BJ-Titan Services v. State Tax Com'n, BJ-TITAN

• Decision Date: 31 March 1992
• Docket Number: No. 900368,BJ-TITAN,900368
• Citation: 842 P.2d 822
• Parties: SERVICES, Petitioner, v. STATE TAX COMMISSION, Respondent.
• Court: Utah Supreme Court

Page 822

842 P.2d 822

BJ-TITAN SERVICES, Petitioner, v. STATE TAX COMMISSION, Respondent.

No. 900368.

Supreme Court of Utah.

March 31, 1992.

Rehearing Denied June 5, 1992.

R. Paul Van Dam, Brian Tarbet, Salt Lake City, for State Tax Com'n.

Randy M. Grimshaw, Maxwell A. Miller, Richard M. Marsh, Salt Lake City, for BJ-Titan.

STEWART, Justice:

BJ-Titan Services Company ("BJ-Titan") seeks review of the Utah State Tax Commission's ruling which imposed sales and use taxes on BJ-Titan's oil and gas well stimulation services and on a transfer of motor vehicles from BJ-Hughes Holding Company ("BJ-Hughes") to BJ-Titan. We reverse in part and remand.

FACTS

The basic facts are undisputed. The appeal before the Commission involved two consolidated cases: Hughes Tool Co. v. Auditing Division of the Utah State Tax Commission, Appeal No. 88-1500, filed May 31, 1988, and BJ-Titan Services Co. v. Auditing Division of the Utah State Tax Commission, Appeal No. 88-1644, filed June 24, 1988. The Auditing Division of the Utah State Tax Commission assessed additional sales and use taxes against Hughes Tool Company in the amount of $239,842.89 for the period October 1, 1983, to March 31, 1985, and against BJ-Titan Service Company in the amount of $116,574.11 for the period April 1, 1985, to September 30, 1986. BJ-Titan appealed the assessment to the Utah State Tax Commission.

In April 1985, Hughes Tool Company, through its holding company, BJ-Hughes, and Titan Services, Incorporated ("Titan Services"), combined to form BJ-Titan, a general partnership. BJ-Hughes contributed 72 percent of BJ-Titan's assets, and Titan Services contributed 28 percent. Accordingly, BJ-Hughes received a 72 percent interest in the partnership, and Titan Services received a 28 percent interest. Assets contributed by BJ-Hughes included certain motor vehicles, titled and registered in Texas. BJ-Titan did not pay a sales and use tax on the vehicle transfers. The Auditing Division included the sales and use tax on the transfer in its assessment against BJ-Titan.

BJ-Titan provides oil and gas well stimulation and stabilization services. The well stimulation services generally consist of three different activities: cementing, hydraulic fracturing, and acidizing. Cementing is the placement of cement and other slurry compositions into various places in the well. BJ-Titan uses a special grade of Portland Cement in combination with any of 54 additives, depending on well conditions. The most important part of cementing is the injection of the cement slurry between the well hole and the well casing. Once poured, the cement permanently affixes the casing to the surrounding hole and cannot be removed. The cementing process stabilizes the well and isolates producing zones within the well. Hydraulic fracturing extends the bore laterally by injecting fluids into the well. Acidizing is an extension of hydraulic fracturing and uses hydrochloric acid in combination with other agents to improve well flow capacity. A substantial portion of BJ-Titan's audit deficiency relates to cementing services. ¹

BJ-Titan delivers its products to the well site and makes recommendations to the well operators regarding the precise formulas to be used and the method of placement in the well. Well operators decide whether to accept or reject the recommendations. Contracts between BJ-Titan and operators contain a specific provision which states that "work done by BJ-Titan shall be under the direction, supervision and control of the owner, operator, or his agent and BJ-Titan will perform the work as an independent contractor and not as an employee or agent of the owner or operator." BJ-Titan uses specialized equipment and trained personnel in providing stimulation services.

BJ-Titan bills customers for a lump sum and does not separately itemize labor and materials. The price, however, includes a charge for sales tax on the materials. BJ-Titan then remits the collected tax to the State Tax Commission. Based on the amount of tax remitted, the materials portion comprises on average about 30 percent of a total contract price. BJ-Titan does not pay sales tax on the materials it purchases.

The parties dispute exactly what BJ-Titan's customers purchase. The Commission contends that BJ-Titan's customers purchase the final product (the cement foundation and chemical materials) in the hole where it has its only value and that the product acquires value only after the materials and services together have been provided. BJ-Titan asserts that its customers actually purchase improved well performance, rather than the materials used to achieve that result.

