United States

Utah: Sales Tax Applies to Amounts Paid to Affiliate for Employee Time to Repair Tangible Personal Property

Sep 12, 2016
From KPMG TaxWatch

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An Administrative Law Judge (ALJ) for the Utah Tax Commission recently addressed whether a taxpayer owed sales tax on amounts paid to a related corporation for reimbursements of employee labor. Under Utah law, unless an exemption applies, sales and use tax is imposed on amounts paid or charged for repairs or renovations to tangible personal property. In the instant case, a related corporation’s employees installed parts and made repairs to the taxpayer’s machinery and equipment. The taxpayer reimbursed the related corporation for the employees’ time plus an amount to cover payroll costs. The taxpayer and the related corporation were previously a single entity, but they were split into two separate entities in 2010. The labor costs at issue were not invoiced, but were tracked based on employee time sheets and accounted for through internal accounting entries. On audit, the Tax Commission asserted that the amounts paid to the related corporation were actually payments for performing repairs to tangible personal property and therefore sales tax should have been charged. The taxpayer protested this treatment, arguing that the essence of the transaction was sharing employees or payroll reimbursement.

Although a prior Utah ruling provided support for the taxpayer’s position that payroll reimbursements were not taxable, the facts in the prior ruling were distinguishable because the employees involved in the prior ruling did not appear to be performing repairs to tangible personal property. The taxpayer, however, was giving money to a related corporation for the service of repairing the taxpayer’s equipment. The ALJ observed that the tax result might have been different if the taxpayer and the related corporation had not split into two separate entities. However, taxpayers cannot disregard the tax consequences of their chosen business arrangements. Furthermore, although the taxpayer argued that some of the services provided by the related corporation’s employees were not repair services, the taxpayer had not established that any of the transactions were for something other than the repair and renovation of tangible personal property. Please contact Chris Hoge at (801) 237-1350 with questions on this decision.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.