If a Utah refinery processes gold and silver bullion for an out-of-state mining company and the bullion is then sold to a third party who takes delivery outside Utah, does that sale count as a 'Utah sale' in the corporation's apportionment sales factor?

Plain-English summary

A CPA wrote to the Utah State Tax Commission on behalf of a precious-metals company (a parent that acts as management/marketing agent for its wholly owned mining subsidiaries, which mine gold and silver at operations outside Utah). The company shipped its raw mine output ("dore bars," over 75% pure) to an unrelated commercial refinery located in Utah. The refinery weighed, melted, sampled, and assayed the material, occasionally accumulating it over several weeks, and produced a 99.5%-pure finished product within about 15 working days. Title to the dore bars stayed with the mining subsidiary throughout refining and did not pass until the final sale to a buyer, which could be the Refiner itself or an unrelated third party. The Refiner offered to deliver the finished bullion FOB at its Utah plant, or at London, Zurich, or other major gold-trading centers, for a small added cost. Neither the parent nor its subsidiaries owned or rented property, kept an office, or conducted other business in Utah beyond holding title to the bullion during refining, though some affiliated entities with Utah nexus already filed Utah corporate income tax returns.

The company asked two questions. First, under U.C.A. § 59-7-318 (the statute governing how sales of tangible personal property are assigned to Utah for the sales-factor fraction), does a sale of bullion from the refiner's Utah location count as a "Utah sale" when the third-party buyer accepts delivery outside Utah under the terms of the sale agreement? Second, if that sale is a Utah sale, is it nonetheless excluded from the sales factor under § 59-7-318(2) when sold to a third party not doing business in the United States, assuming the taxpayer does not elect worldwide unitary reporting under § 59-7-304(3)?

The Commission's Auditing Division answered the first question with the statute's throwback rule. Under § 59-7-318(1)(a), a sale is a Utah sale if the property is delivered to a purchaser within Utah, regardless of the sale's f.o.b. terms — that would apply if the buyer were the Refiner itself or another Utah purchaser. Under § 59-7-318(1)(b), a sale shipped from a place of storage in Utah is still a Utah sale if the purchaser is the U.S. Government, or — the throwback scenario here — if the taxpayer is not taxable in the purchaser's state. Because the bullion is physically handed to the refiner (who also acts as carrier) in Utah and delivered to the buyer outside Utah, the sale is a Utah sale under the throwback rule only if the seller is not taxable in the destination state or foreign jurisdiction. If the seller is taxable there, the sale belongs to that other jurisdiction's sales factor, consistent with UDITPA's goal that each sales dollar be assigned to exactly one state (avoiding both double taxation and "nowhere income").

On the second question, the Commission ruled that the § 59-7-318(2) exclusion did not apply. That exclusion only removes a sale from the Utah sales factor when it is between a company and an affiliated "Foreign Operating Company" (as defined in § 59-7-302(6): an affiliated U.S.-incorporated corporation, 80% or more of whose business activity, measured under § 59-7-303(2), is conducted outside the United States) as part of a water's-edge combined report. Because the sale described in the request was to an unrelated third party, not to an affiliated foreign operating company, it did not qualify for the exclusion regardless of the worldwide-unitary-reporting election question raised.

What this means for you

Multi-state or multi-national corporations selling goods processed in Utah

If your company has goods manufactured, refined, or stored in Utah and then sold to buyers who take delivery elsewhere, don't assume the sale automatically escapes the Utah sales factor just because delivery happens out of state. Utah's throwback rule can pull the sale back into the Utah factor if you aren't taxable (i.e., don't have nexus or an income-tax filing obligation) in the destination state or country. Track where you are and are not "taxable" in the UDITPA sense for every jurisdiction your goods are delivered to.

Refiners, processors, and commodity sellers using a Utah facility

This ruling shows the Commission treating title-holding during processing, and use of the processor as an incidental carrier, as consistent with the goods still being "shipped from a place of storage" in Utah for throwback purposes — the analysis didn't turn on who physically transported the bullion, but on where title passed and where the buyer accepted delivery under the sale agreement.

