BEFORE THE STATE BOARD OF EQUALIZATION

FOR THE STATE OF WYOMING

IN THE MATTER OF THE APPEAL OF )

UNION PACIFIC RAILROAD COMPANY )

FROM A SALES AND USE TAX AUDIT ) Docket No. 2000-67

ASSESSMENT DECISION BY THE EXCISE )

DIVISION OF THE DEPARTMENT OF REVENUE )

_________________________________________________________________________________________________________________________

FINDINGS OF FACT

CONCLUSIONS OF LAW

DECISION AND ORDER

_________________________________________________________________________________________________________________________



APPEARANCES

For the Union Pacific Railroad Company (Petitioner): Gregory C. Dyekman, Dray, Thomson & Dyekman, Cheyenne, Wyoming.

For the Department of Revenue (Department): Cathleen D. Parker, Assistant Attorney General, Cheyenne, Wyoming.



DIGEST

Pursuant to notice duly given to all parties in interest, this matter came on for hearing on the 22nd day of June, 2001, at 9:00 a.m. in the Board Hearing Room, Herschler Building, 122 West 25th Street, Cheyenne, Wyoming, and was heard by the State Board of Equalization (Board), consisting of Chairman Edmund J. Schmidt, Vice Chairman Roberta A. Coates, and Board Member Sylvia Lee Hackl. This appeal arises from a decision of the Department assessing Petitioner on nonpayment of sales tax for ballast used in the maintenance and construction of railroad beds.

ALL STATUTORY CITATIONS USED IN THIS DECISION AND ORDER REFERENCE TITLE 39 PRIOR TO RECODIFICATION, WHICH WAS EFFECTIVE MARCH 6, 1998.



JURISDICTION

Upon application of any person adversely affected, the Board is mandated to review final Department actions concerning state excise taxes, Wyo. Stat. 39-1-304(a), and to "[h]old hearings after due notice in the manner and form provided in the Wyoming Administrative Procedure Act and its own rules and regulations of practice and procedure." Wyo. Stat. 39-1-304(a)(ix).

The Board is required to "[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes, in accordance with the rules, regulations, orders and instructions prescribed by the department." Wyo. Stat. 39-1-304(a)(iv). The rules of practice and procedure for appeals before the Board involving tax matters contemplate appeals from final administrative decisions of the Department. Rules, Wyoming State Board of Equalization, Chapter 2, 3. The rules require that appeals be filed with the Board within thirty days of any final administrative decision. Rules, Wyoming State Board of Equalization, Chapter 2, 5.



DISCUSSION

Union Pacific Railroad Company, Petitioner, purchases ballast from Granite Canyon Quarry in Laramie County, Wyoming. Ballast is granite rock, mined and fragmented to certain specifications, which is used to construct and maintain railroad beds. Petitioner uses the ballast from Granite Canyon Quarry in its operations throughout several mid-western and western states.

Pursuant to a 1975 agreement between Petitioner and the Department, Petitioner did not pay sales tax to the State of Wyoming on ballast purchased in Wyoming, but instead paid use tax to the state where the ballast was first removed from inventory for use. This practice, known as the "UP authority,"(1) came before the Board through appeals filed in 1988 and 1989 from audit assessments in which Petitioner was assessed sales tax on the ballast purchased in Wyoming. In an opinion issued May 31, 1991, the Board ruled the UP authority "was a valid exercise of policy" by the former State Tax Commission, which policy "should be codified by the Wyoming Legislature at its earliest convenience." In the Matter of the Appeal of Union Pacific Railroad Company, Docket Nos. 88-110 and 89-61 (5/31/91), p. 5 [hereinafter "the 1991 decision"].

The issue arose again during an audit covering the 1993 to 1996 time period. Originally, the Department included the ballast in the audit findings, and assessed Petitioner for sales tax and interest due on the ballast purchase amount. However, after discussions between Petitioner and the Department, the issue concerning sales tax on the ballast was removed from the final audit and no assessment was imposed.

Petitioner was then audited for the period from April 1, 1996, through March 31, 1999. The Department's final assessment, issued on January 10, 2000, included sales tax and interest on all of the ballast purchased by Petitioner in Wyoming. It is from this assessment that Petitioner appeals. A second final assessment was issued by the Department on November 15, 2000, which included sales tax and interest only on ballast purchased after June 1, 1998.

