Did Utah rule that a subsidiary's purchase and later sale of satellite equipment to its parent qualified for the resale exemption during temporary Utah storage?

Plain-English summary

Utah Private Letter Ruling file 95-006 did not decide whether the satellite-equipment purchases qualified for the resale exemption.

The requester submitted a long argument that a wholly owned subsidiary bought equipment and later sold it to its parent outside Utah, so temporary Utah storage should be exempt as property held for resale.

The Commission did not accept or reject that argument.

It said the same questions were already under examination in an audit and should be resolved through the audit and any resulting appeals.

Equipment structure

The parent company developed and managed private satellite networks.

Satellite equipment from multiple suppliers was shipped to a Utah warehouse and later sent to customer installation sites outside Utah.

After an earlier Utah assessment, the company changed its purchasing structure:

• A wholly owned subsidiary purchased the equipment.
• The subsidiary invoiced and sold the equipment to the parent.
• Title was intended to transfer at the out-of-state customer location.
• The subsidiary shared employees, officers, directors, and common-paymaster services with the parent.

The company asked whether the subsidiary's purchases were for resale and therefore exempt while temporarily stored in Utah.

Requester's legal argument

The request argued that:

• The subsidiary should be respected as a separate corporation.
• The parent-subsidiary sale transferred title.
• The subsidiary's equipment purchases qualified as purchases for resale.
• Temporary Utah storage before an out-of-state resale should not be taxed.

The request cited Utah statutes and several cases supporting its theory.

Those points were the requester's advocacy, not findings adopted by the Commission.

Commission declined to issue an opinion

The Commission said the questions, concerns, and situations in the request were already at issue in an Auditing Division audit of the company.

It directed the company to provide relevant information to the auditors.

The Commission said an advisory opinion based on limited information would improperly bypass the audit and appeal process.

No holding on the merits

The official response did not decide:

• Whether the subsidiary was separate from the parent for sales-tax purposes.
• Whether the intercompany transfer was a resale.
• Whether the temporary Utah storage was exempt.
• Whether the corporate structure affected taxability.
• Whether the company's legal authorities supported its position.

Those issues were left to the audit and any later appeal.

Holding

The only Commission determination in this file was procedural:

• The merits were already under audit.
• The audit process was the proper fact-finding method.
• Appeal procedures were available if necessary.
• The Commission would not issue an advisory opinion that circumvented those processes.

What this means for you

Parent-subsidiary groups and equipment companies

Do not treat a detailed ruling request as agency approval. Only the Commission's response states the agency's position.

Companies under audit

An advisory-ruling process may not be available to decide the same issue already being examined through audit and appeal.

Accountants and tax professionals

Separate taxpayer arguments from agency holdings. This file supplies no substantive resale-exemption precedent.

Common questions

Q: Did the Commission approve the subsidiary resale structure?

A: No.

Q: Did it reject the structure?

A: No. It did not reach the merits.

Q: Why was no opinion issued?

A: The issues were already being examined in an audit.

Q: Where did the Commission direct the company?

A: To the auditors and, if necessary, the appeal process.

Q: Can the requester's cases and statutory analysis be treated as Commission guidance?

A: No. They were advocacy that the Commission did not adopt.

Key source language

• Existing audit: “The questions, concerns and situations which are the subject of your inquiry are at issue before the Auditing Division in an audit”
• Proper process: “The issues of concern should be resolved in the audit process and, if necessary, available appeal processes resulting from the audit.”
• No circumvention: “It would not be appropriate for the Commission to circumvent the audit and appeal process”
• Fact development: “The audit function provides a more efficient method of reviewing the details of the situation as basis for a determination.”

Citations and references

The Commission's response did not rely on a statute, regulation, or case because it declined to reach the merits. The authorities reproduced in the official file appear in the requester's submission only.

Source

• Landing page: Utah Private Letter Rulings
• Official ruling file: Utah PLR 95-006
• Outcome note: the official response deferred the issue to audit and appeal and did not decide the substantive resale question.
• Fetch note: the exact official URL returned HTTP 404 to a direct request and was then retrieved through Sofya.

Original ruling text

Response February 22, 1995

Request

February 7, 1995

Val Oveson

Chairman, Utah State Tax
Commission

210 North 1950 West

Salt Lake City UT 84134

Re: Advisory Opinion

Background

XXXXX develops and manages private
satellite networks primarily for large retail and wholesale chain stores and organizations. After a contract ("Service Agreement") is negotiated and executed with a customer, XXXXX places purchase orders with various manufacturers of satellite equipment. A complete satellite system installed at each customer location consists of an audio receiver, video receiver, satellite antenna, LNB, satellite mount and miscellaneous cabling and connectors. This equipment is purchased from different manufacturers and suppliers located primarily out of state but certain of the receivers have been purchased, in the past, from in-state manufacturers.

The equipment is usually
shipped to XXXXX Utah warehouse in large lots and then the various items of equipment needed for a complete system are shipped out-of-state for installation at the customers' locations. Use tax is then paid to the jurisdiction in which the equipment is used, installed, and consumed.

