoted by the
   taxpayer on page 18 of his brief spells out the intent of the Utah Legislature.

3. It is not a lease termination (page 14 of
   brief) that triggers a taxable event, but what happens after the termination.

4. The Auditing Division, although agreeing
   that the court has said that statutes should be construed liberally in favor of
   the taxpayer, the same court has said that "exemptions should be construed
   narrowly."

In
summary, The Auditing Division takes the position that tax is due when leased
assets are withdrawn from the lease inventory for a purpose other than sale.

Based
on the facts presented in your letter, we are in agreement with the Auditing
Division's recommendations. Obviously, if there are deviations from these
facts, this opinion may be negated.

If
you do not agree with this determination, you may appeal to the Tax Commission for
a formal hearing. The results of that hearing would constitute a declaratory
judgement and be appealable to the Utah State Supreme Court. A notice of appeal
rights is attached.

For
the Commission

Joe
B. Pacheco

Commissioner

M
E M O R A N D U N

TO: XXXXX,
Director

Auditing Division

FROM: XXXXX

DATE: January 4, 1990

SUBJECT: Request for Advisory Opinion

XXXXX
has requested a declaratory judgment/advisory opinion on the taxable sale status
when transferring assets from XXXXX to a XXXXX-related company.

Please
respond according to the guidelines established by the Commission.

Thank
you.

December
28, 1989

Utah
State Tax Commission

Heber
M. Wells Building

160
East 300 South

Salt
Lake City, UT 84134

Re:
In Re XXXXX Petition for Declaratory Order

Dear
Commissioners:

I
understand that a Request for Agency Action by Way of Declaratory Judgment
should be filed directly with the Tax Commission, as opposed to the Appeals
Division. Accordingly, I have submitted with this letter the original of XXXXX.
Request for Agency action by Way of Declaratory Judgment, with copies of this
cover letter and copies of the request with its supporting memorandum for each
commissioner.

Please
note that the Request for Agency Action also includes a request for a formal
hearing before the Tax Commission. If the Commission cannot accommodate XXXXX
by holding a formal hearing and issuing an order before 60 days have expired
from the filing of the Request for Agency Action, XXXXX is willing to
stipulate, pursuant to Utah Code Ann. � 63-46(b)-21(7) (1989), that the hearing
can be held and the declaratory judgment issued after 60 days from the receipt
of the Request for Agency Action.

Please
contact me directly if you have any comments or questions concerning XXXXX's
Request.

Very
truly yours,

XXXXX

[BEFORE THE UTAH STATE TAX
COMMISSION]

In
Re:

XXXXX,
Utah Sales

Tax
Exemption for Transfer

of
Assets

REQUEST
FOR AGENCY ACTION

BY
WAY OF DECLARATORY

JUDGMENT
AND REQUEST

FOR
FORMAL HEARING

Appeal
No.

*

Pursuant
to Utah Code Ann. � 63-46b-21(1989), and Rules R861-1-4A and R861-1-5AQ of the
Administrative Rules of the Utah State Tax Commission, XXXXX petitions the Utah
State Tax Commission ("Tax Commission") for an order declaring that:

(1)
a transfer of assets from XXXXX to a parent or wholly-owned subsidiary as part
of a business reorganization does not constitute a taxable sale pursuant to
Utah Code Ann. � 59-12-103(1989);

(2)
assuming such a transfer does constitute a sale, such sale is an "isolated
or occasional" sale exempt from sales taxation pursuant to Utah Code Ann.
� 59-12-102(6)(1989); and

(3)
there is no statutory or other authority for sales taxation of the so-called
"residual value" of XXXXX's leases.

XXXXX
also requests a formal hearing before the Tax Commission on this Request for
Agency Action. This Request is supported by an accompanying memorandum that is
incorporated by reference as part of the Request. The supporting memorandum
includes a statement of facts and legal argument demonstrating that the
contemplated asset transfer from XXXXX to a XXXXX-related company is not a
taxable event, and that the so-called "residual value" of XXXXX's
leases is not taxable.

RELIEF SOUGHT

XXXXX
is entitled to an order, pursuant to Utah Code Ann. � 63-46b-21, declaring that
a transfer of assets from XXXXX to a XXXXX-related company as part of its
business reorganization is not a taxable sale pursuant to Utah Code Ann.
59-12-103. If it is determined that such a transfer is a sale, XXXXX is
entitled to an order declaring that such sale is exempt from sales tax as an
"isolated or occasional" sale pursuant to Utah Code Ann. �
59-12-104(14)(1989). XXXXX is also
entitled to an order declaring that the "residual value" of the
leases on the transferred assets is not subject to sales tax.

