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Open Collection of Student Writing (OCSW)

Where the Rubber Hits the Road

Utah State sales tax auditors need to be reigned in. Auditors are grossly misusing their power during sales tax audits, effectively turning routine audits into fishing expeditions by looking for any additional, unrelated, possible mistakes by business owners. These actions are unethical and entirely wrong. As chairman of the Utah State Tax Commission, you, [Chairman’s Name], hold sway over the auditors within your organization. Your bio indicates that you hold degrees in accounting and economics as well as a doctorate degree from J. Reuben Clark Law School. These degrees combined with your previous work experience in tax law, and many years serving in Utah’s Congress clearly make you an expert in your field (Office).

I submit there is a situation which requires your immediate, expert attention; auditors are hunting down Utah’s tire companies and attempting to extort additional state sales tax from them by declaring that the Federal Excise Tax, or FET, is a taxable item, which it clearly is not. They are further stating that service fees for the waste disposal of unserviceable tires are also subject to state sales tax. Since the recycling company who collects these waste products is not required to charge sales tax for this service, it appears both assertions made by your auditors are in fact, utter fiction. Heavy-duty tires, according to federal guidelines, are taxed by different rules than Utah’s sales tax auditors are playing by; however, these auditors are successfully bullying business owners into paying sales tax on both items although they are classified as non-taxable. This needs to be remedied immediately, by you, as these business owners lack the financial power to fight such absurd audits in court, due to the unseemly costs imposed by prolonged court cases.

According to the Code of Federal Regulations (Annual Edition), the rules regarding the taxation of heavy-duty tires differ dramatically from most other commodities in the marketplace (Code 779.262). Heavy-duty tires are defined as exceeding a 3,500-pound carry capacity (United States). These tires are primarily used on heavy-equipment vehicles in commercial enterprises which provide for a sizeable amount of goods to be transported across the nation. Heavy-duty tire taxation is federally categorized along with gasoline as items which, “in practical operation, are taxes (levied) at the retail level” (Code 779.262).

The wage and labor guidelines repeatedly define that FET are not includable when calculating annual gross volume sales (Code 779.258,259,261,262). Guidelines further specify that “Federal excise taxes on gasoline, tires, and inner tubes reflect that, although they are listed under the title of “Manufacturers Excise Taxes”, they are in practical operation, taxes “at the retail level” (Code 779.262).”

It is impossible to read these codes and walk away confused. The law could not more clearly state that FET amounts are not includable as part of the annual gross volume of sales for an enterprise. The distinction in Code 779.262 clearly identifies that the FET gets paid by the end-user at the retail level. Although FET is itemized on every sales invoice from the manufacturer to the end user, it does not change the fact that the end-user, in practical terms, is the party intended to pay the FET. Our state sales tax law specifically declares that the “purchase price and sales price do not include a tax or fee legally imposed directly on the buyer when separately stated on an invoice, bill of sale or similar document given to the buyer” (Utah!). The FET on heavy-duty tires is a compulsory, legally imposed tax which is understood, according to federal guidelines, to be paid by the end-user at the retail level. Auditors and review boards at the tax commission need to take note of the ongoing, wrongful actions which are being made by members of your organization.

If the tax commission intends to employ ethical business practices, they must stop bullying companies to pay illegal sales tax on FET and begin working towards changing state sales tax laws that would allow for legal taxation of FET and service fees for waste disposal. Government responsibility includes providing public goods, protecting public health and welfare, assist in stabilizing the economy, protecting businesses, aid in conserving the environment, help to regulate working conditions (Regulate). Auditors are an extension of the government and should be held to the same standard of responsibility; instead, they are unfairly targeting a small, specific group of businesses.

