Broadcast Intern., Inc. v. Utah State Tax Com'n
| Decision Date | 30 September 1994 |
| Docket Number | No. 930527-CA,930527-CA |
| Citation | 882 P.2d 691 |
| Parties | BROADCAST INTERNATIONAL, INC., Petitioner, v. UTAH STATE TAX COMMISSION, Respondent. |
| Court | Utah Court of Appeals |
Randy M. Grimshaw and Maxwell A. Miller, Salt Lake City, for petitioner.
Jan Graham and Clark L. Snelson, Salt Lake City, for respondent.
Before GREENWOOD, JACKSON and ORME, JJ.
This case comes to us on a petition for review of the Utah State Tax Commission's order assessing sales and use tax and imposing a ten percent penalty against Broadcast International, Inc. The Tax Commission's assessment is affirmed in part and remanded in part. The imposition of the penalty is affirmed.
Neither party disputes the material facts. Broadcast is a Utah corporation that provides the services of a private satellite network. Its subscribers are typically large retail businesses such as those operated by American Stores, Fleming Foods, and Safeway. Broadcast's services include background music, in-store advertising, electronic mail, video conferencing, stock and commodity quotes, check verification, and credit card services. Each subscriber selects the services it will receive from Broadcast and the content of such services. For example, a subscriber chooses the type of background music it will receive, makes arrangements for its own in-store advertising directly with advertisers, and establishes the time and content of video conferences. Broadcast delivers the selected services over its satellite network, according to the subscriber's instructions.
Broadcast services its subscribers by means of a satellite dish and mount, low noise amplifier, connecting cable, printer, and receiver at each location. If a particular subscriber already has some of the equipment necessary to receive Broadcast's services, such equipment is incorporated into the system installed by Broadcast.
Broadcast's employees or contractors install the required system components at each subscriber's location. The satellite dish is typically mounted on the building's roof and attached to the building's framework. Cables connect the external equipment to the other components, most of which are usually located in a secure office.
Broadcast's services are provided pursuant to "service agreements" negotiated between Broadcast and each subscriber. These contracts specify the types of service the subscriber will receive from Broadcast and their price. Broadcast is bound by its service agreements to provide its services throughout the subscriber's hours of operation.
The contracts contain no recitation that the subscriber is also purchasing equipment. Rather, Broadcast is obligated to furnish, install, and maintain all equipment necessary for delivery of its services. Subscribers are contractually prohibited from moving the equipment, adding equipment, or altering the equipment. The service agreements specifically provide that equipment furnished by Broadcast remains Broadcast's property. Such equipment is labeled as Broadcast's property and also marked with Broadcast's inventory number. The equipment in question is carried as an asset on Broadcast's financial records. In addition, subscribers are contractually bound to indemnify Broadcast for damage, destruction, or loss to Broadcast's equipment while it is at the subscriber's location. It is possible for Broadcast to move its equipment from one location to another. However, such relocation has rarely been necessary because subscribers have usually renewed their contracts with Broadcast.
Once Broadcast has installed the equipment, the subscriber communicates any desired changes in service to Broadcast, which then implements those changes from its headquarters in Midvale, Utah. The subscribers cannot make such changes in service themselves. Broadcast's service staff visits each installation as required to maintain the system in good working order, averaging only about one visit per year to each site.
Broadcast purchased the majority of its equipment from out-of-state vendors. Such equipment was shipped directly from the vendors to the installation site. In most cases, such sites were also out of state. The Tax Commission has not assessed Utah sales or use tax on these out-of-state transactions.
However, the Tax Commission did assess sales tax on Broadcast's purchases of equipment from Utah vendors, primarily "Digistar" receivers purchased from CDI Corporation in Orem, Utah. CDI delivered the receivers to Broadcast's Midvale office. They were stored in Utah, then shipped to installation sites typically outside Utah. At first, CDI collected sales tax on its sales of receivers to Broadcast. Later, after Broadcast provided CDI with an exemption certificate stating that it purchased the receivers for resale, CDI stopped collecting sales tax.