DATED
this 27th day of December, 1989.

XXXXX

[BEFORE THE UTAH STATE TAX
COMMISSION]

In
Re:

XXXXX,
Utah Sales Tax

Exemption
for Transfer

of
Assets

MEMORANDUM
IN SUPPORT OF

REQUEST
FOR AGENCY ACTION

BY
WAY OF DECLARATORY

JUDGMENT
AND REQUEST FOR

FORMAL
HEARING

Appeal No.

This
Memorandum is filed in support and as part of XXXXX Request for Agency Action
by way of Declaratory Judgment and Request for Oral Presentation which seeks an
order declaring that:

(1)
a transfer of assets from XXXXX to a parent or wholly-owned subsidiary as part
of a business reorganization does not constitute a taxable sale pursuant to
Utah Code Ann. � 59-12-103 (1989);

(2)
assuming such a transfer does constitute a sale, such sale is an "isolated
or occasional" sale exempt from sales taxation pursuant to Utah Code Ann .
� 59-12-104 ( 14 ) ( 1989 ); and

(3)
there is no statutory or other authority for sales taxation of the residual
value of XXXXX's leases. XXXXX also
requests a hearing before the Tax Commission on its Request for Agency Action.

STATEMENT
OF FACTS

1.
Prior to September 1, 1982, XXXXX was a single-entity mining company and a
wholly-owned subsidiary of the XXXXX of XXXXX. On or about August 31, 1982,
XXXXX reorganized its Mineral Division into a number of subsidiaries. As a part
of the reorganization plan, all depreciable mining assets were to be held by
XXXXX leasing companies. XXXXX transferred its coal and land rights to XXXXX,
which then transferred them to the newly formed XXXXX, and reserved for itself
a 4% overriding royalty interest. XXXXX retained the depreciable assets which
it had purchased prior to August 31, 1982 ( "old assets" ) and changed
its name to XXXXX, sometimes known in Utah as XXXXX. A new corporation, XXXXX,
was created to purchase all assets to be used at the XXXXX after September 1,
1982 ('new assets"). The leasing companies, XXXXX and XXXXX, leased both
"old" (pre-1982) assets and "new" (post-1982) assets to
XXXXX, the owner of the coal rights. A new corporation, XXXXX, was formed to
act as operating company for the XXXXX, under contract with XXXXX.

2. On August 30, 1985, XXXXX, a subsidiary of
   XXXXX, and XXXXX's subsidiary, XXXXX, acquired the stock of all the XXXXX
   companies described above. Promptly upon acquisition, the leasing companies,
   XXXXX (which held title to the "old assets) and XXXXX (which held title to
   the "new" assets), were reorganized, both merging into XXXXX, the petitioner
   herein. XXXXX, the lessee of the assets and the owner of the land and mineral
   reserves, was merged into XXXXX. XXXXX thereby became lessee of the assets and
   the parent of the lessor, XXXXX. XXXXX continued to lease both the
   "old" and "new" assets to XXXXX. The operating company
   became XXXXX. A schematic drawing, showing the corporate structure as it has
   existed since September 1, 1985, is attached hereto as Exhibit A.

3. The lease agreement between XXXXX, and
   XXXXX, signed August 19, 1983, remained intact after August 30, 1985. This
   agreement prescribes the method for calculating the lease payments which the
   lessee XXXXX (replaced by XXXXX) pays to the lessor XXXXX (replaced by XXXXX).
   A copy of the lease agreement is attached hereto as Exhibit B. The lease
   agreement, in pertinent part, provides as follows:

For
each item of such equipment and facilities, OWNER [lessee] shall pay Lessor a
monthly amount equal to the sum of (a), (b), and (c) where:

(a)
equals the cost of purchase or construction of the item of equipment or
facility less estimated salvage value (if any), and less any accumulated
depreciation on the day the equipment is placed in service by owner divided by
the estimated useful life, in months, of the item of equipment OWNER and LESSOR
recognize that depreciation expense on LESSOR S books of account will equal the
amount specified in this paragraph (a );

(b)
equals three percent (3%) of (a); and

(c)
equals the cost of ownership of the item of equipment of facility paid by
LESSOR.