At issue in this case are the meaning, effect and effective date(s) of several discussions and letters between Petitioner and Department concerning the revocation of the UP authority and the subsequent assessment of sales tax on the ballast purchased by Petitioner. Petitioner sets forth several contentions:

(1) The 1991 Board decision is binding on both the Department and this Board, and the Department is precluded from arguing that it never had the legal authority to permit the tax payment mechanism known as the UP authority.

(2) The Department has never effectively revoked the UP authority in accordance with the 1991 Board decision, and thus Petitioner is entitled to continue its method of paying sales and use taxes.

(3) Any transactions involving ballast used outside the State of Wyoming after June 1, 1998, are not subject to sales tax in any event, since as of that date Petitioner, pursuant to contract with the ballast vendor, received the ballast FOB at its location of use.

Conversely, the Department contends:

(1) Ballast is tangible personal property. As such, it is subject to taxation in Wyoming. The statutes do not provide an exemption from taxation for ballast.

(2) The Department never had the legal authority to agree to this practice by Petitioner. However, the Department is not seeking assessment of taxes prior to the date upon which it contends its revocation was effective.

(3) The Department revoked the UP authority, effective June 1, 1998.

(4) Despite Petitioner's efforts to restructure its contract with the ballast vendor, Petitioner nevertheless owes sales tax and interest on all amounts of ballast purchased in Wyoming because Petitioner receives both title to and possession of the ballast in Wyoming.





FINDINGS OF FACT

1. For purposes of this proceeding, the parties differentiated between "direct pay," which is a method by which a purchaser of goods pays sales tax directly to the State of Wyoming rather than to the vendor, and the term "Union Pacific authority" or "UP authority," which refers to an agreed-upon mechanism pursuant to which Petitioner has been allowed to purchase certain inventory free of sales tax and to pay use tax on that inventory to the state in which first use actually occurred. [Stipulations of Fact, Paragraph 2; Tr. pp. 42-43, 176-177].

2. Petitioner was audited by the Wyoming Department of Audit for the period from April 1, 1996, through March 31, 1999. [Stipulations of Fact, Paragraph 8; Department Exhibit 500].

3. During the audit period, Petitioner purchased ballast from the Granite Canyon Quarry located in Laramie County, Wyoming. [Petitioner Exhibits 100, 101, 103; Tr. pp. 146-147].

4. Petitioner did not pay sales tax in Wyoming on the ballast when it was purchased. Rather, Petitioner paid use tax in the state where the ballast was first used for track construction, repair or maintenance. Petitioner treated rail and ties purchased in other states the same way. [Tr. pp. 42-43, 84-85, 88-89, 143-144].

5. On January 21, 2000, the Department sent Petitioner an assessment based on the audit, assessing Petitioner additional tax, penalty and interest in the amount of $1,615,129.84, including taxes related to ballast purchased by Petitioner during the audit period. [Notice of Appeal; Joint Exhibit 324].

6. Petitioner appealed that portion of the Department's assessment related to the ballast purchases. The Notice of Appeal was filed on February 17, 2000. [Notice of Appeal].

7. In November, 2000, under the direction of Dan Noble, the newly-appointed administrator of the Excise Tax Division of the Department of Revenue, the audit assessment was adjusted consistent with the Board's 1991 decision to include only ballast purchased after June 1, 1998. The amount of tax due on ballast purchases was reduced to $661,428.70 plus interest and penalty. [Stipulation of Facts, Paragraph 8; Joint Exhibits 326 and 327, Department Exhibit 508; Tr. pp. 186-190].

8. A new assessment was not issued. Instead, the parties stipulated to the new date and the amount as representative of the amount allegedly owed by Petitioner for sales tax on ballast purchased after June 1, 1998. [Stipulation of Facts, Paragraph 9; Tr. p. 191].









9. Petitioner contends that a combination of letters sent in 1975 to and from Harvey McNutt, Director of the Excise Tax Division, granted Petitioner the authority to purchase ballast tax free in the State of Wyoming. [Joint Exhibits 300 and 301; Tr. pp. 183-184].

10. The April 1, 1975, letter from Petitioner to Mr. McNutt read in pertinent part:

This [letter] refers to Senate File 16 which repealed the use tax exemption for property used or to be used in maintaining interstate transportation. . .. Now that legislation has been passed and enacted into law, we must revise our computer program in order that taxable transactions can be reported from the effective date of the act.

In many states in which we operate, we have the authority to pay the tax directly to the state at the time the materials are withdrawn from storage and used. . .. This method is commonly referred to as a "direct pay" authority. It is our desire to utilize this procedure in Wyoming only for materials purchased for maintenance stock included in our material on hand account. All other purchases would be reported in the usual manner at the time of shipment into Wyoming.

