Snarr Advertising, Inc. v. Utah State Tax Commission , 20 Utah 2d 55 ( 1967 )

ELLETT, Justice:

This case is before us for a review of a matter determined by the Utah State Tax Commission based on a stipulation of facts.

The plaintiff sells to clients custom-made advertising displayed on unique and individually constructed roadside signs. The contracts between plaintiff and its clients are usually for a term of years with the duty on the plaintiff to maintain the signs. The customer pays a specified sum of money monthly to the plaintiff during the life of the contract. The client has no right to possession of the sign, nor has he any other rights therein except the right to have the sign remain on public display and a hope for an increase in business as a result of the advertising thereon displayed. The cost of constructing the sign and erecting it amounts to approximately fifteen per cent of the total rentals paid by the customer. The remaining eighty-five per cent includes costs paid to the landowner by way of purchase of the land or rental thereof and the cost of acquiring the site (realtor’s commission, etc.), electrification, and lighting of the structure, the rotation of the advertisements and structures from place to place, the maintenance of the sign during the agreement, sales services, artistic services, and profits.

The Tax Commission now undertakes to tax the entire rentals received by the plaintiff under the authority of Section 59-15-2 (g), U.C.A.1953, which reads as follows:

When right to continuous possession or use of any article of tangible personal property is granted under a lease or contract and such transfer of possession would be taxable if an outright sale were made, such lease or contract shall be considered the sale of such article and the tax shall be computed and paid by the vendor or lessor upon the rentals paid.

The question here to be determined is simply this: Is billboard advertising subject to the sales tax under the above section?

Originally, a statute was enacted to tax the sale of tangible personal property. To avoid paying the tax, many transactions were made under the guise of a long-term lease of personal property, usually for the estimated life of the article in question. Possession and control were given to the lessee, and the rentals to be paid were roughly the same as installment payments would have been had the property been purchased on conditional sales contracts. To plug this loophole, the Legislature in 1937 (Chapter 110, Section 2(g)), amended the law to read as above quoted.

There can be no doubt that if the tangible sign only was sold to a customer, a tax on the sale price would be due. However, renting an outdoor advertising sign and agreeing to keep it serviced at a price greatly disproportionate to the cost of the sign gives rise to a serious consideration as to whether such a transaction was meant to be within the statute.

The leasing of a typewriter for five years, the estimated life of the machine, at a rental commensurate with its selling price and the delivery of possession to the purchaser so he would have the exclusive use thereof would be taxable under the statute, because here the rental is a subterfuge in •effect for a sale.

Until 1963, some twenty-six years after the statute was passed, the Tax Commission made no effort to collect a tax on •outdoor advertising. This would not prevent the Commission from alerting itself to an error in collecting the tax if it was proper to do so. (See Union Pacific v. State Tax Commission, 19 Utah 2d 92, 426 P.2d 231). However, the fact that no tax was assessed for some twenty-six years of time lends strength to the proper presumption of the validity of the original interpretation. During this time some thirteen regular sessions of the Legislature convened, and at no time was there any attempt made to correct the law so as to change the interpretation placed thereon by the Tax Commission.

Even now, Regulation S-65 promulgated by the Tax Commission is in full force and effect and excludes the taxing of advertising space sold in newspapers, magazines, or otherwise, as well as art work produced in the office of the advertiser for the purpose of visualization of any idea. The regulation is in the following words:

Advertising space sold in newspapers, magazines, or otherwise is not subject to tax. Likewise, charges made by advertising agencies for preparing and placing advertising media are charges for service and, therefore, are not taxable. (Emphasis added.)

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The tax does not apply with respect to art work produced with the office of the advertiser or the advertising agency for the purpose for visualization of any idea and the client’s selection of the particular visualization he favors for use in his advertisements. The sale of materials to the advertiser or advertising agency for producing such art work is subj ect to tax.

Regulation S-32 of the State Tax Commission, still in force and effect, provides:

Tax on receipts of leases and rentals applies when the lessee has the right to use and operate the tangible personal property. (Emphasis added.)

In the instant case, possession of the sign is never given to a customer, and no use thereof is had unless it be thought that calling attention of the public to the advertiser’s business is a use. In that regard the customer gets one hundred per cent of the use, but we think the Legislature had in mind a different use than this evanescent possibility. We think the Legislature meant to tax those pieces of personal property the possession or use of which was given over to the lessee. The benefit which the customer derives from dealing with outdoor advertisers is not of a tangible thing. It is a service similar to that which would be had if a hired man was stationed where the sign is located and by the use of a megaphone called attention of the passing public to the merits of the customer’s merchandise or service, as the case might be. It is a service similar to that of a pied piper who pipes the public to the location of the customer’s business.

It is our opinion that the holding of the Tax Commission is erroneous and that it should be and it is hereby reversed. Each party to bear its own costs.

CALLISTER, TUCKETT, and HEN-RIOD, JJ., concur.