BEFORE THE STATE BOARD OF EQUALIZATION
FOR THE STATE OF WYOMING
IN THE MATTER OF THE APPEAL OF )
DARLING WELDING & DESIGN FROM )
A SALES & USE TAX AUDIT ASSESSMENT ) Docket No. 2001-52
DECISION OF THE DEPARTMENT OF )
FINDINGS OF FACT
CONCLUSIONS OF LAW
DECISION AND ORDER
Darling Welding and Design (Petitioner), by Bob and Cheryl Darling, appearing pro-se.
Department of Revenue (Department), Cathleen D. Parker, Assistant Attorney General.
Pursuant to notice duly given to the parties, this matter came on for hearing on January 25, 2002, in the Room 1722, (State Board Room) Herschler Building, Cheyenne, Wyoming before the State Board of Equalization (Board) consisting of Edmund J. Schmidt, Chairman, Roberta A. Coates, Vice-Chairman, and Sylvia Lee Hackl, Board Member. It arises from a decision of the Department assessing sales and use tax and interest against Petitioner.
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. 39-11-102.1(c)(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, 2. The rules require appeals to be filed with the Board within thirty (30) days of any administrative decision. Rules, Wyoming State Board of Equalization, Chapter 2, 5.
Petitioner timely filed its appeal. The Board is required to decide all issues relating to this appeal and give a written decision, citing findings of fact and conclusions of law following a hearing. Rules, Wyoming State Board of Equalization, Chapter 2, 34. Upon application of any person adversely affected, the Board is mandated to review final Department actions concerning state excise taxes, and "[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. 39-11-102.1(c)(viii), Wyo. Stat. 16-3-101 through 16-3-115.
Petitioner operates a welding service business in Cody, Wyoming. A portion of Petitioner's business involves contract work for various oil and gas operators. Petitioner was audited by the Wyoming Department of Audit (DOA) for the period covering January 1, 1997, through May 31, 2000. The preliminary audit findings alleged Petitioner underpaid sales and use tax related to performing welding services on tangible personal property in the amount of $3,321.14.
By letter dated January 11, 2001, and after considering further and final information from DOA, the Department assessed Petitioner a tax deficiency of $3,321.14 and interest in the amount of $1,000.99. No penalty was assessed. Petitioner remitted a tax payment to the Department in the amount of $400.
Petitioner timely appealed from the final administrative decision of the Department assessing the remaining tax and interest. Petitioner asserts that the assessment was incorrect for four reasons: (1) Taxes should not be owed on welding services performed on oil wells and pipelines because they are real property; (2) Petitioner was unaware use tax needed to be paid on goods purchased out-of-state and used within Wyoming; (3) Petitioner should not have to pay taxes on pipes used to make a corral; and (4) Petitioner should be given an off-setting credit for taxes on fuel that was used in the business, a component of which was manufacturing.
Additional issues arose during the hearing: (5) how should the appropriate tax rate be determined when the invoice fails to specify where the work was performed; (6) should sales tax be paid when the work is provided to a contractor who, in turn, provides work to a non-profit entity; and (7) was sales tax charged on freight.
FINDINGS OF FACT
1. The DOA conducted an audit of Petitioner for the period from January 1, 1997, through May 31, 2000. [Wyoming Department of Revenue's Stipulated Updated Summary of Uncontroverted Facts, Paragraph 1].
2. The Department of Revenue issued its final assessment letter dated January 11, 2001, identifying a tax deficiency of $3,321.14 and interest of $1000.99. No penalty was assessed. [Department Exhibit 500].
3. Petitioner filed a timely letter of appeal with the Board on February 5, 2001. Petitioner requested a reduction of the tax assessment.
4. Petitioner introduced numerous exhibits for welding service on a water injection system and pipeline that would enhance the production of oil by water injection. The work was billed to out-of-state companies even though the work was performed in Park County, Wyoming. [Exhibit 101, pp. 4 - 17; Exhibit 103, pp. 32-39].
5. There were numerous exhibits for purchases from out-of-state vendors, which goods were delivered in Wyoming. Petitioner acknowledged that no sales tax was paid. [Exhibit 102, pp. 17-21, 23-24].
6. Many of the invoices for out-of-state purchases contained a charge for freight or shipping. The sales tax was calculated on the entire amount of the invoice and thus included a tax on the freight and shipping charges. [Exhibit 504].
7. None of Petitioner's invoices noted where the work was performed, other
than an AFE number to identify the well location, and the address to which the invoice was
sent. Many of the invoices were billed to vendors within Wyoming but outside of Park
County. Some of the billing addresses were in counties that have a higher tax rate than
Park County. [Exhibit 101, p. 3; Exhibit 103, pp. 27-28, 30-31].