Our liability under the "direct pay"method is not altered; however, there is a one time timing difference. [Joint Exhibit 300].

11. Mr. McNutt responded to Petitioner's inquiry on September 4, 1975, in pertinent part, "[t]his State has no objection to your method commonly referred to as a "direct pay" authority." [Joint Exhibit 301].

Taxability of ballast under Wyoming law

12. James Douglass, counsel for Petitioner from 1978 through 1999, admitted that, but for the 1975 agreement, Petitioner would be required under Wyoming law to pay sales tax on the purchase of ballast. [Tr. pp. 40-41, 99, 108].

13. Mr. Douglass further admitted that the UP authority was an exception to the statute. [Tr. p. 100].

14. Petitioner is the only entity in the state which claims the privilege of paying use tax upon ultimate use of the property rather than paying sales tax at the time of purchase. [Tr. pp. 184-185; 198; 222].

 

Effectiveness of the Department's revocation of the UP authority

A. The 1991 Board decision and the Department's compliance therewith.

15. On May 31, 1991, the Board issued its decision in In the Matter of the Appeal of Union Pacific Railroad Company, Docket Nos. 88-110 and 89-61 ["the 1991 decision"]. In this decision, the Board held:

We conclude the direct pay authorization issued to Petitioner was a valid exercise of policy by the former State Tax Commission through its administrative division, and such policy properly coordinates the collection of state tax in a manner which does not compromise or reduce the liability of any person owing a tax to the state of Wyoming. W.S. 39-1-302(a), 39-1-303(a)(i) and 39-1-305. We further believe this policy should be codified by the Wyoming Legislature at its earliest convenience. [Joint Exhibit 302, Paragraph 11].

Our conclusion does not mean, however, the Department is required to permit direct pay. Any decision by the Department to revoke such authority shall be prospective only, shall address all entities similarly situated, and shall be made only after full consideration of all taxpayer impacts and state and tax revenue consequences. [Joint Exhibit 302, Paragraph 12].

16. The Department action's were prospective, taking effect only after several meetings with Petitioner, and correspondence between the parties. [Tr. 55-61, 71-75, 81-86, 93, 96, 132, 136-140, 160-162, 188-191, 197-200, 212, 224; Joint Exhibits 306, 318, 319, 320].

17. There are no similarly situated taxpayers to be addressed. Petitioner is the only entity in the state allowed to purchase inventory free of sales tax, and to then pay use taxes to the state in which first use actually occurs. [Tr. pp. 184-185, 198, 222; Department Exhibit, 507, p. 73.**]

18. The impact on tax revenues from rescinding the UP authority was not calculated exactly, but Joyce (Hron) Stewart (hereinafter Ms. Hron), former administrator of the Excise Tax Division, estimated that revenues would increase "dramatically": based upon the amount at issue during a previous audit, she estimated that as much as $931,000/year in tax revenue was due from Petitioner's ballast purchases. [Department Exhibit 507, pp. 37-38, 78].



**[Note: References to page numbers in Exhibit 507, a deposition transcript, are to the transcript page numbers in the upper right-hand corner of each page, not to the Bates-stamp number in the lower right-hand corner.]





19. Petitioner contended that there might be as much as a one million dollar decrease in revenue if Petitioner returned to a "sales reporting" system, but such conclusion was speculative, and not supported by any information provided to the Department. [Tr., pp. 75, 86; Joint Exhibit 317; Department Exhibit 507, pp. 37-39, 46, 63-64, 78].

B. The Department's actions in revoking the UP authority.

20. Following the 1993-1996 audit, a meeting was held on June 17, 1997, with representatives of the Petitioner, the Department of Audit and the Department of Revenue. During that meeting, Petitioner was informed by Johnnie Burton, Director of the Department of Revenue, that the Department has no statutory authority to agree to the Union Pacific authority, "that this was something that [the Department] had to change," and that the UP authority would not be continued. [Tr. pp. 132, 160-162, 224, 231-233; Joint Exhibit 306; Department Exhibit 507, pp. 28-32].

21. During the June 17th meeting Ms. Hron, verbally revoked the UP authority. [Department Exhibit 507, pp. 46-47].

22. Additional meetings were held between Petitioner and Department officials. Petitioner was again informed that it no longer had permission to utilize the UP authority, and that sales tax would be imposed on all ballast purchases in accordance with Wyoming statutes. [Tr. pp. 230-231; Department Exhibit 507, pp. 34, 46-47, 58].