Accountants and tax professionals handling apportionment

Two distinct rules are at play here and shouldn't be conflated: (1) the throwback rule in § 59-7-318(1)(b)(ii), which turns on whether the seller is taxable in the destination jurisdiction, and (2) the narrower foreign-operating-company exclusion in § 59-7-318(2), which applies only to sales between affiliated entities where one is a qualifying "Foreign Operating Company" under § 59-7-302(6) — not to any sale merely because the buyer is foreign or unrelated. Also note this is a 1991 ruling; Utah's corporate franchise/income tax apportionment statutes have been renumbered and revised repeatedly since, so confirm current citations before relying on this reasoning.

Common questions

Q: We ship goods from our Utah warehouse to a buyer who takes delivery in another state. Is that automatically not a Utah sale?
A: Not automatically. Under this ruling's reasoning, it's a Utah sale under the throwback rule if your company isn't taxable in the state or country where the buyer takes delivery. Only if you're taxable there does the sale fall outside Utah's sales factor.

Q: Does it matter that the refiner (not the seller) physically held or transported the goods?
A: In this ruling, no — the Commission focused on where title passed and where delivery was accepted under the sale agreement, treating the refiner's role as carrier as incidental. Title to the bullion stayed with the mining subsidiary throughout refining.

Q: We sell to an unrelated overseas buyer. Doesn't that get excluded from the Utah sales factor automatically?
A: No. The § 59-7-318(2) exclusion applies only to sales to or from an affiliated "Foreign Operating Company" as defined in § 59-7-302(6) — an affiliated U.S. corporation with 80%+ of its business activity abroad. A sale to an unrelated third party doesn't qualify, regardless of where that buyer is located.

Q: Can my company rely on this ruling for our own bullion or commodity sales?
A: Not as binding precedent. A Utah private letter ruling binds the Commission only for the taxpayer and facts it was issued to. It shows how the Commission reasoned about a specific fact pattern in 1991, but your facts, and the current statute text, may differ.

Q: Is the cited statute, § 59-7-318, still the current law?
A: Verify before relying on it. This is a 1991 ruling, and Utah's Code and Commission rules have been renumbered and amended many times since. Check the current Utah Code for the sales-factor and foreign-operating-company provisions before applying this reasoning today.

Citations and references

Statutes (Utah Code Ann., as cited in 1991):

• U.C.A. § 59-7-318 — governs assignment of sales of tangible personal property to the Utah sales factor, including the throwback rule (subsection (1)) and the foreign-operating-company exclusion (subsection (2))
• U.C.A. § 59-7-302(6) — defines "Foreign Operating Company" (an affiliated U.S.-incorporated corporation with 80%+ of business activity conducted outside the United States)
• U.C.A. § 59-7-303(2) — measure used to determine the percentage of a Foreign Operating Company's business activity conducted outside the United States
• U.C.A. § 59-7-304(1) — water's-edge combined reporting treatment giving Foreign Operating Companies a 50% inclusion of income and factor attributes
• U.C.A. § 59-7-304(3) — worldwide unitary reporting election referenced in the taxpayer's second question

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/91-024.htm

Original ruling text

December
6, 1991 Response from Tax Commission

October
30, 1991 Letter from XXXXX of XXXXX

XXXXX,
CPA

XXXXX

Re: Whether sale of gold and silver bullion
constitutes a Utah sale for purposes of the Utah apportionment fraction when
sold to a third party not doing business in Utah from refiners Utah location.

Dear
Mr. XXXXX:

This
letter is in response to your recent request for a Tax Commission ruling on
whether XXXXX's sale of gold and silver bullion constitutes a Utah sale for
Utah corporation franchise tax purposes when sold to a third party not doing
business in Utah from the refiners Utah location and if so, whether such sale
would be excluded under U.C.A. 59-7-318 if XXXXX does not file on a XXXXX.

