When a multinational company consolidates its delivery-truck fleets from several 100%-owned subsidiaries into one new 100%-owned transportation subsidiary, does that vehicle transfer trigger Utah sales tax?

Plain-English summary

A multinational corporation ("Company") that manufactures and delivers consumer products used several wholly-owned subsidiaries to own and operate its delivery trucks. Company planned to consolidate all transportation activities by creating a new, wholly-owned subsidiary ("TransSub") and having each existing subsidiary transfer its delivery trucks to TransSub in exchange for TransSub stock. Since delivery trucks require title/registration, Company wanted to confirm this wouldn't trigger Utah sales tax.

Utah Code Ann. § 59-12-104(13) exempts "isolated or occasional sales" by people not regularly in business, but that exemption normally doesn't cover vehicles subject to titling and registration. However, Utah Admin. Rule R865-19S-38(C) carves out an exception: a vehicle transfer made as part of a business reorganization, where the transferee's ownership is substantially the same as the transferor's, still counts as an exempt isolated/occasional sale. The rule requires two things to both be true:

1. A business reorganization exists. The Utah Supreme Court's B.J.-Titan Services v. State Tax Commission, 842 P.2d 822 (Utah 1992), initially quoted a traditional corporate-law definition of "reorganization" that's narrower than simply forming a new subsidiary -- but the Court ultimately decided that case on the ownership issue rather than the reorganization definition, which the Commission has since read as giving it latitude on what counts as a "reorganization." As recently as May 1997, the Commission had found that a sole shareholder forming a new wholly-owned subsidiary and transferring delivery vehicles into it satisfied this requirement. Company's plan -- consolidating fleets into a newly formed, wholly-owned TransSub -- was materially the same kind of transaction, so it met the business reorganization requirement.

2. Ownership is substantially the same before and after. In B.J.-Titan, the Commission set an 80% ownership threshold for "substantially the same" ownership, and the Utah Supreme Court upheld that policy as reasonable (in that case, the transferor's 72% ownership of the new entity fell short and the transfer was taxed). Here, Company owned 100% of the subsidiaries transferring the vehicles and would own 100% of the new TransSub -- comfortably clearing the 80% bar.

Because both requirements were met, the Commission held the vehicle transfers qualify as an exempt isolated and occasional sale, with no sales or use tax due. The Commission added the standard caveat that a different underlying fact pattern could produce a different result.

What this means for you

Multinational and multi-subsidiary companies consolidating operations

Moving vehicles (or other titled/registered property) between commonly-owned entities during an internal reorganization can be tax-free in Utah, but only if you clear both prongs of the test: it has to look like a genuine reorganization (not, say, a transfer to an unrelated joint venture), and ownership before and after has to be at least roughly 80% the same. Below that threshold -- as in B.J.-Titan itself, at 72% -- expect the transfer to be taxed.

Businesses forming a new subsidiary to hold a fleet or other titled assets

The Commission has shown some flexibility in treating "creating a new wholly-owned subsidiary and moving assets into it" as a qualifying reorganization, even though the strict historical legal definition of "reorganization" is narrower. Still, get your own advisory opinion if your transaction departs from a straightforward wholly-owned-subsidiary transfer.

Accountants and tax professionals

This ruling is a clean, citable application of the B.J.-Titan 80%-ownership rule and the Commission's broader reading of "business reorganization" under Rule R865-19S-38(C) -- useful precedent for any titled-vehicle transfer within a corporate family.

Common questions

Q: Is transferring vehicles between commonly-owned companies always tax-free in Utah?
A: No -- vehicles are normally excluded from the isolated/occasional sale exemption. It's only exempt if the transfer is part of a genuine business reorganization AND the ownership before and after is substantially the same (at least roughly 80%).

Q: What ownership percentage counts as "substantially the same"?
A: The Commission's policy, upheld by the Utah Supreme Court in B.J.-Titan, sets the bar at 80%. Below that (72% in B.J.-Titan itself), the transfer was taxed.

