Union Pacific R. Co. v. Auditing Div. of Utah State Tax Com'n

• Decision Date: 06 November 1992
• Docket Number: No. 910150,910150
• Citation: 842 P.2d 876
• Parties: UNION PACIFIC RAILROAD COMPANY, Petitioner, v. AUDITING DIVISION OF THE UTAH STATE TAX COMMISSION, Respondent.
• Court: Utah Supreme Court

Page 876

842 P.2d 876

UNION PACIFIC RAILROAD COMPANY, Petitioner, v. AUDITING DIVISION OF THE UTAH STATE TAX COMMISSION, Respondent.

No. 910150.

Supreme Court of Utah.

Nov. 6, 1992.

Robert A. Peterson, Salt Lake City, for Union Pacific.

R. Paul Van Dam, Rick Carlton, Salt Lake City, for Tax Com'n.

DURHAM, Justice:

In proceedings before the Utah State Tax Commission, Union Pacific Railroad Company sought relief from a sales and use tax deficiency order imposed against it by the Auditing Division of the Commission. After a formal hearing, the Commission determined that (1) Union Pacific owed sales and use tax on its in-state purchases of diesel fuel and ballast ¹ even though Union Pacific transported the materials for its own use outside of Utah; (2) Union Pacific owed sales and use tax on certain services performed in Oregon on cross ties (commonly known as railroad ties) it owned; and (3) in the future, the Commission may assess a sales tax on the full cost of repair services Union Pacific performs on the railcars of other carriers. Union Pacific now seeks review of these determinations. It also challenges the Auditing Division's imposition of a penalty on the deficiency. We affirm the first determination, reverse the second, and decline to review the third. We also vacate the imposition of the penalty and remand the issue for further review by the Commission.

Because the issues have different factual backgrounds and standards of review, we set forth the facts and standard of review separately for each issue.

I. TAXABILITY OF IN-STATE PURCHASES OF BALLAST AND FUEL USED OUTSIDE UTAH

Union Pacific, through its fuel division located in Omaha, Nebraska, arranged to purchase diesel fuel from Amoco's Salt Lake City operation. Amoco loaded the fuel into Union Pacific tank cars and turned them over to Union Pacific at the railhead. Amoco's sales invoice specifies that Amoco delivered the fuel f.o.b. at Amoco's Salt Lake City operation and that a common carrier shipped the fuel. Union Pacific produced "waybill" ² summaries indicating the destination of each tank car of fuel.

Union Pacific also generated waybills showing the destination of each railcar load of ballast purchased from three Utah vendors. The vendors, MONROC, RME, and UP Resources, loaded the ballast into Union Pacific railcars, and Union Pacific then transported the ballast to its ultimate destination. One sales invoice for the purchase of ballast between MONROC and Union Pacific states, "It is hereby agreed that sale is consummated & title passes at plant site." The record does not include invoices or purchase agreements between RME or UP Resources and Union Pacific.

Union Pacific did not pay sales tax on the portion of ballast it transported for its own use outside Utah on purchases from two of the three Utah ballast vendors. Nor did Union Pacific pay sales tax on the portion of the in-state diesel fuel purchases that it transported for its own use outside Utah. The Commission upheld a deficiency order against Union Pacific for sales and use taxes on these purchases. Union Pacific claims that the Commission's rules on interstate sales exempt these purchases. See Utah Admin.R. 865-19-44S.

Section 16 of the Utah Administrative Procedures Act (UAPA) governs the standard of review in this matter. Utah Code Ann. § 63-46b-16. Because Union Pacific claims that the Commission's decision does not comport with the Commission's interstate sales rule, possible grounds for relief include section 63-46b-16, subsections 4(a) and 4(h)(ii). Section 63-46b-16(4)(a) provides for judicial relief if the "rule on which [an] agency action is based[ ] is unconstitutional on its face or as applied." Subsection (4)(h)(ii) provides for judicial relief if agency action is "contrary to a rule of the agency." Union Pacific did not challenge the constitutionality of the Commission's rule or its application. We therefore conclude that Union Pacific bases this claim on subsection (4)(h)(ii).

Section 63-46b-16(4)(h)(ii) refers to rules promulgated by the agency itself. Because courts should uphold agency rules if they are reasonable and rational, see Williams v. Public Serv. Comm'n, 754 P.2d 41 (Utah 1988), courts should also uphold reasonable and rational departures from those rules absent a showing that the departure violated some other right. We will thus employ an intermediate standard (one of some, but not total, deference) in reviewing Union Pacific's claim that the Commission erred in applying its rules.

