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L.E. MYERS and HAMBY YOUNG [2006] [DO] [ST]

Topic Code: S156Sales Tax v. Use Tax (ST) Document Reference: 06300020

BEFORE THE IOWA DEPARTMENT OF REVENUE

HOOVER STATE OFFICE BLDG

DES MOINES, IOWA

IN THE MATTER OF:

L.E. MYERS

1655 HUBBARD AVENUE

DECATUR, IL. 62526

and

HAMBY YOUNG, A

DIVISION OF WESCO DISTRIBUTION INC.

1245 DANNER DRIVE

AURORA, OHIO 44202

* DECLARATORY ORDER

SALES/USE TAX

* DOCKET NO. 05-30-6-00169

Pursuant to a Petition for Declaratory Order filed with the Iowa Department of Revenue (hereinafter referred to as "Department") by L.E. Myers and Hamby Young (hereinafter referred to as “Myers”, “Young”, respectively and "Petitioners", jointly) on December 27, 2005, and in accordance with Iowa Code, section 17A.9 and Department rule 701-7.56(17A) "declaratory order" (in general) Iowa Administrative Code, the Director hereby issues this Declaratory Order.

The facts under consideration in this Declaratory Order are as follows:

Myers provides a complete range of power line construction services to electric utilities, telecommunication providers, industrial facilities and governmental agencies

throughout the United States. Myers has local district offices in Iowa and is currently engaged in a construction project in Iowa.

Young is a material supply business that focuses on high voltage applications and is a division of Wesco Distribution (Wesco). Young is located in Aurora, Ohio and has one full-time employee located near Des Moines, Iowa. Wesco has approximately 250 branches in the United States, including three branches in Iowa.

Myers has contracted with Young to provide the bulk of materials necessary for completion of a construction project. Young combines value-added services and materials management as a full-service package. Young coordinates and supplies services and materials to provide an efficient and cost effective method to ensure the form, fit and function for each project.

Young’s full-time employee located near Des Moines, Iowa and Young’s Ohio employees have traveled to an Iowa job site on numerous occasions. These employees have performed a variety of management services. This travel by Young’s employees is provided as a service to Myers in order to support their construction efforts with services that include: site delivery coordination; on-site material verification; material technical coordination; trouble shooting; and technical material representation.

As part of the contract with Young, Myers has agreed to self-assess and remit all Iowa sales and use tax on all materials it procures from Young. Myers does not have a direct pay permit. Many of the materials purchased from Young are directly shipped by Young’s vendors to Myers in Iowa. Most of the time, a common carrier receives the materials from a vendor outside of Iowa and ships the materials to Myers at an Iowa location.

ISSUES
1. Since Myers has contractually agreed to remit any taxes due, is Myers required to remit applicable local option (LOST) and/or school infrastructure local option (SILO) taxes on purchase from Young originating outside of Iowa and delivered to Iowa via a common carrier?

2. Since Myers has contractually agreed to remit any taxes due, is Myers required to remit applicable LOST and/or SILO taxes on purchases from Young originating outside of Iowa and delivered to Iowa locations via Young’s own trucks?

3. Since Myers has contractually agreed to remit any taxes due, is Myers required to remit applicable LOST and/or SILO taxes on purchases from Young originating outside of Iowa and delivered to Iowa locations using common carrier tractors and Myers’ trailers?

4. Considering the contractual agreement described above, and the desire of Myers to comply in full with that agreement and with Iowa law, is the total tax liability between the two parties the 5% use tax?

PURPOSE OF RULING
The function of a declaratory order is to provide "reliable advice from an agency as to the applicability of unclear law." Bonfield, The Iowa Administrative Procedure Act: Background, Construction, Applicability, Public Access to Agency Law, The Rulemaking Process, 60 Iowa Law Rev. 731, 805 (1975). Iowa Code § 17A.9 contemplates declaratory orders by administrative agencies on a disclosed set of facts. City of Des Moines v. P.E.R.B., 275 N.W.2d 753, 758 (Iowa 1979). A declaratory order enables the public to secure definitive binding advice as to the applicability of agency-enforced law to a particular set of facts. Bonfield, at 822-23.

It is not the function of a declaratory order to resolve issues involving factual analysis "too complicated to handle outside of an actual adjudication." Bonfield, at 807. A declaratory order is not a "contested case" as defined in Iowa Code § 17A.2(5); namely, it is not an evidentiary hearing which is also an administrative remedy set forth in Iowa Code ch. 17A and in the Department's rules, see 701 IAC 7.41(17A). Consequently, for purposes of this declaratory order, the Director views the issues raised in the petition for declaratory order as questions of law applicable to the factual situation disclosed by the Petitioner in the petition. This view is consistent with Department rule 701 IAC 7.56 concerning the issuance of declaratory orders.