8. Petitioner provided supplies to a contractor, who in turn built display cases at the Buffalo Bill Historical Center and Plains Indians Museum. The museum is a tax exempt organization. [Exhibit 101, pp. 1-2 ].
9. Three invoices were for sprinkler systems affixed to ranch land. [Exhibit 103, pp. 28-29].
10. One of the invoices was for angle iron for brick facing on a building. [Exhibit 101, p. 1, Invoice 1524]. One invoice was for materials sold to a contractor for improvements to real property. [Exhibit 101, p. 1, Invoice 1861]. One invoice was for tubing to be used on a corral. [Exhibit 101, p. 1, Invoice 1524].
11. Petitioner paid four hundred dollars ($400.00) to the Department after the audit assessment. [Exhibit 104, p. 47].
12. Petitioner claimed credit for all of the fuel used in his business, and for consumable supplies. Petitioner produced for the first time at the hearing a handwritten itemization of the fuel bills and a handwritten list of consumable supplies. No original invoices or bills were introduced. [Exhibit 104, pp. 40- 46]. Petitioner testified he had not claimed these items as tax exempt before. Petitioner does manufacture metal chairs for resale. However, Petitioner was not able to show how much of the fuel or the supplies were used in the manufacture of the products, as opposed to the fuel and supplies used in the welding business.
13. Any Discussion above or Conclusion of Law below which includes a finding of fact may also be considered a Finding of Fact and, therefore, is incorporated herein by this reference.
CONCLUSIONS OF LAW
14. The letter of appeal by Petitioner was timely filed and the Board has jurisdiction to determine this matter.
15. The applicable rules provide in relevant part as follows:
Wyoming State Board of Equalization Rules
Chapter 2, 19. Burden of Going Forward; Burden of Persuasion.
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. If Petitioner provides sufficient evidence to suggest the Department determination is incorrect, the burden shifts to the Department to defend its action. For all cases involving a claim for exemption, the Petitioner shall clearly establish the facts supporting an exemption. In proceedings involving the question of whether or not there is a taxable event under Wyoming law, the Petitioner shall have the burden of going forward and the Department shall have the ultimate burden of persuasion. (Emphasis supplied).
16. Wyoming law states that sales tax is due for services provided in conjunction with oil and gas production:
(a) Taxable event. The following shall apply:
(i) Except as provided by W.S. 39-15-105, there is levied an excise tax upon:
(K) The sales price paid . . . for all services rendered in . . . completing, recompleting, repairing, equipping for production or abandonment, and all other services in completing or attempting to complete any well for production of oil or gas or as an injection or disposal well for the injection of water, gas, air, steam or other substances into any underground stratum . . ..
Wyo. Stat. 39-15-103.
17. Sales tax is due for services performed to enhance the production of
oil and gas. Wyo. Stat. 39-15-103(a)(i)(k). Therefore sales tax is owed for
invoices shown in Exhibit 101, pages 4 through 17 and Exhibit 103, pages 32 through 39.
18. Purchases from out-of-state vendors, delivered in the State of Wyoming, constitute a sale under Wyoming Statute Section 39-16-101(a)(iii). Petitioner is liable for the payment of use tax. Wyo. Stat. 39-16-103(c)(vi). The Petitioner should pay taxes for the purchase price of the goods evidenced in Exhibit 102, pages 17 through 21, 23 and 24.
19. The Department assessed sales tax on freight charges for out-of-state purchases. [Exhibits 102, pp. 17-21; Exhibit 504]. Federal law and Wyoming Statute 39-15-105(a)(ii)(A) exempts the imposition of excise tax on interstate transportation of freight.
20. The compliance provisions of the statutes require the person liable
for payment of sales tax to keep sufficient records to determine the tax liability. Wyo.
Stat. 39-15-107(a)(ii), (iii). The invoices Petitioner kept did not indicate where
the services or the sales occurred. The Department calculated the tax rate on the
following basis: (1) for invoices billed to out-of-state purchases, the tax rate was
calculated as if the sale were in Park County, Wyoming; (2) for sales made to
in-state-purchasers, the tax was calculated at the address of the purchaser. [Exhibit
101, p. 3; Exhibit 103, pp. 27-28, 30-31]. Because of the incompleteness of the
records of the Petitioner we will not disturb the judgement of the Department.