Union Pacific argues that the Commission's decision to assess sales tax on Union Pacific's purchases of fuel and ballast transported for Union Pacific's use outside of Utah does not comport with the Commission's rule on interstate commerce, codified at Utah Admin.R. 865-19-44S (rule 44S). The rule reads as follows:

A. Sales made in interstate commerce are not subject to the sales tax imposed. However, the mere fact that commodities purchased in Utah are transported beyond its boundaries is not enough to constitute the transaction of a sale in interstate commerce. When the commodity is delivered to the buyer in this state, even though the buyer is not a resident of the state and intends to transport the property to a point outside the state, the sale is not in interstate commerce and is subject to tax.

B. Before a sale qualifies as a sale made in interstate commerce, the following must be complied with:

1. the transaction must involve actual and physical movement of the property sold across the state line;

2. such movement must be an essential and not an incidental part of the sale;

3. the seller must be obligated by the express or unavoidable implied terms of the sale, or contract to sell, to make physical delivery of the property across a state boundary line to the buyer[.]

C. Where delivery is made by the seller to a common carrier for transportation to the buyer outside the state of Utah, the common carrier is deemed to be the agent of the vendor for the purposes of this section regardless of who is responsible for the payment of the freight charges.

Subsection A makes clear that the mere fact that Union Pacific transported the fuel and ballast out of Utah does not qualify the purchases for the interstate sales exemption. Therefore, Union Pacific must look to subsections B and C to exempt the fuel and ballast purchases.

Subsection B imposes three requirements that Union Pacific must meet to qualify for the exemption. Without examining the first two requirements, we conclude that Union Pacific did not qualify for the interstate sales exemption under subsection B(3) because the fuel and ballast vendors were not obligated to deliver Union Pacific's purchases outside Utah. Amoco's sales invoice for the purchase of fuel specified that Amoco delivered the fuel f.o.b. to Amoco's Salt Lake City operation. The sales invoice for the purchase of ballast from MONROC indicated that title to the ballast passed at MONROC's pit in Utah. Moreover, the record did not contain evidence of any contractual obligation of Amoco, MONROC, RME, or UP Resources to deliver Union Pacific's purchases across the state boundary. ³ In short, the evidence supports the conclusion that physical delivery occurred in Utah when the vendors loaded the fuel and ballast on Union Pacific's cars and that the vendors had no obligation to deliver the fuel or ballast out of state. We therefore hold that the Commission made a rational and reasonable determination that Union Pacific did not qualify for the interstate sales exemption under subsection B.

Subsection C presents the question of whether Union Pacific should qualify for the exemption because of its status as a common carrier. All railroad companies are common carriers under the Utah Constitution. Utah Const. art. XII, § 12. Union Pacific argues that because subsection C treats a common carrier as "the agent of the vendor," when a common carrier delivers material out of Utah it is the equivalent of the vendor's making direct delivery to the out-of-state purchaser. The Commission rejected this contention, holding that Union Pacific took delivery of the fuel and ballast in the capacity of purchaser and consumer and not in the capacity of common carrier.

Both Union Pacific and the Commission offer plausible constructions of subsection C of the interstate sales exemption rule. Although our conclusion might be different under a correction-of-error standard, we conclude that the Commission made a reasonable and rational decision. Subsection C seems to contemplate a common carrier other than the buyer. The rule speaks of delivery to "a common carrier for transportation to the buyer." If the common carrier is the buyer, there is no need for transportation to the buyer and the rule does not apply. Furthermore, while courts should generally construe taxing statutes favorably to the taxpayer and strictly against the taxing authority, "the reverse is true of exemptions." Parson Asphalt Prods., Inc. v. State Tax Comm'n, 617 P.2d 397, 398 (Utah 1980). We therefore affirm the Commission's ruling on this question.

II. TAXABILITY OF CROSS TIES

In order to meet its cross tie (railroad tie) needs, Union Pacific purchased raw logs from various places and shipped them to an independent tie treating plant in Oregon. The plant treated the ties with creosote, drilled holes for spikes, and milled the ties to ensure uniform size. After the treating plant completed this work, Union Pacific transported the ties to Utah and installed them there. Union Pacific then paid sales and use tax on them based only on the cost of the raw logs plus the cost of the creosote treatment. The Commission upheld a deficiency order requiring Union Pacific to include the cost of the drilling and milling in the amount taxed on the cross ties. The Commission concluded that "the cost[s] involved in creating the installed products, such as milling costs, represent services rendered in...