In XXXXX, XXXXX was audited
by the Sales and Use Tax Auditing division which determined that Sales Tax was due in Utah because the satellite equipment had been stored in Utah for a period of time prior to shipment to its ultimate destination pursuant to Utah Code Annotated ("UCA") 59-12-103(n).

XXXXX position was that the
storage of the satellite equipment was exempt from taxation under UCA 59-12-1()4(25) because it was stored for "resale." As the term "sale" is defined under UCA 59-12-1()2(1 I)(e) transfer of title is not required for there to have been a "sale." All that is required is that possession of the property must be transferred under a contract which occurs pursuant to XXXXX Service Agreement with its customers. However, on appeal, the Utah State Court of Appeals ruled that under UCA 59-12-102(11)(e) "possession" had to be "permanent possession" for such a transfer to be deemed a "sale." (This may in fact narrow the State's ability to tax transactions otherwise clearly taxable, but is not applicable to this request.)

Before the Court of Appeals
decision was rendered, but after the sales tax assessment, XXXXX changed its form of doing business in purchasing equipment for its customers' networks. All purchasing of satellite equipment is currently accomplished by a wholly-owned subsidiary of XXXXX, XXXXX, XXXXX. As systems are shipped to the installation sites around the country, they are invoiced to XXXXX from the subsidiary for transfer of title to take place at the customer site. The intent of utilizing an intermediate, wholly owned subsidiary as the purchasing agent and subsequently selling the equipment to the parent, is to qualify the transaction as a "sale" under the UCA 59-12-104(25) such that the incidence of taxation is in those jurisdictions where the property is actually used and consumed. The subsidiary has no employees who perform services only for it, but rather it shares the employees, officers and directors with XXXXX who provides common paymaster services.

ISSUE

The sole issue of this
advisory opinion request is:

Does the sale of personal
property to a parent by a subsidiary qualify as a "resale" under UCA 59-12-104(25), thereby exempting the temporary storage of the personal property from Sales and Use taxation in the State of Utah?

DISCUSSION

Attached is a research memorandum
prepared by my law clerk dealing with this specific issue.

CONCLUSION

Based on the foregoing,
XXXXX requests a favorable advisory opinion to the effect that purchases of satellite equipment by its wholly-owned subsidiary and subsequent sales of such equipment to XXXXX qualify as "resales" for purposes of UCA 59-12-104(25), thereby exempting from Utah State Sales Tax the storage of the satellite equipment in Utah prior to the resale out of state.

Thank you for your help in
this matter.

Sincerely,

XXXXX

General Counsel

DISCUSSION

1. Would a Court Consider
XXXXX a Mere Instrumentality of XXXXX and View the Sales Between the Two as Intercorporate Transfers?

If a court were to find that
XXXXX was merely an instrumentality or alter ego of XXXXX, XXXXX should pay Utah sales taxes when XXXXX purchases equipment, since XXXXX's later sales to XXXXX would merely be a transfer within XXXXX's corporate structure, not an interstate resale. XXXXX, however, does not meet Utah's judicial requirements for disregarding a corporation's separate identity. In Colman v. Colman, 743 P.2d 782, 786 (Utah App. 1987) the following test was set forth by the Supreme Court.

"To disregard the
corporate entity under the equitable alter ego doctrine, two circumstances must be shown: (1) Such a unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, but the corporation is, instead, the alter ego of one or a few individuals; and (2) if observed, the corporate form would sanction a fraud, promote injustice, or result in an inequity."

And later affirmed in Envirotech
Corp. v. Callahan, 872 P.2d 487, 499 (Utah App. 1994).

Even if XXXXX's existence
confers a different tax treatment on XXXXX, it does not "sanction a fraud, promote injustice, or result in an inequity.� Additionally, XXXXX has observed the statutory and structural requirements of a "real" corporation. Finally, the Tax Commission has at least twice, as explained below, urged the Utah Supreme Court to find that subsidiaries similar to XXXXX, should, for sales tax purposes, be treated separately from their parent companies.

a. Respecting XXXXX's separate existence doesn't promote injustice or sanction fraud.

Even if the Tax Commission feels
that XXXXX has created XXXXX solely for the purpose of avoiding Utah sales tax, this does not create the kind of fraud necessary to pierce XXXXX's corporate veil. XXXXX ultimately has to pay sales taxes in the jurisdiction where it receives equipment from XXXXX, so XXXXX isn't avoiding sales taxes. Corporate veils are usually pierced when an individual or parent corporation is manipulating a corporate shell to accomplish fraudulent or unjust purposes. For example, inadequately funding a corporation engaged in activities likely to produce tort victims is a typical reason to find a subsidiary the alter ego of a parent. Merely shifting the jurisdiction in which tax is paid does not rise to the level of "fraud, injustice or inequity" required by Utah law.