The
Tax Commission policy is to refer such requests to the division most qualified
to analyze the request and make recommendations concerning it. As such, your request was referred to the
Tax Commission's Auditing Division for their analysis and recommendation. The division's recommendation is as follows:

QUESTION

1. Under the Utah Code Annotated,

1953, Title 59, Revenue and Taxation 59-7-318, does the sale of gold and silver
bullion constitute a Utah sale if the bullion is sold to a third party from the
refiners Utah location by XXXXX and the third party accepts delivery outside of
Utah by terms of the sale agreement itself?

RESPONSE: The Utah statute governing the assignment of
sales to Utah in the Sales Factor is U.C.A.
59-7-318 which states:

"(1) Sales of tangible personal property are in
this state if:

(a) the property is delivered or shipped to a
purchaser, other than the United States Government within this state regardless
of the f.o.b. point or other conditions of the sale; or

(b)
the property is shipped form an office, store, warehouse, factory, or other
place of storage in this state and:

(i)
the purchaser is the United States Government; or

(ii) the taxpayer is not taxable in the state of
the purchaser.

(2) Sales of tangible personal property are not
in this state if the seller and the purchaser would be members of the same
unitary business group but for the fact that either the seller or the purchaser
is a foreign operating company, and the property is purchased for resale
outside of the United States."

The
sales of bullion are assigned to Utah under (1)(a) above if the sale is to the
refiner or other Utah purchaser. The
sale would be assignable to Utah under (1)(b)(i) above if the purchaser is the
U.S. Government. Finally the sale would
be assignable to Utah as a throwback sale under (1)(b)(ii) above if XXXXX is
not taxable in the destination state or foreign jurisdiction. The answer to your question is that the sale would be a Utah sale under the
throwback rule only if XXXXX is not taxable in the state of destination. If XXXXX is taxable in the destination state
or foreign jurisdiction, it would not be a Utah sale.

It
is important to remember that the intent of the UDITPA statute from which the
above section is taken is that each dollar of sales be assignable to one and
only one state or foreign jurisdiction.
There should be neither "double taxation" through inclusion of
the sales in more than one state or foreign jurisdiction's factor nor
"nowhere income" through exclusion from any state's factor. In the case of XXXXX, the refiner is also
the transportation carrier whether the gold or silver bullion is physically
shipped at the time of the sale or not.
The end result is that the gold and/or silver bullion is given to the
refiner (carrier) in Utah and delivered to the purchaser outside of Utah. If XXXXX is taxable in the delivery state or
foreign jurisdiction, the sale is assignable to that state or foreign
jurisdiction. If XXXXX in not taxable
in the destination location, then the sale is thrown back to the Utah sales
factor pursuant to the throwback rule as outlined above.

QUESTION

2 If (1) above is yes, does the sale

to the third party not doing business in the United States constitute an
excluded sale for apportionment factor purposes under 59-7-318, if the taxpayer
does not elect XXXXX under 59-7-303(2) is conducted outside of the United
States.

RESPONSE: U.C.A. 59-7-318(2) is the paragraph referred
to in this question. As stated in the
above statute, this paragraph excludes a sale from the Utah sales factor if
either the seller or purchaser is a foreign operating company. "Foreign Operating Company" is
defined in U.C.A. 59-7-302(6) and means an affiliated corporation incorporated
in the United State, 80% or more of whose business activity as measured
according to Subsection 59-7-303(2) is conducted outside of the United States.

Foreign
Operating Companies in the context of a "waters edge combined report"
are given certain tax benefits by including only fifty percent of their income
and factor attributes in the combined report.
[See U.C.A. 59-7-304 (1)]. The
intent of the above paragraph is to exclude all intercompany sales between a
company and an affiliated foreign operating company for purposes of the sales
factor, even though only fifty percent of the foreign operating company's
income is being included in the water's edge combined report.

In
your question, the sale was to a third party and not to a "foreign
operating company". Therefore, the
sale would not be excludable under U.C.A. 59-7-318(2).

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 and a copy of the Utah Taxpayer Bill of Rights are attached.