From the time it began doing business in 1985 until 1988, Broadcast had no system for reporting and paying sales and use tax on its acquisitions of equipment. Broadcast developed such a system during 1988 and attempted to apply it retroactively to all prior equipment purchases. Under its system, Broadcast treats sales or use tax as being due in the jurisdiction in which the equipment is installed, and as being payable by Broadcast on the amount paid by Broadcast for the equipment. With respect to equipment purchased from out-of-state vendors and used in Utah installations, Broadcast pays use tax to Utah on such equipment as though it is the consumer, i.e., based on the purchase price of the equipment.
In a transaction unrelated to Broadcast's equipment purchases, Broadcast provided a blank master tape to Merrill Osmond Enterprises and allowed Osmond to use Broadcast's facilities to record on the master tape. Osmond produced the tape and duplicated it for retail distribution. Broadcast did not charge sales tax on the transaction, nor did it request an exemption certificate from Osmond until after the Tax Commission's Audit Division began its investigation. Osmond later furnished an exemption certificate, but it was undated and did not contain an exemption number or a sales tax license number.
On August 1, 1991, after comprehensive review of Broadcast's business activities, the Audit Division assessed Broadcast with unpaid sales and use tax in the amount of $241,809.04 for the period of January 1987 to September 1990. It also imposed a ten percent negligence penalty in the amount of $24,180.92 and interest at the statutory rate 1 in the amount of $47,456.09. Broadcast filed a timely appeal of the Audit Division's assessment with the Tax Commission, claiming it was wrongfully denied its request for sales and use tax exemptions for its purchases of equipment.
Following a formal hearing, the Tax Commission affirmed the Audit Division's assessment and denied Broadcast's appeal. The Tax Commission first concluded that the equipment purchased and stored in Utah was not purchased or stored for resale, and therefore was subject to taxation. Second, the Tax Commission concluded that Broadcast, a Utah corporation, did not engage in transactions considered exempt as part of interstate commerce insofar as it purchased stored, and took delivery of equipment in Utah. The Tax Commission further held that Broadcast was not entitled to claim a credit for taxes paid to other jurisdictions. The Tax Commission ruled that because the first taxable event occurred in Utah, Utah tax liability preceded any tax liability imposed by other jurisdictions.
To summarize, the Tax Commission held Broadcast liable for sales or use tax on equipment purchased from Utah vendors, or purchased from out-of-state vendors and stored in Utah, and denied Broadcast credit for sales or use taxes paid to other jurisdictions.
The second issue before the Tax Commission concerned the imposition of tax on Broadcast's sale of a master recording tape to Osmond. The Tax Commission found that Broadcast provided both the blank master tape and the recording facilities from which the recorded master tape was produced. The Tax Commission concluded that Broadcast's sale of the recorded master tape to Osmond constituted a sale of tangible personal property subject to sales and use tax. In so holding, the Tax Commission noted that Osmond's inaccurate and incomplete exemption certificate, obtained by Broadcast after the Audit Division had begun its investigation, was insufficient to insulate Broadcast from tax liability.
The Tax Commission also affirmed the Audit Division's decision to add a ten percent negligence penalty to Broadcast's tax bill. The Audit Division imposed the negligence penalty on the grounds that Broadcast failed to organize and conduct its business with reasonable prudence so as to provide for proper payment of taxes and had improperly used a resale exemption certificate in its dealings with CDI. In affirming the imposition of the penalty, the Tax Commission noted "Broadcast's inattention to its sales and use tax liability during the initial portion of the audit period, its adoption of inconsistent positions with respect to its Utah and out-of-state installations, and its neglect of sales and use liability on the Osmond transaction."
The primary issues on appeal are whether the Tax Commission erred (1) in determining that Broadcast did not purchase or store its equipment for the purpose of resale, and that the equipment was therefore not exempt from sales and use tax; (2) in denying Broadcast credit for use taxes paid to jurisdictions other than Utah; (3) in concluding that the exemption certificate obtained by Broadcast in the Osmond transaction was flawed, that the transaction constituted a sale of tangible personal property, and, therefore, that the recorded master tape was subject to sales tax; and (4) in determining that a ten percent negligence penalty was appropriately added to...
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