An empirical study by
Professor XXXXX at XXXXX supports the conclusion that XXXXX's actions are not the fraudulent kind which justify piercing a subsidiary's corporate veil. XXXXX's study indicates that even though piercing a corporation occurs much more frequently with closely held corporations or parent/subsidiary groups than with public corporations, XXXXX, Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036, 1039 (1991), courts seem to require something more egregious than even giving the parent favorable tax treatment. Thompson's analysis of 552 cases between XXXXX and XXXXX indicated that courts pierced the corporate veil of 9 of the 11 cases dealing with fraud, or 82 of the reported cases, but only 41 of the 133 cases dealing with tax avoidance, or 31 of the reported cases. Thompson, supra at 1062. In view of the fact that XXXXX is not avoiding taxation, these statistics are even more compelling in determining whether XXXXX should be recognized for purposes described herein.

b. XXXXX satisfies the structural requirements of a separate corporation.

In addition to the lack of
fraud in its incorporation, XXXXX satisfies most of the structural requirements necessary to maintain its status separate from XXXXX.

Certain factors which are
deemed significant, although not conclusive, in determining whether [the injustice test] has been met include: (1) undercapitalization of a one-man corporation; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) siphoning of corporate funds by the dominant stockholder; (5) nonfunctioning of other officers or directors; (6) absence of corporate records; (7) the use of the corporation as a facade for operations of the dominant stockholder or stockholders; and (8) the use of the corporate entity in promoting injustice or fraud.

Colman v. Colman, 743 P.2d 782, 786 (Utah
App. 1987).

XXXXX has sufficient revenue
to be self-supporting, although it is not making a profit. Additionally, it maintains corporate records distinct from XXXXX's, and has observed the corporate formalities required by the state of Utah, including the formal requirements of incorporation and registration with the Division of Corporations and Commercial Code.

c. The Tax Commission has twice successfully
urged the Utah Supreme Court to find that subsidiaries and parents are separate.

The Tax Court has argued
that a subsidiary like XXXXX should be considered a separate taxable entity. In Ogden Union Railway and Depot Co. v. State Tax Comm'n, 395 P2d 57 (1964) and Institutional Laundry, Inc. v. Utah State Tax Comm'n, 706 P2d 1066 (Utah 1985), the Tax Commission urged the Utah Supreme Court to hold that the subsidiaries in question were separate taxable entities from their parent corporations.

In the first case, the Tax
Commission asserted that a subsidiary does not have to be known by the public before instate sales between the parent and the subsidiary are subject to sales taxes due to their status as two distinct corporations. The Utah Supreme Court agreed. Ogden Union Railway and Depot at

60. In the second case, the Supreme
    Court found that non-profit in-state sales between a parent corporation and its subsidiary laundry company were subject to sales taxes, even though the laundry company (called Institutional Laundry) was clearly not an entity separate from the parent's control." Institutional owned no property and kept no separate corporate records .
    . . Institution existed only for the
    administrative convenience of ~the parent corporation], providing laundry services for the parent on a nonprofit basis." Institutional Laundry at 1067. The Supreme Court found that transactions between the two were taxable since the subsidiary had made the conscious choice to incorporate." Having elected to operate as a corporation, for whatever benefits that separate status conferred upon Institutional and its parent, Institutional must also accept the tax burden and responsibility attendant to its corporate form" The presumption of these cases is clearly that Utah subsidiaries are separate from their parent corporations for sales tax assessment purposes when they are involved in-state, taxable transactions, and should similarly be so recognized when the parents and subsidiaries are involved in interstate, exempt transactions.

2. Do XXXXX's Purchases
Quality for the "Purchased for Resale" Statutory Exemption from Sales Tax Liability?

Assuming that XXXXX is not
merely an instrumentality of XXXXX, its purchase of equipment in Utah (the first step upon which Utah could attempt to impose a sales tax) qualifies for the Utah Code's "purchased for resale" exemption. The Code exempts from sales tax "property purchased for resale in this state, in the regular course of business. Utah Code Ann. 59-12-104(27) ( Supp. 1994 ).

Unlike XXXXX, XXXXX can
easily show that it releases title to the equipment it sells.

In Broadcast
International v. Utah State Tax Commission, 882 that XXXXX did not purchase equipment for resale. The Court found that "Broadcast only transfers use or possession . . . for the length of the service. Id. at 698. In contrast, XXXXX releases all claims to the equipment upon its sale to XXXXX and title passes completely.

TO: XXXXX, Director

FROM: XXXXX, Secretary

DATE: February
10, 1995

SUBJECT: Request for Advisory Opinion - No.
95-006DJ

Attached is a request for an
advisory opinion from XXXXX of XXXXX.
Will you please review the request of XXXXX for an advisory opinion regarding purchases of satellite equipment.

Please expedite this request
as quickly as possible. They need an answer before the XXXXX Legislative Session is over.

Thank you.

XXXXX

Dear XXXXX:

In response to your letter of
XXXXX (copy attached), I am providing you with the following Information.

The questions, concerns and situations which are the subject of your inquiry are at issue before the Auditing Division in an audit of XXXXX. The issues of concern should be resolved in the audit process and, if necessary, available appeal processes resulting from the audit. It would not be appropriate for the Commission to circumvent the audit and appeal process be issuing an opinion based on the relatively limited information at hand. The audit function provides a more efficient method of reviewing the details of the situation as basis for a determination.

Any information you feel will be of import to the audit determination should be provided to the auditors working with your company.

Respectfully,

Alice Shearer

Commissioner