4.
XXXXX (XXXXX's parent), XXXXX, and XXXXX (XXXXX's subsidiary), have determined
to simplify the corporate structure of the XXXXX operation by eliminating at
least one and perhaps both of the intermediary corporations (XXXXX and XXXXX)
by merger or dissolution of XXXXX and distribution of its mining assets to an
affiliated corporation. No consideration will be paid for the merger or
dissolution.

5.
XXXXX's proposed transfer of assets, whether to a parent or subsidiary
corporation, would be a business reorganization and not a "sale" made
in XXXXX's regular business. Even if it could be considered a sale, the
transfer of mining assets to a related company would have to be considered an
"isolated or occasional sale" exempt from imposition of the Utah
Sales or Use tax pursuant to Utah Code Ann. � 59-12-104(14) (1989).

DISCUSSION

The
Utah Sales and Use Tax Act ("the Act") imposes a sales tax on
tangible personal property purchased within the state and a use tax on tangible
personal property purchased outside Utah and stored, used or consumed in Utah.
Utah Code Ann. � 59-12-103 (1989) provides in pertinent part:

1.
There is levied a tax on the purchaser for the amount paid or charged for the
following:

(a)
retail sales of tangible personal property made within the state;. . .

By
definition, the term "sale" includes leases. As defined in Utah Code
Ann. � 59-12-102(10) (1989):

(10)
"Sale" means any transfer of title, exchange or barter conditional or
otherwise, in any manner, of tangible personal property or any other taxable
item or service under Subsection 59-12-103(1), for consideration. It includes:
. . .

(e)
any transaction under which right to possession, operation, or use of an
article of tangible property is granted under a lease or contract and such
transfer of possession would be taxable if an outright sale were made.

The
lessor is required to collect and remit both local and state sales tax.

I.
THE TRANSFER OF ASSETS BETWEEN XXXXX ENTITIES IS NOT A SALE WITHIN THE MEANING
OF UTAH CODE ANN. �59-12-103.

The
liquidation and transfer of XXXXX's assets to a related, wholly-owned XXXXX
entity is exempt from sales tax, since the transfer is not for value. In such a
transfer there is no "purchaser" and no "amount paid or
charged" as required by Section 59-12-103(1) in order for the state to
impose a sales tax.

The
transfer of assets from one corporation to another will constitute a sale if
the transfer is between unrelated corporations and value is exchanged between a
buyer and seller. In other words, a sale occurs when assets are transferred for
a purchase price. In such transfers, the consideration passing from buyer to
seller is generally easily identified. In this case, however, the transfer of
assets from one related company to another in connection with a business
reorganization through the liquidation or merger of or merger into the
transferring company will not be a "sale" within the meaning of
Section 59-12-103, since there is no exchange of value between buyer and
seller, and thus no requisite "purchase."

There
are several possible methods by which XXXXX could transfer its assets to a
XXXXX affiliate. Whatever the method of transfer, XXXXX, the lessor, would
agree with XXXXX, the lessee, to terminate the leases.

One
method of transfer would be by property dividend, not to XXXXX, a XXXXX
subsidiary, but upward to XXXXX, XXXXX's sole shareholder and parent or even to
XXXXX, its parent and sole shareholder. The transfer would not be a
"sale" because shareholders do not "buy" dividends.
Dividends are a return on the shareholder s equity investment. For that reason,
a dividend distribution by any XXXXX subsidiary to one of its parents would not
be a ''sale'' within the meaning of Section 59-12-103.

This
point, although obvious, has been pivotal to the outcome of certain cases. In
Weaver v. King County, 437 P.2d 698 (Wash. 1968) (en banc reh'g denied), a
corporation was liquidated and real estate which it owned was transferred as a
liquidating dividend to stockholders. The Weaver Court held that the conveyance
of corporate property as a liquidating dividend in dissolution of a solvent
corporation is not a conveyance, grant, transfer for valuable consideration, or
a "sale" in the ordinary sense and was thus not subject to real estate
transfer tax. Id. at 699. This holding is a restatement of the obvious: the
term "sale" means the transfer of property for consideration in the
ordinary course of business. Id. From that premise, it is logical to conclude
that the proposed liquidation and transfer of XXXXX's assets is not a
"sale" and hence not taxable as such pursuant to Section 59-12-103 if
the transfer were structured as a property dividend.

