News and Insights

Repair Services Between Related Companies Were Subject to Tax in Utah

Tax Development Sep 08, 2016

The Utah Tax Commission (“Tax Commission”) recently issued a ruling on the application of sales tax to transactions between two related Utah companies. The taxpayer in question was a retailer, who sold building materials. The taxpayer and related corporation were initially the same entity until they split into two separate entities in 2010. The taxpayer was audited and at issue was the repair service performed by the related corporation on the taxpayer’s equipment.  These repairs were not performed by the taxpayer’s employees because although it paid directly for the parts, it did not have any employees of its own who could do the repairs and installation labor. Upon reviewing the transactions, the auditor determined they consisted of taxable repair services and consequently assessed tax

Although repair services are subject to tax, charges for payroll reimbursements and service fees by a professional employer organization to provide employment services to affiliated businesses are not subject to sales tax in Utah. The taxpayer, on appeal, argued that the true essence of the transactions in question was the exempt sharing of employees or payroll reimbursement for shared employees. In support of this argument, the taxpayer pointed out that employees’ timecards and internal accounting, rather than invoices, were used to determine the reimbursement. Ultimately, the Tax Commission determined that the taxpayer did not prove the transactions in question were payment for anything other than the taxable repair and renovation of tangible personal property. As a result, the assessment was upheld.

This is a cautionary ruling regarding intercompany transactions between related entities causing sales tax to be unintentionally created through the use of a legal entity that while affiliated is still viewed as a third-party vendor.