Utah Rules That Contractor’s Purchase of Freeway Signage Subject to Sales Tax

For real property contractors, one of the most difficult issues to analyze is if tangible personal property used in the project becomes real property, which ultimately determines each party’s sales tax compliance obligations.

By Tina M. Chunn, SALT Senior Manager

In most states, real property contractors are considered the end-users of the tangible personal property (“TPP”) they purchase and use in a real property construction contract.  Therefore, real property contractors typically pay sales tax on those TPP items.  For example, when a real property contractor purchases lumber to build a house, the lumber is TPP.   However, when the contractor constructs the house, the lumber is affixed to the land and becomes real property.  The lumber is considered last used as TPP by the real property contractor; therefore, the contractor pays sales tax on the lumber when purchased.  The contractor does not charge sales tax to the future homeowner since the contractor is selling real property, which is not subject to sales tax.

One of the more difficult sales tax issues for contractors is whether TPP they purchase becomes real property at the end of the project or retains its original character as TPP.  This is often a determination made based on the specific facts and circumstances of each situation, and it can be subjective.  On Oct. 22, 2018, the Utah State Tax Commission (the “Commission”) released a decision in which it rejected a subcontractor’s appeal for sales and use tax refunds on items it purchased and installed on public freeways for the Utah Department of Transportation (“UDOT”).[1]

The state had denied the subcontractor’s claim for refund of the sales tax paid on sign structures, signage (on and off freeway), guardrails and crash cushions (referred to collectively as the “Property”) that it purchased and installed on public freeways and/or highways for the UDOT pursuant to various contracts for the building or rebuilding of freeways and highways.  The subcontractor appealed to the Commission arguing that the property remained tangible personal property after installation and thus were not subject to sales tax when purchased by the subcontractor.  Rather, the subcontractor claimed that it purchased the property for resale (i.e., exempt from sales tax), and that when it resold the property to the UDOT, sales tax did not need to be collected since the purchaser was the state of Utah.[2]

In its decision, the Commission relied on a prior Utah Supreme Court opinion that identified nine factors used to determine whether items remain TPP or become real property upon installation.[3]  These nine factors are:

  1. whether the property is removable without harm to the structure on which it is placed;
  2. whether the property is manufactured with the idea it could be used elsewhere;
  3. whether the parties to the transaction contemplated that the property would be removed for repairs or replacement;
  4. whether the primary purpose of the transaction was for the property or the installation of the property;
  5. whether the installation was for convenience;
  6. whether the transaction indicated that the property was to be treated as real property after installation;
  7. whether the purchaser intended to purchase real property;
  8. whether the property becomes inseparably meshed into a greater facility which is the object of the transaction; and
  9. whether the property becomes attached to real property.

In making its arguments, the taxpayer focused on the individual items of property.  For example, with regard to the first factor, the taxpayer noted that the signs are bolted to concrete beds that protrude above the road, and therefore, they can be removed without physically harming the real property (i.e., the highway).  The taxpayer makes similar claims about the guardrails and crash cushions.  However, the state argues that the focus should not be on each individual item, but rather on the contract as a whole and functions served by the property.  For example, the state explains that the contracts pursuant to which the property was installed were highway projects, and that such projects would be “frustrated” by and would not function properly without such property.  Therefore, removing such property results in functional harm to the highway.

The Commission ultimately agreed with the state, determining that under each of the nine factors, the property should be considered real property after installation.  The findings were based on several concepts:  First, the property is crucial to the function of the freeway and/or highway, and that such property was specifically designed and installed for this purpose.  Second, the primary object of the transaction was for the building or rebuilding of a freeway and/or highway and not specifically for the installation of signage, etc.  Finally, the contacts themselves were written in the same manner, and they do not specifically provide for the sale of the property.

Aprio’s SALT Team is experienced with analyzing these types of real property contracting transactions and helping businesses understand the unique application of sales and use tax rules to real property contracting activities.  Our guidance helps to ensure that you will be in compliance with your multistate sales and use tax obligations and will not incur unexpected liabilities.  We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at tina.chunn@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the November/December 2018 SALT Newsletter.

[1] Commission Decision, Appeal No. 15-761, Utah State Tax Commission, (Feb. 27, 2018).

[2] Sales to the state, its institutions, or its political subdivisions are exempt from tax pursuant to Subsection 59-12-104(2).

[3] BJ-Titan Services v. State Tax Commission, 842 P.2d 822 (Utah 1992).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.