23. On April 29, 1998, in response to an inquiry from Petitioner's counsel, Ms. Hron sent a letter which stated in pertinent part:

I would also like to remind you of our position on the other type of transaction UPRC is routinely involved with in this state, the purchasing of ballast from Wyoming vendors. We have discussed this several times in the past but I think it worthy of another mention. When UPRC buys ballast in Wyoming, and the sale is finalized here, you owe the Wyoming sales tax on those transactions. (Emphasis added.) [Joint Exhibit 318; Tr. p. 195].

C. Petitioner's conduct evincing knowledge of effective revocation.

24. Counsel for Petitioner, James Douglass, participated in at least 2 meetings in which the UP authority was discussed: one on June 17, 1997, and another in January of 1998. He admitted that Mrs. Burton was "uncomfortable" with the mechanism permitted by the UP authority. He also admitted that he knew "through body language" that Department personnel intended to revoke the authority. [Tr. pp. 57-58, 71; Joint Exhibit 306].



25. During the 1998 legislative session, the Wyoming State Legislature considered House Bill 57, which would authorize the Department of Revenue to permit direct pay (the method by which a purchaser of goods pays sales tax directly to the State rather than to the vendor). [Stipulations of Fact, Paragraph 12; Tr. pp. 63-68, 181; Department Exhibit 507, pp. 54-59].

26. Petitioner sought an amendment to the bill, in an effort to obtain statutory authorization for the UP authority:

Upon application, the Department of Revenue may grant common carriers by rail the authority to report and pay sales and use tax directly to the Department of Revenue based on the point of use of the property in lieu of the point of sale. (Emphasis in original.) [Joint Exhibit 316].

27. Counsel for Petitioner, James Douglass, sent a letter to Petitioner's lobbyist for legislative matters, Dick Hartman, concerning the direct pay bill and Petitioner's proposed amendment. [Tr. pp. 63-68]. The February 5, 1998, letter was in question-and-answer format, and contained the following exchanges:

Question: Why is this an issue now?

Answer: The Department of Revenue has withdrawn its approval for UPRR to pay the tax directly to Wyoming.

Question: Why did DOR withdraw its approval?

Answer: The DOR, with concurrence of the Attorney General, believes there is no existing statutory authority, to grant taxpayers special permission regarding the method taxes are to be paid. (Emphasis added.) [Department Exhibit 502].

28. In response to a request for information from the Chairman of the Revenue Committee, Joyce Hron prepared a memo, dated February 13, 1998, in which she explained that Petitioner's suggested amendment dealt with the UP authority, and not direct pay, the subject of House Bill 57. [Joint Exhibit 316; Department Exhibit 507, pp. 57-59].

29. The legislature passed the bill, creating Wyoming Statute Section 39-15-107.1, which was effective July 1, 1998. [Joint Stipulation of Facts, Paragraph 12; Tr. p. 181]. The legislature did not adopt the language advanced by Petitioner. [Tr. pp. 113-114, 181; Department Exhibit 507, p. 59].

30. After the legislative session, the Department initiated a rule-making process, amending its rules relating to direct pay. Petitioner provided written input and "gave lengthy comments" during the public hearing, seeking to persuade the Department to include the UP authority in its direct pay rules. The Department did not so amend the rules. [Department Exhibit 507, pp. 59-60].



31. On April 23, 1998, Petitioner sent a letter to Ms. Hron, requesting approval for the Union Pacific authority:

There is a possibility the legislature may revisit the direct pay issue in next year's session because of this revenue impact. UPRR is willing to continue paying use tax on a direct pay basis until the next legislature adjourns, if the department wishes to administratively continue our authority. If not, we will make the arrangements to pay the tax on rail and tie as sales tax to our out-of-state vendors and claim credit for the taxes paid when the track materials are installed in Wyoming.

Once UPRR's tax reporting system is modified to pay the tax as sales tax, it could be difficult to change back to a use tax reporting system even if the next legislature authorizes direct payment of use tax. This will probably be Wyoming's last chance to retain this tax revenue. We are willing to pay the tax to Wyoming, instead of other states, but we will do so only with your approval of the use tax payment system for all materials purchased for use in Wyoming. [Joint Exhibit 317; Tr. p. 195].

32. On April 29, 1998, Ms. Hron responded to the Petitioner's letter:

I would also like to remind you of our position on the other type of transaction UPRC is routinely involved with in this state, the purchasing of ballast from Wyoming vendors. We have discussed this several times in the past but I think it worthy of another mention. When UPRC buys ballast in Wyoming, and the sale is finalized here, you owe the Wyoming sales tax on those transactions. (Emphasis added.) [Joint Exhibit 318; Tr. p. 195].