Q: Does creating a brand-new subsidiary count as a "business reorganization"?
A: The Commission has interpreted this requirement with some flexibility, and has found that transferring vehicles into a newly formed, wholly-owned subsidiary can satisfy it -- as it did here.

Q: Does this ruling apply to my company's reorganization?
A: No. It binds the Commission only for the requesting company and the facts described, and the Commission expressly noted a different fact pattern could yield a different result. Another taxpayer can't rely on it as binding, though it may carry some persuasive weight in a dispute with closely similar facts.

Citations and references

Statutes, rules, and cases:

• § 59-12-104(13) (isolated/occasional sale exemption; vehicles generally excluded)
• Utah Admin. Rule R865-19S-38(C) (business reorganization exception)
• B.J.-Titan Services v. State Tax Commission, 842 P.2d 822 (Utah 1992) (80% ownership threshold)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original page: https://files.tax.utah.gov/tax/commission/ruling/98-070.htm

Original ruling text

98-070

Response
October 21, 1998

REQUEST
LETTER

October 21, 1998

Re: Request
for Advisory Opinion on Sales Tax Issue

Dear Ms. Rees:

This
request is a follow up to a telephone conversation I recently had with Mr. Gil Naisbitt,
Deputy Director of the Auditing Division, wherein we discussed potential sales
tax consequences of a business reorganization for one of our firm's clients. On
behalf of this client, I would like to request a written advisory opinion
addressing the following situation:

Our
client who I will refer to as COMPANY , is a multi-national corporation with
numerous wholly owned subsidiaries. COMPANY
maintains a presence in the State of Utah. COMPANY manufactures and delivers consumer products
for retail consumption. These products are delivered by wholly owned
subsidiaries of COMPANY which own
delivery trucks used for this purpose. Each of the subsidiaries previously paid
any applicable sales tax on the purchase of these delivery trucks COMPANY intends to reorganize some of these
subsidiaries in order to consolidate transportation activities. The new
subsidiary (COMPANY B) would be wholly owned either directly or indirectly by
COMPANY and would perform all transportation
functions for COMPANY .

The
new COMPANY B would be created through a stock reorganization whereby the
subsidiaries which currently perform transportation and delivery services would
transfer their fleets of vehicles to COMPANY B in exchange for stock in COMPANY
B.

It
appears that Utah law would not require COMPANY or its subsidiaries to collect additional sales taxes on this
reorganization. Utah Code Annotated � 59-12-104(13)(1998) exempts from sales
tax "isolated or occasional sales by persons not regularly engaged in
business." That exemption does not generally apply to the "sale of
vehicles required to be titled or registered under the laws of this
state." Id. However, the administrative rule interpreting the exemption
recognizes that when the transfer is made pursuant to a business reorganization
and "the ownership of the transferee organization is substantially the
same as the ownership of the transferor organization," no sales tax will
be assessed. Utah Admin.Rules R865-19S-38.

The
Utah Supreme Court addressed this issue in BJ-Titan Services v. State Tax
Commission, 842 P.2d 822 (Utah 1992), wherein it held that a transfer of motor
vehicles pursuant to a business reorganization where the ownership of the
transferor and transferee was substantially the same would not be taxable. The
Tax Commission had concluded that the vehicle transfer at issue in BJ-Titan was
taxable because the transferor (BJ-Hughes) only owned 72% of the newly created
corporation (BJ- Titan). According to the Commission, the creation of a new
business entity was not a reorganization unless the ownership of the transferee
and transferor was substantially the same (at least 80%). The Court held that
the 80% rule adopted by the Commission was reasonable and upheld the Commission
on its assessment of sales tax for the vehicle transfers. The reorganization contemplated by COMPANY
will result in a new subsidiary which will be 100% owned either directly or
indirectly by the same entity which currently owns 100% of the transferor
subsidiaries. It appears that under Utah Code Annotated 59-12-104(13) and Rule
38 there would be no sales tax consequences resulting from the transfers of the
vehicles to the new subsidiary. Please confirm

this interpretation. I appreciate your prompt
consideration of this matter. If you have any

questions, you may contact me at 366-6060.