CONCLUSION
Effective July 1, 2004, Iowa implemented Streamline Sales Tax (SST) laws. SST laws apply to all sellers making sales of tangible personal property and enumerated services in Iowa regardless of whether a seller has executed an SST agreement with the Department or not. Included in the SST laws is Iowa Code section 423.15 which sets forth the general “sourcing” provisions for Iowa under SST. The purpose of this sourcing statute is to determine which state has the right to tax a given transaction when more than one state is involved in the sale of tangible personal property or an enumerated service. However, the statute defers to the state that has jurisdiction to tax regarding the issue of whether to impose sales or use tax.

Relevant part of Iowa Code section 423.15 states the following:

…These provisions apply regardless of the characterization of a product as tangible personal property, a digital good, or a service, excluding telecommunications services. This section only applies to determine a seller's obligation to pay or collect and remit sales or use tax with respect to the seller's sale of a product…A seller's obligation to collect Iowa sales tax or Iowa use tax only occurs if the sale is sourced to this state. The application of whether Iowa sales tax applies to sales sourced to Iowa depends upon where the sale is consummated by delivery. Iowa Code section 423.15(2005) (emphasis added)

Iowa Code section 423.15 sets out how to determine where the sale of products is sourced. Section 423.15 (1) (a) states that “When the product is received by the purchaser at a business location of the seller, the sale is sourced to that business location”. Under the circumstances you have presented, the sales from Young to Myers are sourced to Iowa, because receipt of the materials is at a business location in Iowa. Consequently, it is up to the laws of Iowa to determine whether Iowa sales tax and any application local option sales tax (LOST) and/or school infrastructure local option sales tax (SILO) or Iowa use tax is to be imposed and who is responsible to collect or remit the tax. Iowa does not impose any local option use taxes.

Under Iowa Code section 423.15(2005), if it is determined that the sale is sourced to the state of Iowa, the question of whether Iowa sales tax applies “depends on where the sales is consummated by delivery”. The law governing whether Iowa use tax or sales tax is due on any given transaction continues to be based on the principles discussed in Sturtz v. Iowa Department of Revenue, 373 N.W. 2d 131 (Iowa 1985) and cases cited therein. The law discussed in these cases has not been changed by the provisions set forth in SST law. The intent of SST is to change Iowa law as little as possible pursuant to Iowa Code section 423.10(2005).

Generally, a state sales tax is imposed on sales of tangible personal property sold at retail in Iowa. See Iowa Code section 423.2(2005). A use tax is imposed on the use of property in Iowa and the transaction is not subject to Iowa sales tax. See Iowa Code section 423.5(2005).

The primary factor used to determine if Iowa sales or use tax is imposed is “the time of delivery”. Sturtz, 373 N.W.2d at 134. When looking for delivery for Iowa tax purposes, the two factors used to determine if a sales or use tax is imposed are the means and manner of delivery.

Department rule 701 IAC 14.3 also discusses the principles used to determine when delivery occurs. Department rules have the force and effect of law and are presumed valid. Hope Evangelical Lutheran Church V. Iowa Department of Revenue and Finance, 463 N.W.2d 76 (Iowa 1990), Richards v. Iowa Department of Revenue, 360 N.W.2d 830 (Iowa 1985). Department rule 701 IAC 14.3 provides the following in pertinent part:

…The intent of the parties to the contract for sale determines when delivery occurs. However, in the event the intent is not readily established from the contract, the rules set out in the Uniform Commercial Code (Iowa Code chapter 554) shall apply in order to determine the place of delivery…

14.3(2) Shipment by carrier. The following principles shall be used to determine the conditions under which delivery is made pursuant to a contract for sale when the retailer utilizes a carrier to ship tangible personal property to a purchaser. If the contract for sale makes no reference of an F.O.B. (free on board) or F.A.S. (free along side) point or of any other point at which title and risk of loss with regard to the tangible personal property are transferred from the retailer to the purchaser and contains no other indication of a delivery point, it shall be presumed that delivery of the property occurs when the seller transfers possession of the property to the carrier. If property is sold under a C.I.F. (cost, insurance and freight) or a C. & F. (cost and freight) contract it shall also be presumed that delivery occurs when the retailer transfers possession of the property to the carrier. If a contract for sale makes mention of an F.O.B. or F.A.S. point, it shall be presumed that the parties intended delivery of the property at the time the property reaches that point. (emphasis added)

Given this law, the Department answers the issues presented by the Petitioner as follows:

1. Since Myers has contractually agreed to remit any taxes due, is Myers required to remit applicable local option (LOST) and/or school infrastructure local option (SILO) taxes on purchase from Young originating outside of Iowa and delivered to Iowa via a common carrier?

As the above subrule states, “if the contract for sales makes no reference of an F.O.B. (free on board) or F.A.S. (free along side) point or of any other point at which title and risk of loss with regard to the tangible personal property are transferred from the retailer to the purchaser and contains no other indication of a delivery point, it shall be presumed that delivery of the property occurs when the seller transfers possession of the property to the carrier.” Based on the present facts, Young transferred possession of the materials to the carrier outside of Iowa and the materials were subsequently transferred to Myers by common carrier to points in Iowa. Consequently, “delivery” of the materials for purposes of Iowa tax, occurred outside of Iowa. With delivery occurring outside of Iowa, Iowa sales tax would not be imposed.