33. Petitioner never responded to Ms. Hron's letter, nor in any way indicated confusion over, or disagreement with, the statements therein. [Tr. p. 212.]

34. In June of 1998, Mr. Douglass prepared a briefing paper for the Tax Reform 2000 Project initiated by the legislature. Mr. Hartman delivered the paper. The draft of the "Statement of Union Pacific Railroad Company Regarding Tax Reform 2000 Project" included the following paragraphs under the heading "Sales/Use Tax":

This tax is applied to transactions involving personal property. The railroad's principal personal property is locomotives and rail cars but there are no Wyoming vendors selling rolling stock so rolling stock is purchased out-of-state and placed in interstate commerce before it arrives in the state. UPRR does purchase large amounts of rail, ties and ballast rock which are subject to tax. UPRR has paid use tax on all rail, ties and ballast rock installed in Wyoming even though major portions of this tax could have been paid to other states.

This choice of venue for paying sales/use tax led to the direct pay issue which was before the 1998 legislature. The legislature elected not to renew UPRR's direct pay authority and as of July 1998, UPRR will no longer have a direct pay authority from the Department of Revenue. [Department Exhibit 503, Bates stamp page 0008].

A handwritten note to the side of the second paragraph asks the question: "Do we want to acknowledge that it is gone?" [Department Exhibit 503, Bates stamp page 0008]. The document went on to explain how the UP authority (referred to as "direct pay authority") had worked in Wyoming "for the last 20 years." The document then stated, "UPRR does need direct pay authority to purchase ballast in Wyoming sales tax free." [Department Exhibit 503, Bates stamp page 0009]. The final version of the document contained the two paragraphs quoted above, as well as the acknowledgment that Petitioner needed "direct pay" authority to continue its tax-free purchases of ballast. The handwritten note was neither present nor incorporated into the final version. [Department Exhibit 503, Bates stamp page 14].

35. In testimony before the Board, Mr. Douglass attempted to "explain away" his letter to Dick Hartman, and the Tax Reform 2000 memo, as written "in anticipation of revocation occurring." [Tr. pp. 70, see also pp. 66, 68-72]. This testimony was not credible. Similarly lacking in credibility was his testimony acknowledging his participation in discussions during which the UP authority was at issue and admitting that it was the Department's "position" that sales tax was owed on all ballast purchases, but insisting that it was his "interpretation" the authority was never revoked, because he never heard the word "revocation." [Tr. pp. 57-58, 71, 78-79, 990-91, 93-97].

Effect of the contract on the taxability of the ballast

36. Pursuant to a Ballast Sales Agreement dated May 1, 1990, Petitioner purchased ballast from Granite Canyon Quarry, a joint venture, which operates a quarry located in Laramie County Wyoming. [Petitioner Exhibits 100, 101].

37. The Ballast Sales Agreement originally provided that title and possession of the ballast transferred to Petitioner at the quarry when the ballast was loaded onto Petitioner's rail cars. [Petitioner Exhibit 100, Sections 7, 15]. By amendment entered into between the parties, effective July 1, 1998, the Ballast Sales Agreement was modified to provide that constructive possession and title to the ballast remained with Granite Canyon Quarry until the ballast was delivered to Petitioner at delivery points designated by Petitioner. [Petitioner Exhibit 101].(2) The purpose of the change was to clearly show that title to the ballast passed at the ballast delivery location at the job site. [Tr. p. 147].

38. Granite Canyon Quarry also has a standard Rail Transportation Contract with Petitioner. Steven Utech, Director of State Tax for Petitioner, testified that pursuant to this contract, Petitioner transports the ballast as a common carrier. [Petitioner Exhibit 102; Tr. pp. 148-150].

39. Mr. Utech testified the change in the contract did not affect the way ballast purchases were handled in Petitioner's accounting system. [Tr. pp. 147, 151]. Representative invoices introduced by Petitioner show the ballast shipped to specified locations on Petitioner's railroad system. No freight charge was included on the invoices. [Petitioner Exhibit 103]. Instead, "there is a chargeback to the project itself for the cost of operating that train . . . includ[ing] the train crews, the cars [and] the locomotives." [Tr. p. 155].

40. Petitioner is responsible for the movement of the railroad cars at the quarry and for the transportation of the ballast to the destination. [Petitioner Exhibit 100].