Sincerely,

NAME

November
30, 1998

NAME

COMPANY

RE: Advisory
Opinion - Sales Tax Liability of Transfer of Motor Vehicles

NAME,

We
have received your request for an advisory opinion concerning specific sales
tax consequences for your client, referred to as COMPANY . COMPANY
is consolidating the transportation activities of its various wholly
owned subsidiaries, which currently own delivery trucks. To do so, each of these subsidiaries is
transferring its delivery trucks to another newly- formed subsidiary referred
to as TransSub, which is also wholly owned by COMPANY . You specifically ask if these transfers are
transactions subject to sales tax.

Utah
Code Ann. �59-12-104(13) provides for a sales and use tax exemption for
isolated and occasional sales by persons not regularly engaged in
business. It further provides that
sales of vehicles subject to titling and registration do not qualify for this
exemption. However, an exception that
does extend the exemption to certain vehicle sales is found in Utah Admin. Rule
R865-19S-38(C), which states that�any transfer of a vehicle in a business reorganization
where the ownership of the transferee organization is substantially the same as
the ownership of the transferor organization shall be considered an isolated or
occasional sale.� The rule requires two
conditions to be met: (1) the existence of a business reorganization; and (2)
the ownership of the two parties conducting the transaction to be substantially
the same. Let us apply these two
requirements to the fact situation you present.

Business
Reorganization. In B.J.-Titan
Services v. State Tax Commission, 842 P.2d 822 (Utah 1992), the Utah
Supreme Court addressed the definition of a �reorganization� as it is applies
to the rule, stating that �[t]he general rule on organizations is as follows:

A
reorganization . . . is not ordinarily the combination of several existing corporations,
but is simply the carrying out by proper agreements and legal proceedings of a
business plan or scheme for winding up the affairs of, or foreclosing a
mortgage or mortgages upon, the property of insolvent corporations, and the
organization of a new corporation to take over the property and business of
the distressed corporation.

19 Am. Jur. 2d Corporations � 2514 (1986). Clearly,
under this rule, a transfer of assets by two separate entities to create a
partnership, a new legal entity, is not a "business reorganization."�

However,
the Supreme Court did not decide B.J. Titan on the �business
reorganization� issue, but instead deferred to the �substantially same
ownership� issue, adding, �[h]owever, even assuming that a reorganization
includes the transfer of assets by one corporation to another entity, the
ownership of the transferee and transferor in this case is not substantially
the same.� The Commission has
interpreted this language and the Court�s reliance on the latter issue as
allowing it a certain amount of latitude when determining if the �business
reorganization� requirement is met.

As
recently as May, 1997, the Commission determined that the following situation
satisfied Rule R865-19S-38(C), thus
meeting the �business reorganization� requirement. In that case, a corporation with only one shareholder created a
wholly owned subsidiary corporation and transferred all of its delivery
vehicles to the newly-created subsidiary.
This transfer was deemed an �isolated or occasional sale� and received
the sales tax exemption.

The
fact situation you present concerning COMPANY
and COMPANY A is a situation similar to that in the paragraph
above. Accordingly, the transfer of
vehicles to TransSub would meet the �business
reorganization� requirement as interpreted by the Commission.

Substantially
Same Ownership. In B.J. Titan,
the Commission determined that the transferor must hold at least an 80%
ownership in the tranferee before the ownership of the transferee is considered
to be substantially the same as the transferor. The Supreme Court upheld this �80% policy.� As COMPANY
owns 100% of the subsidiaries transferring the vehicles and will own
100% of the new, tranferee subsidiary, the �substantially same ownership�
requirement is also met.

As
both of the requirements for Rule R865-19S-38(C) will be met by a transfer such
as the one you describe in your request, the transfer from COMPANY to COMPANY A is an isolated and occasional
sale and is subject to the sales and use tax exemption. Should the actual transfer involve a fact
situation different from that submitted in the request, an opinion other than
the one offered here could result.

Please
contact us if you have any other questions.

For
the Commission,

Joe
B. Pacheco, CPA

Commissioner

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