Another
method of transferring assets could be by capital contribution from XXXXX to
its subsidiary XXXXX. For similar reasons, such a transfer from XXXXX to XXXXX
would not be taxable as a "sale" because there would be no transfer
of assets for value in an arm's-length transaction. XXXXX would not receive
stock, cash or collateral in exchange for the transfer.

A
third method of transferring assets could be through merger. By this method,
the surviving corporation in the merger would become the owner of all the
assets previously owned by the merged corporation which would cease to exist as
a separate entity. As with the other methods, XXXXX's merger with its parent or
subsidiary, or even the merger of either into XXXXX, would not be a taxable
"sale" because there would be no transfer of assets for value in an
arm's length transaction.

II. EVEN ASSUMING, ARGUENDO, THAT XXXXX'S
TRANSFER OF ASSETS TO A RELATED XXXXX COULD BE CONSIDERED A SALE, THAT SALE
FALLS WITHIN THE SALES TAX EXEMPTION OF UTAH CODE ANN. �59-12-104(14) AS AN
"ISOLATED OR OCCASIONAL SALE."

Subsection
(14) of Utah Code Ann. �59-12-104 exempts "isolated or occasional sales by
persons not regularly engaged in business, except the sale of vehicles or
vessels required to be registered under the laws of this state;" The Tax
Commission has interpreted the "isolated and occasional sales"
provision by rule as exempting business reorganizations from sales tax
liability, even for businesses that sell or lease tangible personal
property. Rule R865-38S-1 ("Rule
38S") provides in relevant part:

Isolated
or occasional sales made by persons not regularly engaged in business are not
subject to the tax. The word "business" refers to an enterprise
engaged in selling tangible personal property or taxable services
notwithstanding the fact that the sales may be few or infrequent. Any sale of
an entire business to a single buyer is
an isolated or occasional sale and no tax applies to the sale of any assets
made part of such a sale (with the exception of a vehicle subject to
registration). (Emphasis added.)

Although
XXXXX is in the business of leasing equipment to XXXXX, and even though such
leasing is recognized as a taxable transaction, XXXXX proposes a business
reorganization. Even if such reorganization could be construed as a sale,
nonetheless it is not subject to taxation because it would be the sale of
XXXXX's "entire business to a single buyer" which is a XXXXX
affiliate. Utah case law interpreting the predecessor to present Section
59-12-104(14) and Rule 38S holds that the legislature did not intend to tax the
transfer of personal property in business reorganizations, even though the
business reorganized may ordinarily sell tangible personal property.

For
example, in Geneva Steel Co. v. State Tax Commission. 209 P.2d 208 (Utah 1949),
the Utah Supreme Court held that the sale of a steel plant, from the XXXXX
through the XXXXX to XXXXX, was not a taxable transaction within the meaning of
the Act. In its analysis of the transaction, the Court examined Rule 38S, which
then provided, as it does now, that "isolated or occasional sales"
made by persons "not regularly engaged in business are exempt from Utah
sales tax. The Court concluded:

The
above regulations, as well as those of other states which we have examined,
definitely contemplate an isolated or occasional sale as one made by a person
while not in the pursuit of the regular course of his business of selling
tangible personal property. We think this is a proper and fair interpretation.
Thus ordinarily when a person sells his entire business outright to a single
purchaser, the sale is isolated or occasional since the regular course of his
business is not selling businesses. Id. at 212 (emphasis added).

This
quotation emphasizes two important points. First, sales made that are not in
the regular course of a taxpayer's business are exempt sales. Second, the
"sale of a business," or a business reorganization, is an example of
a sale not in the regular course of a taxpayer's business.

Even
though the XXXXX Court, in the context of the facts before it, interpreted Rule
38S as applying to a "single purchaser", the underlying rationale for
the court's opinion is that "the sale is isolated or occasional since the
regular course of his [the seller's] business is not selling businesses."
Id.

In
L.A. Young Sons Construction Co. v. State Tax Commission, 457 P.2d 973 (Utah
1969), the Utah Supreme Court held that where a construction company purchased
equipment at an out of-state auction from another construction company not in
the business of selling construction equipment nor in making retail sales, the
sale was an isolated or occasional sale within the meaning of the Act. Although
the sale at issue in XXXXX was not the transfer of assets from a parent to a
subsidiary, the court interpreted Rule 38S by specifically reaffirming XXXXX.