COMMISSION'S RULINGS

The Commission affirmed the Audit Division's assessment and denied BJ-Titan's petition. The Commission found that BJ-Titan had failed to establish by a preponderance of the evidence that oil and gas stimulation services and the transfer of motor vehicles from BJ-Hughes to BJ-Titan were exempt from sales and use tax. The Commission first concluded that "the portion of its product which BJ-Titan has labeled as services is really charges 'for fabrication or installation which is part of the process of creating a finished article of tangible personal property' (the cement which is sold to the well operators)...." The Commission further found, "Where the Petitioner is in the business of oil and gas stimulation, the Petitioner operates as a retailer of tangible personal property. The services that it provides to its customers in the sale of these products is a necessary component of the final product." Second, the Commission concluded that BJ-Titan was not a real property contractor within the meaning of the administrative rules and, thus, was not exempt from sales and use taxes. Third, the Commission concluded that the transfer of motor vehicles was subject to sales and use taxes. Finally, the Commission concluded that BJ-Titan failed to establish that the Commission had a formal policy of taxing motor vehicle transfers on an aggregate basis, i.e., taxing the value at the proportion of the noncontributing partner's equity ownership in the partnership.

ISSUES ON APPEAL

The primary issues on appeal are whether the Commission erred (1) in determining that BJ-Titan operates as a retailer of tangible personal property in providing cementing, acidizing, and fracturing to its customers; (2) in concluding that BJ-Titan was not a real property contractor; (3) in determining that the transfer of vehicles was subject to sales and use taxes; and (4) in rejecting BJ-Titan's argument that the Commission had an established policy of taxing motor vehicle transfers on an aggregate basis.

DISCUSSION

Standard of Review

As the proceedings in these petitions commenced after January 1, 1988, the Utah Administrative Procedures Act ("UAPA"), Utah Code Ann. §§ 63-46b-1 to -22 (1989), governs the standards of review. See Utah Code Ann. § 63-46b-22 (1989); Morton Int'l, Inc. v. Auditing Div. of Utah State Tax Comm'n, 814 P.2d 581, 583 (Utah 1991); Savage Indus., Inc. v. Utah State Tax Comm'n, 811 P.2d 664, 668-69 (Utah 1991).

Well Stimulation Services

We first address whether the Commission erred in determining that BJ-Titan operates as a retailer of tangible personal property in providing cementing, acidizing, and fracturing to its customers and, therefore, that sales and use taxes should be imposed on all charges billed to its customers. Because the tax was assessed for the years 1983 to 1986, statutes from those years are controlling.

Since the 1930s, Utah law has imposed a tax on retail sales of tangible personal property. See Utah Code Ann. § 59-15-4(1) (Supp.1986) (currently § 59-12-103(1)(a) (1987 & Supp.1991)). The Code defines a retail sale as every sale by a retailer or wholesaler to a user or consumer and not for resale. Id. § 59-15-2(4), (5), (6), (7) (Supp.1986) (currently § 59-12-103(1)(a) (1987 & Supp.1991)). However, the Code exempts from tax sales of tangible personal property to a manufacturer which becomes an ingredient or component part of other tangible personal property. Utah Code Ann. § 59-15-2(7) (Supp.1986) (currently § 59-12-104(27) (Supp.1991)). Although the Legislature did not define the term "tangible personal property" until 1991, the Commission's rules in effect in 1986 defined it as "all tangible or corporeal things and substances which are dealt in or capable of being possessed or exchanged." Utah Admin.R. 865-26S (1986). ²

A review of our case law analyzing these provisions reveals two emerging lines of theory. The first, known as the essence of the transaction theory, focuses on the nature of what was sold and whether it primarily entails tangible personal property. See Mark O. Haroldsen, Inc. v. State Tax Comm'n, 805 P.2d 176 (Utah 1990); Snarr Advertising, Inc. v. Utah State Tax Comm'n, 20 Utah 2d 55, 432 P.2d 882 (1967); McKendrick v. State Tax Comm'n, 9 Utah 2d 418, 347 P.2d 177 (1959); Young Electric Sign Co. v. Utah State Tax Comm'n, 4 Utah 2d 242, 291 P.2d 900 (1955); see also Thorne and Wilson, Inc. v. Utah State Tax Comm'n, 681 P.2d 1237 (Utah 1984). This theory examines the transaction as a whole to determine whether the essence of the transaction is one for services or for tangible personal property. The analysis typically requires a determination either that the services provided are merely incidental to an essentially personal property transaction or that the property provided is merely incidental to an essentially service transaction. Since the law imposes a tax only on the sale of tangible personal property, transactions that are essentially services are not taxable. ³

The second theory, known as the ultimate user or consumer theory, focuses on whether a retail sale is made to a user or consumer and not for resale. See Tummurru Trades, Inc. v. Utah State Tax Comm'n, 802 P.2d 715 (Utah 1990); Hardy v. State Tax Comm'n, 561 P.2d 1064 (Utah 1977); Sine v. State Tax Comm'n, 15 Utah 2d 214, 390 P.2d...