41. The ballast used by Petitioner for maintenance is loaded onto Petitioner's green maintenance hopper cars for transportation to locations on Petitioner's railroad system where it is held until needed for maintenance or repair. [Trans. pp. 103-104, 110-111].

42. Ballast used for construction is loaded onto regular railroad cars for transportation to specified sites where it is used almost immediately. [Trans. pp. 103, 110].

43. No evidence was presented indicating that Granite Canyon Quarry, as seller, was responsible for or paid the freight associated with the delivery of the ballast.

44. Any Conclusion of Law set forth below which includes a Finding of Fact may also be considered a finding of fact and is therefore incorporated herein by this reference.



CONCLUSIONS OF LAW

45. The Notice of Appeal in this matter was timely filed and the Board has jurisdiction to determine this matter. Wyo. Stat. 39-1-304(a); Rules, Wyoming State Board of Equalization, Chapter 2, 5(a).



46. The doctrine of collateral estoppel is inapplicable to this case, because the Department is no longer arguing the validity of the 1991 Board decision, nor seeking retroactive application of its revocation of the UP authority. The Department seeks enforcement of its revocation actions only prospectively from June 1, 1998, thus rendering moot Petitioner's argument with respect to collateral estoppel.

Burden of Proof

47. Chapter 2 19 of the State Board of Equalization's Rules and Regulations states in relevant part that:

Except as specifically provided by law or in this section, the Petitioner shall have the burden of going forward and the ultimate burden of persuasion, which burden shall be met by a preponderance of the evidence.

48. Petitioner has the burden of going forward and the ultimate burden of persuasion, to be met by the preponderance of the evidence, that the Department's assessment was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. Rules, State Board of Equalization, Chapter 2 19; Wyo. Stat 16-3-114(c).

49. Furthermore, because all property not specifically exempt is subject to taxation, Wyoming Central Irrigation Co. v. Farlow, 19 Wyo. 68, 114 P. 635, 636 (1911), "[t]axation is the rule and exemption the exception." Appeal of Chicago & North Western Railway Company, 70 Wyo. 84, 246 P.2d 789, 795 (1952).

50. "[E]xemptions are not favored and generally taxation is held to be the rule and exemption the exception, which means there is a presumption against a grant of exemption and in favor of the taxing power." State Board of Equalization v. Wyoming Auto Dealers Association, 395 P.2d 741, 742 (Wyo. 1964). "A statutory exemption from taxation must be clearly conferred in plain words." Commissioners of Cambria Park v. Board of Commissioners of Weston County, 62 Wyo. 446, 174 P.2d 402, 405 (1946). A tax exemption must be strictly construed against the one who asserts it, and the party claiming the exemption bears the burden of demonstrating its existence. Thus, Petitioner also bears the burden of demonstrating the existence of a tax exemption permitting the UP authority.

Taxability of ballast under Wyoming law: the sale of ballast is a taxable event

51. Section 39-6-404(a)(i) of the Wyoming Statutes levies a sales tax to be paid by the purchaser on the sales price of every retail sale of tangible personal property within the state:

Except as provided by W. S. 39-6-405, there is levied and shall be paid by the purchaser on all sales an excise tax of three percent upon: (i) The sales price of every retail sale of tangible personal property within the state.

52. Section 39-6-402(a)(iii) of the Wyoming Statutes defines sale in pertinent part as "any transfer of title or possession in this state for a consideration. . .."

53. Ballast is tangible personal property as defined in Wyoming Statute Section 39-6-404(a)(i).

54. The retail purchase of ballast in Wyoming is a taxable transaction and sales tax must be imposed thereon.

55. Any agreement allowing ballast to be purchased tax-free by Petitioner requires the existence of an exception under the Wyoming statutes.

56. "The power to tax is a legislative power which includes the power to say what shall be taxed, who pays it and what the tax shall be." Barcon, Inc. v. Wyoming State Board of Equalization, 845 P.2d 373, 377 (Wyo. 1992).

57. All property not specifically exempt is subject to taxation. Wyoming Central Irrigation Co. v. Farlow, 19 Wyo. 68, 114 P. 635, 636 (1911). " 'It is elementary that taxation is a legislative function and that taxes may be impressed, levied, assessed and collected only under the statutory authority and in the manner provided by law.' " Chevron U.S.A., Inc. v. State, 918 P.2d 980, 984 (Wyo. 1996), quoting Kelsey v. Taft, 72 Wyo. 210, 217, 263 P.2d 135, 136 (1953). "Taxation is the rule and exemption the exception." Appeal of Chicago & North Western Railway Company, 70 Wyo. 84, 246 P.2d 789 (1952).