XXXXX
is also significant because the court effectively gave notice that the
"isolated and occasional sales" exemption must be broadly construed.
Given XXXXX's underlying rationale, the court would have reached the same
decision even if more than one construction company purchased the equipment at
the out-of-state auction, as long as none of the companies was in the business
of selling construction equipment.

In
Husky Oil Company of Delaware v. State Tax Commission of Utah, 556 P.2d 1268
(Utah 1976), the Utah Supreme Court held that XXXXX's purchase of used refinery
equipment from XXXXX was an "isolated or occasional" sale within the
meaning of the Act. In reaffirming XXXXX, the XXXXX court recognized that the
holdings of those cases "emanated from and are restricted to the facts. .
.[,]" but that:

[T]he
analysis by this court in XXXXX concerning isolated sales are helpful to our
determination here, and particularly so when the present analysis of our
statute conduces to that determination. The words "isolated or occasional
sales" would be excessive and useless unless they had reference to sales
of tangible personal property by retailers or wholesalers who do not regularly
sell such property in their business. If the legislature had intended to
exclude from sales only those sales of tangible personal property by persons
not regularly engaged in retail or wholesale business, then it could, - and we
submit would - have eliminated "isolated and occasional" from the
statute. Also, the Commission's S-38 regulation which interpreted the statute
in question for 34 years to allow an exemption for a sale such as the one in
this case adds strength to the retention of that exemption.

Id.
at 1270 and 1271 (emphasis added).
Significantly, the XXXXX Court further declared:

[T]he
legislature did not intend to tax a sale of personal property transferred as a
component part of the sale of an integrated business.

Id.
at 1270.

XXXXX
require a finding that XXXXX's transfer of all of its assets to a related XXXXX
entity, if a sale at all, constitutes an "isolated or occasional
sale" exempt from sales tax, since a XXXXX business reorganization is even
further removed from a "sale" of assets than those assets exchanges
reviewed by the Utah Supreme Court in XXXXX. The phrase " isolated or
occasional " must be understood within the context of the transaction
involved, as the XXXXX court recognized. Where XXXXX transfers all of its
assets as part of a business reorganization, whether by property dividend,
liquidation, merger, or otherwise, the exemption must apply.

III.
THERE IS NO AUTHORITY FOR THE IMPOSITION OF SALES TAX UPON THE RESIDUAL VALUE
OF XXXXX LEASES.

Article
XIII, Section 11 of the Utah Constitution creates the Tax Commission and vests
it with administrative and supervisory authority over the tax laws of the
state. It is axiomatic that the Tax Commission cannot act outside statutory
authority. See Olson Construction Co. v. State Tax Commission of Utah, 361 P.2d
1112 (Utah 1961). Even where the
statute authorizes a tax, Utah's tax laws must be strictly construed against
the taxing authority and in favor of the taxpayer. See e.g., Utah Farm Bureau
Insurance Co. v. State Tax Commission of Utah, 347 P.2d 179 (Utah 1959),
Builders Components Supply Co. v. Cockayne, 450 P.2d 97 (Utah 1969), Salt Lake
County v. State Tax Commission of Utah, 116 Adv. Rep. 26 (No. 870368, September
8, 1989). In this case, the foregoing legal principles apply with particular
force because there is no statutory authority, either explicit or implicit, authorizing
the imposition of a sales tax upon the residual value of leased assets when a
lease terminates. If the legislature had intended that lease terminations would
trigger a taxable event, it would have so provided, as have other states in the
United States.

XXXXX
purchased the "new assets" tax free because the purchase of those
assets was a "wholesale sale." See Utah Code Ann. �� 59-12-103(1)(a)
(1989), and 59-12-1104(28). In other
words, these assets were purchased for "resale" or lease to XXXXX,
the ultimate consumer, which paid applicable sales taxes on its lease payments
to XXXXX.

When
XXXXX's assets are transferred as part of a business reorganization, and its
leases with XXXXX are terminated, the issue will arise whether additional sales
taxes should be paid if the aggregate value of taxes paid on XXXXX's lease
payments to XXXXX is or may be less than the taxes that would have been paid on
the original fair market value of the tangible personal property XXXXX
purchased tax free.

