United States: Even Lawyers Have To Pay Idaho Use Tax!

The Idaho State Tax Commission ("Commission") affirmed a use tax assessment of $973, with penalty and interest totaling $1,565 against an anonymous attorney ("Mr. Attorney"), a licensed Idaho attorney with a law office in Idaho. In May, 2000, Mr. Attorney was selected by the Commission’s Sales Tax Audit Bureau for an audit. Based on a review of purchase documents, the Commission determined that Mr. Attorney had purchased supplies and other tangible personal property during 1999 upon which he had not paid sales or use tax.

The Commission asked Mr. Attorney to enter into the Managed Audit Agreement, to review all purchases for the audit period May, 1993 through April, 2000, to determine if there were any taxable purchases, and agree to a use tax payment. Being an attorney, Mr. Attorney declined to enter into the Managed Audit Agreement. Not surprisingly, the Commission then estimated the amount of Idaho use tax due for the audit period, based on the 1999 purchase records that had been reviewed.

Mr. Attorney made numerous arguments against tax assessment, again not unsurprisingly, and the Commission issued a Letter Ruling in Docket No. 15671, which sets forth all of the arguments it rejected, some of which are highlighted herein.

Mr. Attorney argued that the Commission had no jurisdiction to impose use tax on property purchased outside Idaho or purchased through interstate commerce. In rejecting this argument, as it should, the Commission gave a nice summary of the purpose and history of the Idaho use tax. It was first enacted in 1965 as a complement to sales tax. Use taxes are imposed in Idaho under Code § 63-3621. Use tax is calculated at the same rate as sales tax, as it must be to satisfy the Equal Protection Clause, and is imposed on "every person storing, using, or otherwise consuming, in [Idaho], tangible personal property." Idaho Code § 63-3621(c). If the consumer has paid sales tax to another state, the Idaho Code gives the consumer a credit against any use tax liability.

As the Commission stated, "[t]he idea behind the use tax is to impose a tax, equal to the amount of the Idaho sales tax, on property that was purchased outside the state and then brought into the state for storage, use, or other consumption. The use tax takes away the incentive to purchase property outside of Idaho for the purpose of avoiding the Idaho sales tax on that property." The Commission concluded that use tax was properly imposed on Mr. Attorney’s out-of-state purchases upon which no other state sales tax had been paid and which were properly taxable in Idaho. That led to the next issue contested by Mr. Attorney.

As part of his law practice, Mr. Attorney paid to obtain hospital records, charts, and other documents used in his law practice. Mr. Attorney argued that these charges were service charges or handling charges imposed by clinics and hospitals to compensate them for the labor and other cost of preparing documents at his request.

In rejecting this argument, the Commission pointed out again that Idaho use tax is imposed on the storage, use, or other consumption of tangible personal property within Idaho. Idaho Code § 63-3621. Here, Mr. Attorney did not dispute that the hospital reports, charts, and other documents which he obtained constituted tangible personal property. However, he argued that the value of that property was nominal and that he was actually paying for the non-taxable services performed by the hospital and clinic to gather, review, prepare, copy, and deliver the documents to him.

The Commission noted that the proper determination of this argument turned on whether the "true object of the transaction" was the transfer of tangible personal property to Mr. Attorney or the rendering of exempt services.

The Commission relied upon Consolidated Freightways Corp. of Delaware v. Department of Revenue and Taxation, 735 P.2d 963(1987), in which the Idaho Supreme Court adopted the predominant test for services vs. the purchase of tangible personal property. The test is as follows:

1. In determining whether a transfer of tangible personal property is a taxable retail sale or a transfer merely incidental to a service transaction, the proper test is to determine whether the transaction involves a consequential or inconsequential professional or personal service. If the service rendered is inconsequential, then the entire transaction is taxable. If a consequential service is rendered, then it must be ascertained whether the transfer of the tangible personal property was an inconsequential element of the transaction. If so, then none of the consideration paid is taxable.
2. (b) In determining whether a mixed transaction constitutes a consequential service transaction, a distinction must be made as to the object of the transaction — i.e., is the object sought by the buyer the service per se or the property produced by the service.
3. (c) Where a transaction is mixed in such a manner that the tangible personal property transferred and the service rendered are distinct consequential elements having a fixed and ascertainable relationship between the value of the property and the value of the service rendered so that both may be separately stated, there exists two separate transactions and the one attributable to the sale of tangible personal property is subject to sales taxation while the other is not.

(735 P.2d 966) The Idaho Supreme Court has applied this rule subsequently in City of Sun Valley v. Sun Valley Company, 851 P.2d 961 (1993) and Ryder v. Idaho State Tax Commission, 939 P.2d 564 (1997).

The Commission assessed interest of $349 and the 25% non-filer penalty of $243 upon the use tax assessment. Mr. Attorney argued that it was unfair to impose interest and penalties against him because he was never made aware of his obligation to pay Idaho use tax and, moreover, was not provided with Idaho use tax forms upon which to report his taxable purchases.

The Commission was not impressed by this argument, pointing out that Mr. Attorney had obtained an Idaho withholding permit and an account number for his law office in May, 1983, and that he continuously held the withholding permit. Moreover, in 1973, Mr. Attorney obtained an Idaho sales tax permit and account number for a retail business that he operated and continued to operate.

This was very significant to the Commission because, beginning in 1989, the Commission mailed a quarterly newsletter to all businesses that had an active sales tax account or withholding account. Several of these newsletters had articles dealing with the responsibility to accrue and pay Idaho use tax. The Commission pointed out that the entire March, 1997, issue was devoted to the Idaho use tax and compliance therewith. Since Mr. Attorney had active accounts with the Commission, he was sent copies of these newsletters and, according to the Commission, ". . . at a minimum he should have been aware of the existence of the Idaho use tax and of the possibility that he might need to obtain a use tax reporting number."

Finally, the Commission felt ". . . it is also worth noting that since 1993 the Idaho Individual Income Tax Return has included a specific line for reporting the Idaho sales or use tax owned on mail order or other non-taxed purchases. Therefore, individuals who did not have an Idaho sales or use tax permit number still had an available mechanism to report and pay the use tax owed on taxable property used or consumed in this state."

One can only hope that Mr. Attorney immediately paid the tax, penalty, and interest and did not start working on an appeal to the next level!