58. No applicable exemptions or exclusions exist in the Wyoming statutes which allow Petitioner to avoid paying sales tax on the purchase of ballast within Wyoming. Wyo. Stat. 39-6-405 et seq.

59. Section 39-1-305 of the Wyoming Statutes provides that "[t]he board and department shall not compromise or reduce the tax liability of any person owing a tax to the state of Wyoming . . .." (Emphasis added.) Thus, the Department does not have the authority to create an exemption which would allow Petitioner to avoid paying sales tax upon the purchase of ballast in Wyoming.

Effectiveness of the Department's revocation of the UP authority

60. An administrative agency has only those powers expressly conferred upon it by the legislature. State Department of Revenue v. Pacificorp. 872 P.2d 1163, 1166 (Wyo. 1994). The State Board of Equalization has the authority to "[d]ecide all questions that may arise with reference to the construction of any statute affecting the assessment, levy and collection of taxes," Wyo. Stat. 39-1-304(a)(iv), and by law serves as the appeals board for the Department, Wyo. Stat. 39-1-302, but such authority cannot be expanded to permit infringement upon the duties that are delegated solely to the Department. Wyo. Stat. 39-1-303. Thus, absent express statutory authority, the State Board of Equalization may not direct the Department in the development, implementation or revocation of its policies and procedures. State Board of Equalization v. Jackson Hole Ski Corp., 737 P.2d 350, 356, on rehearing 745 P.2d 58 (Wyo. 1987).

61. Nevertheless, the Department met all terms as set forth in Paragraph 12 of the Board's Findings of Fact, Conclusions of Law, Order of Wyoming Board of Equalization, Docket Nos. 88-110 and 89-61.

62. The Department properly revoked the "Union Pacific authority," and adequately conveyed its decision to the Petitioner, on at least two occasions: during the meeting on June 17, 1997, between representatives of the Department and Petitioner, and again in writing by letter dated April 29, 1998, from Joyce Hron to James Douglass. The revocation was effective June 1, 1998.

Effect of the contract on the taxability of the ballast

63. There is no dispute concerning whether ballast is tangible personal property. Nor is there any claim the purchase of ballast falls under any exemption from taxation set forth in Section 39-6-405 of the Wyoming Statutes.

64. The retail sale of tangible personal property within the state is subject to sales tax unless otherwise exempt. Wyo. Stat. 39-6-404(a)(i). Therefore, Petitioner's purchase of ballast from the Wyoming quarry from and after June 1, 1998, is taxable unless the purchase of the ballast did not occur in Wyoming.

65. Petitioner contends the amendment of the contract providing for the transfer of title at the specified destination point outside of Wyoming renders the sales exempt from taxation in Wyoming. The Department counters that a taxable sale occurs at the quarry since Petitioner takes possession of the ballast at the quarry - where Petitioner controls the movement of the train for loading - and retains possession through the actual delivery of the ballast.

66. The question of the taxability of sales of personal property destined for use outside Wyoming first arose shortly after the passage of the Selective Sales Tax Act of 1937. Wyo. Stat. 39-6-401(a). In State Board of Equalization v. Blind Bull Coal Co., 55 Wyo. 438, 101 P.2d 70 (1940), the Wyoming Supreme Court held the sale of coal to out-of-state residents was subject to sales tax where the delivery was made to the purchaser near the mine in Wyoming, and the purchasers then transported the coal out of state for use.

67. In Morrison-Knudson Co. v. State Board of Equalization, 58 Wyo. 500, 135 P.2d 927 (1943), the Court looked at the following factors in determining taxability: the "free on board" (f.o.b.) location, the seller's interest in the transportation, the responsibility for payment of the freight charge, and the risk of loss pending delivery. Where the sale was f.o.b. Wyoming, the seller did not agree to deliver the goods to a location outside Wyoming, and the purchasers paid the freight and remitted the purchase price to the seller, the Court found the Wyoming sales tax due. The Court specifically noted that the purchasers' intent that the goods would be shipped by interstate carrier was insufficient, in and of itself, to withdraw the goods from the state's power to tax it. Id. at 934-935.

68. State statute and case law provide that when a shipping agreement between two parties is a destination contract, that is, where the goods are shipped "f.o.b. destination," the seller bears the expense and risk of placing the goods into shipment. Wyo. Stat. 34-21-236(a)(ii) (1977), as recodified Wyo. Stat. 34.1-2-319(a)(ii); Buenger v. Pruden, 713 P.2d 771, 772 (Wyo. 1986).