In
discussions with XXXXX, one auditor at the Auditing Division initially took the
position that the difference between the liquidation value of XXXXX's assets
and the total lease payments already collected, or what the auditor called
"residual value," is taxable. That position, if adopted by the
Auditing Division itself, cannot withstand a challenge for several reasons.

First,
the definition of the term "sale," found at Section
59-12-102(10)(1989) means "any transfer of title . . . of tangible
personal property . . . for consideration." Likewise, "purchase
price, as defined in Section 59-12-102(b) means "the amount paid . .
." Neither of these definitions
provides authority for including so-called "residual value" as part
of the sale purchase price upon which taxes are computed. Similarly, these
definitions presume a willing buyer and willing seller, and do not imply that
some third party, like the Auditing Division, can set what it thinks is a
"proper" purchase price. There is no authority elsewhere for such a
position. XXXXX's leases will be terminated upon liquidation of XXXXX because
the surviving entity from the merger will hold the assets and the leases; that
is, it will be both lessor and lessee and thus the leases will terminate. The
leases will have ended and will no longer be taxable. Had the leases continued,
the lessee would, of course, be required to continue to pay the applicable
sales tax component of lease payments. However, there is no possible rationale
or authority for assessing sales tax on the "residual" of a lease
that has been terminated.

Second,
a "sale" under Section 59-12-102(10)(e)(1989) includes "any
transaction under which the right to possess, operate, or use an article of
tangible property is granted under a lease or contract and such transfer of
possession would be taxable if an outright sale were made." As originally
enacted in 1933, the Act (then entitled the Emergency Revenue Act of 1933) did
not tax lease transactions. Taxation of leases was later added. As the Utah
Supreme Court explained in Snarr Advertising Inc. v. Utah State Tax Commission,
432 P.2d 882, 883 (Utah 1967):

Originally,
a statute was enacted to tax a sale of tangible personal property. To avoid
paying the tax, many transactions were made under the guise of a long-term lease
of personal property, usually for the estimated life of the article in
question. Possession and control were given to the lessee, the rentals to be
paid were roughly the same as installment payments would have been had the
property been purchased on conditional sales contracts. To plug this loophole,
the legislature in 1937 (Chapter 110, Section 2(g), amended the law to read as
above quoted [and as it now does].

XXXXX
explains the reasons why leases are subject to sales tax. But XXXXX cannot be
construed as giving the Auditing Division authority to close an apparent tax
loophole by rewriting leases to the extent that aggregate lease payments do not
equal the sales price of an asset. On the contrary, XXXXX holds, at least in
dicta, that loopholes are to be closed by the legislature, not by arbitrary
administrative decisions. There is no Utah case holding that a leasing company
must make up sales tax for this difference should the leasing company cease to
exist or should a lease terminate by virtue of a legitimate business
reorganization.

Neither
does Rule R865-19-32S, which governs sales taxes on leases and rentals, justify
the Auditing Division in imposing a "make up" sales tax. The rule
merely states that sales taxes are imposed on leases: "When a lessee has
the right to possession, operation, or use of tangible personal property, the
tax applies to the amount paid pursuant to the lease agreement, regardless of
the duration of the agreement." (Emphasis added). The rule nowhere states
or implies that the lessor or lessee must "make up" the difference
between taxes on the lease and taxes on the initial purchase if the lease
terminates.

If
the Auditing Division or the Tax Commission perceives a loophole exists, that
loophole must be closed through legislation, not by liberal construction of
existing legislation in favor of the state and contrary to the express language
in existing legislation and regulations. Other states have utilized legislation
to deal with this issue. For instance, Tex. Tax Code Ann. � 151.055(a) (Vernon
1982) provides:

If
a person purchases tangible personal property by means of a sale for resale for
the purpose of renting or leasing the property for use but subsequently sells the
property in an occasional sale before the person has collected and paid to the
state an amount of sales tax on rental or lease charges equal to the amount of
sales tax that would have been due if the person had not acquired the property
at a sale for resale, the person at the time of the occasional sale shall
include in his receipts from taxable sales the amount by which the purchase
price of the item at the occasional sale exceeds the amount received from
renting or leasing the property.

(Emphasis
added). The Texas statute also requires the lessor to on the purchase price of
the property (including rental payments to be credited to the purchase price)
at the inception of the lease. See Tex. Tax Code Ann. � 151.055(b) (Vernon
1982). [I]f the purchaser-lessee returns the taxable item to the seller-lessor
before the end of the lease or rental period without having acquired title to
the property the seller-lessor may take a credit . . . or a refund . . . for an
amount equal to the amount of the taxes paid on the unpaid portion of the sales
price. Id. This statute provides that, on early termination of a lease, a
refund of taxes on the difference between rental payments made and the purchase
price will be allowed.