For
the Commission,

Joe
B. Pacheco

Mr.
XXXXX

Managing
Corporate Auditor

Utah
State Tax Commission

160
E. 300 South

Salt
Lake City, Utah

81434-2300

Dear
Mr. XXXXX:

This
letter is to formally request a ruling from the Utah State Tax Commission as to
whether the ownership of precious metals within the State, while they are being
refined by an unrelated Utah refinery, and subsequently sold to a third party
not doing business in Utah constitute a Utah sale for income tax purposes.

Facts

All
the related entities mentioned below use the corporate address located at XXXXX
for official correspondence.

XXXXX,
EIN XXXXX, ("XXXXX"), a XXXXX e corporation, provides management services
and acts as a marketing/sales agent (outside the state of Utah) for its wholly
owned subsidiaries whose principal business activity is precious metals mining.
Currently, three subsidiaries, all XXXXX corporations, operate producing gold
mines:XXXXX, EIN XXXXX, ("XXXXX"), located in XXXXX;XXXXX, EIN XXXXX,
("XXXXX") in XXXXX, and XXXXX., EIN XXXXX, ("XXXXX") in
XXXXX.

XXXXX
has entered into a contract whereby a significant portion of the mine
production of XXXXX ,XXXXX, and XXXXX is shipped to and refined by an unrelated
company in Utah. As neither XXXXX nor its subsidiaries have any refinement
capabilities, the use of an outside refinery to get its mine production to a
saleable form is essential.

At
the time of shipment to the Utah refinery, the mine production would be in the
form of XXXXX bars which are in excess of 75 % pure as to precious metal content. At this point, approximately 99% of
the cost of the product ultimately sold has been incurred. The dore bars are
shipped to the refinery where they are weighed, melted, sampled and assayed.
Occasionally material may be accumulated at the refinery over several weeks in
order to make up a saleable quantity. Title to the dore bars, however, remains
with the mining subsidiary throughout the refining process and does not pass
until its final sale to the customer. The final refined product is 99.5% pure
and is usually available within 15 working days after receipt of the dore bars
by the refinery. At this point the bullion will be sold to a commercial buyer
which may be either the Refiner or a third party and title will be passed. The
Refiner has offered to deliver the bullion FOB at either the refiners location
in Utah, London, Zurich or any other major gold trading centre were the Refiner
has a place of business. The common commercial practice of precious metal
refiners is to offer various points of delivery since the bullion is a fungible
commodity. The cost to XXXXX for a delivery outside the Refiner's plant
facility in Utah is approximately $.10 per ounce built into the original
refining terms plus the Refiner's ability to make additional profit on ounces
the Refiner currently holds at various worldwide locations. Under the refining
agreement with the Refiner, XXXXX maintains that title transfers at the point
of delivery by the terms of the sale agreement itself.

Neither
XXXXX nor any of its subsidiaries will own/rent property, maintain an office or
conduct any other business in Utah other than to hold title to the dore bars
during the refining process. XXXXX and
its subsidiaries which have Utah nexus are qualified to do business in Utah and
are currently filing Utah Corporate Income Tax Returns. XXXXX and its subsidiaries hereby attest
that to the best of its knowledge this issue is not being considered by the
Department in connection with an active examination or audit of previously
filed returns.

Questions

(1) Under the Utah Code Annotated, 1953, Title
59, Revenue and Taxation �59-7-318, does the sale of gold and silver bullion
constitute a Utah sale if the bullion is sold to a third party from the
refiners Utah location by XXXXX and the third party accepts delivery outside of
Utah by the terms of the sale agreement itself.

(2)
If (1) above is yes, does the sale to the third party not doing business in the
United States constitute an excluded sale for apportionment factor purposes
under 59-7-318, if the taxpayer does not elect Worldwide Unitary Reporting
under 59-7-304(3).

We
appreciate your attention in this matter and request a response as soon as
possible. If you have any questions please call XXXXX, Manager International
Taxation or myself at XXXXX.

Very
truly yours,

XXXXX,
CPA