An anonymous source, who has worked in the commercial tire industry for over 30 years, claims that every company he has worked for has ALWAYS separated out the FET as the non- taxable item it is. Suddenly, in 2018, sales tax auditors are tripping over themselves to dig through age-old files and taking it upon themselves to re-write and/or enforce non-existent tax laws. These shameful practices unduly burden tire companies, causing unnecessary interruption to their regular business operations so they can attempt to prove that they are properly invoicing, collecting, and paying sales tax. Yet, it is the tax agency who actually bears the burden of proof to provide irrefutable evidence to these businesses, showing that sales tax is due on both the FET for heavy-duty tires and the waste-disposal service fees.

Auditors are distorting the state sales tax law in their attempt to charge sales tax on FET because it is well-defined by federal and state guidelines as non-taxable. To support their fallacious argument, these auditors are attempting to apply the “special rule, manufacturer’s retail stores” from publication 510 (United States), alleging that these businesses owe sales tax on the FET portion of the tire sale. The special rule which they are referring to states, “the excise tax on taxable tires is imposed at the time the taxable tires are delivered to the manufacturer-owned retail stores, not at the time of sale”. While this rule may well apply to all manufacturer-owned retail stores it has no relevance to the retailers being targeted; who are wholesalers and/or distributors that are independently owned and operated.

Many excise taxes are not levied at the retail level. Payment of FET for alcohol and tobacco are strong examples where FET is paid by the manufacturer, essentially absorbed at the top of the distribution chain instead of being collected at the retail level. The Code of Federal Regulations clarifies that “in some cases the circumstances may reflect that despite the fact that such taxes may be levied upon the manufacturer or distributor, nevertheless they may be, in practical operation, taxes at the retail level and may be so regarded for the purpose of this provision” (Code 779.263).

This “practical operation” is illustrated by the purchase life-cycle of a heavy-duty tire.

For example, United Tire, a company currently under scrutiny by Utah sales tax auditors purchases and re-sells tires. The example invoices attached include one where United Tire purchased tires from a distributor, Pearson Tire (Pearson); another invoice shows tires sold to an end-user, Maxway Trucking (United Tire). Person Tire itemized FET on their invoice to United Tire; however, since United Tire, a wholesaler, is not the end-user of the products listed on this invoice, they pass along the FET to the true retail-level end-user; who in this example is Maxway Trucking, who was subsequently billed the FET.

Tires eventually become unserviceable and must be properly recycled. According to the Tire Safety Group, “tires significantly degrade around five years from date of manufacture” (Wetherington). Continuing with the earlier example; United Tire routinely pays a recycling company, Liberty Tire, a service fee to haul away unusable tires left by customers. This service fee is offered as both a “pick-up-service” and a “gate service” meaning Liberty will both pick used tires up, as well as allow on-site drop offs. Prices for disposal are based on the weight and type of tires and no sales tax is charged. When asked why they do not charge sales tax on this service, the general manager at Liberty Tire’s Salt Lake office, Dave Jacobowski, said “it is not proper to tax a service”.

If Liberty Tire is not required to charge sales tax to their clients for tire disposal then why are individual tire companies being targeted by the state? Why are your auditors, Samantha Josey and Chris Barnes demanding United Tire to pay sales tax on this exact service? United Tire is merely passing along the service fee which they are charged by Liberty Tire; in fact, any line items for waste disposal on United Tire invoices is essentially a placeholder for Liberty Tire’s service fee for picking up useless tires.

In Utah new heavy-duty tires are subject to a waste tire recycling fee, paid by the retailer to the Utah State tax commission. According to Utah Administrative Code dated September 1, 2018, “the recycling fee is not considered part of the sales price of the tire and is not subject to sales or use tax” (Utah). The concept that the recycling fee is tax exempt logically carries over to explain why Liberty Tires is not required to charge sales tax for waste disposal of unserviceable tires.