69. The Board has also addressed the effect of placement of goods with a common carrier. In the Matter of the Appeals of Wyoming Machinery Co., 1990 WL 260522 (SBOE Docket Nos. A-88-76 & 89-157, Feb. 9, 1990). In that case, the following factors were deemed clearly indicative of a sale occurring within the state: the seller's placement of goods with a common carrier; the transfer of risk of loss and of ownership; the buyer's responsibility for the payment of delivery charges; and the designation "f.o.b. Casper, Wyoming." See also: In the Matter of the Appeal of Urbigkit Sales and Service, 1992 WL 402762 (SBOE Docket No. 91-122, Dec. 18, 1992).

70. Based on the evidence presented, we find a distinction, for tax purposes, between ballast purchased for construction projects, and ballast purchased for maintenance. Construction ballast purchased under the Amendment to the Ballast Sales Agreement is not subject to sales tax. Pursuant to the Amendment, title and constructive possession of the ballast passes to Petitioner at specified destinations, not at the quarry in Laramie County, Wyoming. Petitioner's transportation of this ballast by regular rail car is as a common carrier pursuant to the Rail Transportation Contract. Thus, the purchase of this ballast does not occur in Wyoming, and no sales tax is due. However, Petitioner must pay use tax at the time and place where the construction ballast is first used.

71. Ballast that is purchased for maintenance purposes, however, is subject to sales tax. The point of purchase is the quarry in Laramie County, Wyoming. Maintenance ballast is purchased for future use, at unspecified times and locations. Petitioner loads this ballast in its own maintenance "hopper" cars, and then holds those cars in its system for use when necessary. Petitioner takes possession in Wyoming of ballast purchased for maintenance purposes. Thus, a purchase occurs in Wyoming, and Petitioner owes tax, penalty and interest on such purchases.



ORDER

IT IS THEREFORE HEREBY ORDERED:

(1) The authority of Union Pacific Railroad Company, Petitioner, to pay tax on ballast when and where it was first used rather than at the time of purchase was properly revoked by the Department of Revenue, effective June 1, 1998;

(2) Ballast is tangible personal property and tax is due on those purchases which occur within the State;

(3) Petitioner took possession in Wyoming of ballast sold for maintenance purposes, and thus owes tax, penalty and interest on such sales;

(4) To the extent ballast purchased by Petitioner under the Amendment to the Ballast Sales Agreement effective July 1, 1998, was destined for use on construction projects outside Wyoming, it was an interstate sale and not subject to tax;

(5) The Department's assessment of January 21, 2000, as modified in November, 2000, is affirmed for all the purchases of ballast occurring from June 1, 1998, through June 30, 1998. The Department's assessment is further affirmed as to all purchases of maintenance ballast occurring on and after July 1, 1998. The Department's assessment is reversed as to sales tax due on purchase of construction ballast destined for use on construction projects outside Wyoming, occurring on and after July 1, 1998.

(6) The Department is directed to reassess Petitioner's purchase of ballast in accordance with this decision, and Petitioner shall pay such tax, penalty and interest assessed on the purchase of ballast loaded on its maintenance cars and held for future use for maintenance purposes.

DATED this 19th day of December, 2001.

STATE BOARD OF EQUALIZATION

Edmund J. Schmidt, Chairman

Roberta A. Coates, Vice Chairman

Sylvia Lee Hackl, Member

ATTEST:

Wendy J. Soto, Executive Secretary

1.

Mention must be made of the terminology used in this case. There is in tax law a concept known as "direct pay," which is a method by which purchasers of goods, usually large corporations, pay sales tax directly to the State rather than to the vendor. This term also was used by Petitioner and the Department to refer to a mechanism through which Petitioner purchased certain inventory (primarily ballast, ties and rail) free of sales tax, and then paid use taxes on that inventory to the state in which first use actually occurred. This latter arrangement was also referred to as the "UP authority." The parties have agreed that these are in fact distinct concepts, and that what is at issue in this case is the UP authority, not direct pay. To the extent possible, this opinion shall refer to the UP authority, although some witnesses and exhibits at times used the term direct pay.

2. Petitioner contended that transactions occurring after June 1, 1998, were not subject to sales tax, due to the contract amendment. [Petitioner's Updated Summary of Contentions, 4.] However, the contract amendment clearly states that the effective date is July 1, 1998. [Petitioner Exhibit 101.]