The materials purchased by Myers from Young were shipped from outside of Iowa, by common carrier, for use in Iowa and were delivered to Iowa locations. These materials were used in Iowa for a construction contract by Myers. Consequently, Iowa use tax is due on the use of the materials in this state pursuant to Iowa Code section 423.5(2005) at the rate of five percent use tax. Iowa does not impose local option use taxes.

Iowa Code section 423.5(2005) imposes a five percent excise tax on the use of tangible personal property in Iowa. It is important to note, that if property is used in Iowa, use tax is due. However, not every retailer is required to collect and remit Iowa use tax. When a retailer is not required to collect and remit Iowa use tax, then the purchaser must remit Iowa consumer’s use tax on the purchase directly to the department. To be required to collect and remit Iowa use tax, a retailer must meet the definition of a “retailer maintaining a place of business in Iowa”. Iowa Code section 423.1(43)(2005) defines “retailer maintaining a place of business in Iowa as follows:

“Retailer maintaining a place of business in this state" or any like term includes any retailer having or maintaining within this state, directly or by a subsidiary, an office, distribution house, sales house, warehouse, or other place of business, or any representative operating within this state under the authority of the retailer or its subsidiary, irrespective of whether that place of business or representative is located here permanently or temporarily, or whether the retailer or subsidiary is admitted to do business within this state pursuant to chapter 490. (emphasis added)

As stated above, to be required to collect Iowa use tax, Young must qualify as a “retailer maintaining a business in Iowa”. In the facts at hand, Young is selling tangible personal property to Myers for use in an Iowa construction contract. Consequently, Young is selling tangible personal property to an end-user, thereby making Young a “retailer” of such property. In addition, to being a “retailer”, Young must also “maintain a place of business in Iowa”. Based on the foregoing statute, maintaining an Iowa place of business essentially involves the retailer having a physical location in Iowa or representatives in Iowa that are under the authority of Young. The facts state that Young has an Iowa project office and full-time employees in Iowa that work from that project office. Consequently, Young is a retailer that maintains a business in Iowa and is required to collect and remit Iowa use tax.

Under the facts presented, Young is transporting the materials from outside of Iowa via Young’s vehicle to Myers in Iowa. Under the law, “delivery” is the physical transfer of possession of the tangible personal property directly from the seller to the purchaser Harold D. Sturtz v. Iowa Department of Revenue, 373 N.W.2d 131 (Iowa 1985). Delivery usually, but not always, occurs when the seller of tangible personal property transfers physical possession of the property to the buyer. Because Young retained possession of the good being purchased by Myers during delivery by using Young’s own vehicle to transport the material, physical transfer of the goods does not occur until Young transfers physical possession of the goods to Myers in Iowa. As a result, delivery of the tangible personal property took place in Iowa and Myers is required to remit Iowa sales tax on the purchase of the goods and any applicable local option sales taxes that are imposed in the jurisdiction in Iowa where the goods were delivered.

The power unit or tractor is the primary source of moving the goods. Consequently, the focus is on whether the tractor is owned by a common carrier or the retailer. The owner of the trailer containing the goods that is being hauled by the tractor into Iowa need not be considered. The facts at issue state the tractor is owned by a common carrier. The goods are transferred to the possession of the common carrier outside of Iowa. Consequently, as set forth in the analysis to question one, possession transferred outside of Iowa, so Iowa sales tax would not be due on the transaction. However, because the materials are going to be used in Iowa, Iowa use tax is due on the transaction pursuant to Iowa Code section 423.5(2005). Consequently, Myers’ contractual duty to remit any taxes due on transactions involving Myers and Young, would require Myers to remit Iowa use tax to the department when such a transaction would occur.

Based on the questions presented, total tax liability for transactions between Myers and Young would not necessarily be a five percent Iowa use tax. In the scenarios set forth, it appears that Young may transport materials into Iowa by means of its own vehicles. In such a situation, Iowa sales tax would be due and owing, including any applicable local option taxes imposed in the jurisdiction in which delivery of the materials occurs. In addition, the situation in which Myers uses its own trailers, if Young chooses to use its own tractors and not a common carrier, then Young’s connection with Iowa would result in Iowa sales tax of five percent and any local option taxes in a given jurisdiction of up to two percent may also be imposed.

THEREFORE, based on the foregoing, the means and manner of delivery of goods into Iowa must be considered to determine whether Iowa sales tax or Iowa use tax is to be imposed on a transaction for the purchase of materials bought outside of Iowa and delivered into the state. Consequently, the purchaser, who has agreed to self-assess tax, cannot state that the purchaser is only liable for a five-percent Iowa use tax on all of its purchases with this retailer.

Done at Des Moines, Iowa, this 16th day of February, 2006.

IOWA DEPARTMENT OF REVENUE AND FINANCE

Mark R. Schuling, Director