While
statutes and taxing schemes of other jurisdictions are not binding on the Tax
Commission, the Texas statute reflects important constitutional and
administrative law principles, i.e., it is a state legislature's responsibility
to enact taxing measures for the state.
Any rules or regulations promulgated by an administrative agency of the state
must be supported by the statute and the statute must be given its plain and
obvious meaning. Salt Lake Union Stock Yards v. State Tax Commission, 71 P.2d
538, 540 (Utah 1937).

In
XXXXX's case, the Auditing Division is attempting to impose a policy that is
more restrictive than the statutory language. The intent of the statute and the
regulations promulgated thereunder is to impose a sales tax on payments made
pursuant to a lease agreement, regardless of the lease term, not on any
residual value resulting from a lease termination. Consistent with this
construction of statutory intent, the Utah Supreme Court recently held:
"In fact, our practice is to construe taxation statutes liberally in favor
of the taxpayer, leaving it to the legislature to clarify an intent to be more
restrictive if such an intent exists." Salt Lake County v. State Tax
Commission, 116 Utah Adv. Rep. 26, 27 (No. 870368, September 8, 1989) (emphasis
added). Thus, the Auditing Division cannot impose a standard other than that
specified in the statute.

Third,
Section 59-12-104, which lists the sales tax exemptions, cannot be rationally
interpreted to state or imply that the liquidation of a leasing company will
obligate a lessee-purchaser, lessor-seller, or any entity with which the lessor
or lessee may merge as part of a business reorganization to "make up"
the difference between the exempt sales price and the aggregate lease charges.
Any attempt to tax this so-called "residual value of leases would be
contrary to the underlying policy of the "isolated and occasional"
sale exemption. Case law interpreting
the "isolated or occasional" sale provision implies that the
exemption was intended to facilitate business reorganizations between affiliated
companies. It simply does not follow that the Auditing Division has the
authority, especially in light of cases construing Section 59-12-104 and in the
absence of any legislative authority, to assess taxes it might have received in
the future if the business reorganization were not exempt. There is no
authority for the proposition that the lease of tangible property which is
taxable under Section 59-12-103 is taxable in a subsequent transfer of the same
property, if the subsequent transfer is otherwise exempt. Since the Utah
Legislature has declared "isolated or occasional" sales exempt from
sales taxes, there is no authority to impose taxes in disregard of this
legislative mandate. See, e.g., Utah Restaurant Association v. Davis County
Board of Health, 709 P.2d 1159 (Utah 1985), Olson Construction Co. v. State Tax
Commission of Utah, 361 P.2d 1112 (Utah 1961), Utah Hotel Company v. Industrial
Commission, 151 P.2d 467 (Utah 1944).

CONCLUSION

XXXXX's
transfer of assets to a related XXXXX company, whether by dividend, capital
contribution, merger, or otherwise, is not a "sale" under Section
59-12-103, since it is not for value. Hence there is no "purchase
price" and no "purchaser" as required for taxation under Section
59-12-103. But even assuming that the transfer could be construed as a sale, it
falls under the exemption of Section 59-12-104(14) as an "isolated or
occasional sale," whether the business reorganization is by property
dividend, capital contribution, merger, or otherwise. Finally, there is no
authority for the Auditing Division's position that sales tax may be imposed on
the "residual value" of XXXXX's leases, and such a position could not
withstand a challenge. The Utah Supreme Court mandates that taxation statutes
be liberally construed in favor of the taxpayer. For these reasons, the
transfer of assets in XXXXX' business reorganization is exempt from sales tax.

l The term "sale" under
Section 59-12-103 is equivalent to the definition found in the Utah Uniform
Commercial Code codified at Utah Code Ann. � 70A-2-106(1) (1989), which
provides: "A sale consists of the passing of title from the seller to the

buyer
for a price (Section 70A-2-401.)" (emphasis added.)

DATED
this 27th day of December, 1989.

Attorneys
for XXXXX

Exhibit
"A"

Refer
to the file 89-012DJ to see this exhibit

Exhibit
"B"

Refer
to the file 89-012DJ to see this exhib