21. The Department of Revenue Rules exempt from sales tax welding services for improvements of real property. Rules, Department of Revenue, Chapter 2, 13 (t)(i) (adopted February 24, 1997). Services and materials used for the sprinkler system to the ranch land are exempt from tax. [Exhibit 102, p. 29].
22. Sales of tangible personal property to a contractor are taxable. Wyo. Stat. 39-15-303(i)(ii). If the sale is to a contractor, it is taxable even if the final consumer is a charitable organization such as a museum. Only if the museum had purchased the cabinets directly from Petitioner would the sales have been exempt from sales tax. [Exhibit 101, p. 2, Invoice 1620; Exhibit 103, pp. 25-26; Exhibit 101, p. 1, Invoice 1061].
23. Sales of tangible personal property that will be used in the repair, alteration, improvement or construction of real property are taxable. Wyo. Stat. 39-15- 303(a)(i); Rules, Department of Revenue, Chapter 20, 10(e). This is true even though the welding service may not be taxable. Department of Revenue Rules, Chapter 20, Section 13(t)(i). In this case, the sale of tubing is a taxable event, even if the tubing was ultimately used to construct corrals, a real property improvement.
24. Purchases by a manufacturer of the ingredients of a manufactured product, and fuel used in the manufacturing process, are exempt from sales tax. Wyo. Stat. 39-15-105(a)(iii)(A), (D). However, to qualify for an exemption, the process set forth in Department rules must be followed. The Department of Revenue Rules, Chapter 2, Section 7 (h)(i) and (ii) of provide as follows:
(i) Fuel and Power. Application for exemption from the sales tax for purchases of power or fuel used in manufacturing, processing, or agriculture must be made directly to the Department. Application must explain how the power and fuel will be metered, stored, or separately accounted for to distinguish it from non-exempt power and fuel usage. An exemption certificate will be issued by the Department for all approved exemptions.
(ii) Ingredients or Components. Tangible personal property which is necessarily used or consumed in manufacturing, processing or compounding operations by a person engaged in the operations, is exempted from the sales/use tax, if that property becomes an ingredient or component of the final product. The act of extracting a mineral or other substance from the earth is not manufacturing or processing.
Petitioner was not able to show the items listed in Exhibit 104, pages 40
through 46 fall within the Department rules. Petitioner was not able to
show the fuel was used only in the manufacturing process. In fact, Petitioner acknowledged
the exhibit listed his entire fuel bill for his shop, and that some of the fuel would have
been used for welding purposes, and not for the manufacturing of chairs. Also, the
original invoices for the consumable supplies were not produced; thus, there is no way to
discern if the supplies were consumed in the manufacturing process. In the future,
Petitioner may qualify for exemptions for fuel and consumable supplies used in the
manufacture of chairs, but the evidence before the Board does not prove the exemptions.
25. Wyoming Statute Section 39-15-108(b)(i) and Wyoming Statute Section
39-16-108(b)(i) mandatorily impose interest for failure to timely remit sales and use tax.
The Board holds the Department has no discretion regarding the assessment of statutorily
prescribed interest when a tax deficiency is assessed. In the Appeal of Mrs. William
A. Read, Jr., Docket No. 95-42 (November 29, 1996). Therefore, the Department must
assess interest on the tax deficiencies established, consistent with this opinion.
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IT IS THEREFORE HEREBY ORDERED:
A. The assessment of sales tax on the invoices for welding services for oil and gas production is affirmed.
The assessment of sales tax on the invoices for out-of-state purchases is affirmed but the assessment of sales tax on the freight and shipping charges on those purchases is reversed.
C. The decision of the Department to apply tax rates for various invoices is affirmed.
The assessment on the invoices for supplies to a contractor for
construction of a product for a non-profit organization is affirmed.
E. The assessment of sales tax on invoices for a sprinkler system on ranch land is reversed.
The decision of the Department to not allow a credit for fuel and consumable supplies is affirmed.
G. The case is remanded to the Department for recalculation of the interest assessment based on the tax deficiency determined in paragraphs A-F above.
The total assessment due will reflect the crediting of Petitioner's tax payments of Four Hundred Dollars on the total tax deficiency and interest due as determined in paragraph G above.
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Pursuant to Wyoming Statute Section 16-3-114, and Rule 12, Wyoming Rules of Appellate Procedure, any person aggrieved or adversely affected in fact by this decision may seek judicial review in the appropriate district court by filing a petition for review within 30 days of the date of this decision.
Dated this 7th day of March, 2002.
STATE BOARD OF EQUALIZATION
Edmund J. Schmidt Chairman
Roberta A. Coates
Sylvia Lee Hackl
Wendy Soto, Executive Secretary