One local business owner, Blake Maxfield, of Maxway Trucking, offers some unique industry specific insights regarding certain points made within this paper along with a few brand- new ideas:

“This issue (sales tax on the FET applied to heavy-duty tires) causes yet another burden by state and federal government by unfairly taxing heavy-duty vehicles. We already pay a 12% excise tax on the gross amount purchase price of these vehicles, which in 2007 cost approximately $65,000. Today with all of the EPA regulations and EPA mandated engine modifications that same truck costs over $130,000. Since FET is based on a percentage of sales it has effectively doubled in ten years.

Originally FET was used to fund the building of American’s highway systems. Later it was used to compensate for the deterioration of the roadways which is well and good. However, these taxes are growing at shocking rates. On top of the outrageous FET we currently pay on diesel fuel and licensing, now it appears the state wants us to pay an additional sales tax on top of FET for tires purchased in Utah.

As an interstate carrier who is licensed in Idaho, I could instead purchase tires from a vendor in Idaho and avoid the entire issue of Utah’s attempt to add sales tax to the FET. Would it not be detrimental to Utah’s economy if transportation companies opt to purchase their tires from Idaho or any other nearby state?

When you drive down the road, look at the license plates of the semi-trailers you pass. Why do you think the majority of semi-trailers are licensed in Idaho, Indiana, and Oklahoma? It is because these states have favorable laws in regard to semi- trailer licensing that require companies to pay a one-time license fee rather than having to renew it annually.

If you don’t believe Utah’s laws have an impact on the state’s revenue, then you need to take a hard look at this example because it illustrates how Utah’s laws have already pushed one real revenue stream out of our state, and this ultimately harms Utah’s economy.

Mr. [Chairman’s Last Name], I urge you to make time right away for reviewing the actions of your auditors regarding these issues of attempting to force Utah tire companies to pay sales tax on the FET for heavy-duty tires and sales tax on waste disposal service fees. I believe you will find that their endeavors are unethical and illegal. The auditors are literally dragging these tire sales companies through a nightmare by scrutinizing every transaction, looking for opportunities to impose sales tax where none is owed. Thank you for your consideration.

Works Cited

Barnes, Chris and Josey, Samantha. “Re: United Tire Sales Tax Audit.” Received by United Tire, Re: United Tire Sales Tax Audit. emails date from June 2018 – November 2018.

“Code of Federal Regulations (Annual Edition).” Code of Federal Regulations | Govinfo, Government Publishing Office, 1 July 2018, 779.258, 779.259, 779.260, 779.261,

779.262, 779.263, 779.264. www.govinfo.gov/app/details/CFR-2018- title29-vol3/CFR-2018-title29-vol3-sec779-262/context

“Office of the Commission.” Utah State Tax Commission, tax.utah.gov/commission-office. “Pearson Tire Sales Invoice.” 3422 South 700 West, Salt Lake City, UT 84119, 20 Nov. 2018. “Regulate and Protect Government and Business.” www.Mark-ED.org, Marketing Education

Resource Center, 2009, www.pendleton.k12.ky.us/userfiles/116/Classes/5437/LAP-EC- 016 Government and Business.pdf.

United States, Congress, Internal Revenue Service.” Excise Taxes (Including Fuel Tax Credits and Refunds), Publication 510, 2018. Cat. No. 15014I. https://www.irs.gov/pub/irs- pdf/p510.pdf.

“United Tire Sales Invoice.” P.O. Box 26774, Salt Lake City, UT 84126, 8 Aug. 2017. Invoice to Maxway Trucking

“Utah Administrative Code.” UT Admin Code R865-19S. Sales and Use Tax.September 1, 2018, Utah Office of Administrative Rules, 1 Sept. 2018, rules.utah.gov/publicat/code/r865/r865-19s.htm.

Utah! tax.utah.gov. Sales and Use Tax General Information, Tax.utah.gov, Oct. 2018. tax.utah.gov/forms/pubs/pub-25.pdf.

Wetherington, Matt. “Tires Expire in Six Years.” Tire Safety Group, 13 May 2014, www.tiresafetygroup.com/tires-expire-in-six-years/.

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