Are duty-free 'in bond' sales and 'tax paid' sales at the Salt Lake City airport's duty-free store exempt from Utah sales tax as interstate commerce?

Plain-English summary

An operator opened a duty-free store in the international concourse of the Salt Lake City International Airport under a lease with the city, and asked the Commission whether two types of sales it made were subject to Utah sales tax. "In bond" sales involve foreign goods (tobacco, alcohol, perfumes, jewelry) purchased without US import duties or foreign export duties, subject to strict US Customs Service inventory/handling rules -- any inventory shortage causes the store to lose duty-free status and become liable for the duties itself. These items are delivered directly from the store to the departing aircraft, with the buyer never taking custody until arriving at the foreign destination. "Tax paid" sales are nearly identical but involve a small duty paid on certain items (insignificant compared to duties on tobacco/alcohol); like in-bond items, they're segregated from other airport gift-shop merchandise and delivered directly to the aircraft by the store operator, similar to how the operator's mail-order sales are shipped out of state via common carrier and treated as tax-exempt.

Both categories can qualify for Utah's interstate commerce exemption -- but the test is about delivery, not the "duty-free" label. Sales made in interstate commerce aren't subject to Utah tax under Utah Admin. Rule R865-19S-44, which requires (1) actual physical movement of the goods across state lines, (2) that cross-border delivery be an unavoidable condition of the sale, and (3) that the delivery be essential, not merely incidental, to the sale. For "in bond" sales, federal law (19 U.S.C. § 1555(b)(3)) requires the duty-free operator to ensure exported merchandise reaches the departing passenger or aircraft at the point of exit -- making cross-border delivery an essential, unavoidable condition of the sale, which satisfies the interstate commerce test.

"Tax paid" sales get the same treatment, but only if delivery is likewise a true condition of the sale. The Commission applied the identical analysis: if, as a condition of the sale, the merchandise must be delivered to the departing passenger or aircraft at the point of exit, the sale qualifies as exempt interstate commerce. But the Commission drew a sharp line for any transaction that does NOT require cross-border delivery as part of the sale itself -- for example, if a departing passenger simply buys a book or magazine at the gift shop before boarding, that sale is fully taxable in Utah, even though the passenger will obviously carry the item out of state. The buyer's mere intent to remove the property from Utah after purchase does not convert an ordinary in-state sale into an exempt interstate transaction.

Mail order sales follow the same delivery-based rule. If merchandise is delivered by a common carrier directly to an out-of-state destination, the sale qualifies as exempt interstate commerce. But if the purchaser takes possession of the merchandise in Utah first and only later ships it out of state themselves, the transaction is taxable in Utah.

What this means for you

Duty-free and airport retail operators

The interstate commerce exemption doesn't turn on whether your merchandise is labeled "duty-free" -- it turns on whether cross-border delivery (to the passenger or aircraft at the exit point) is a legally or contractually required CONDITION of the specific sale. Structure your delivery procedures (segregated inventory, direct hand-off at the gate, no customer custody until the foreign destination) to document that the condition is actually met for each transaction type.

Any Utah retailer selling to customers who will leave the state

Simply knowing a customer plans to take goods out of state doesn't exempt the sale. Only sales where the seller is contractually or legally obligated to deliver across state lines as an essential part of the transaction qualify -- an over-the-counter sale that the customer happens to carry out of state remains taxable.

Mail-order and shipping-based sellers

Ship directly to the out-of-state address via common carrier to preserve the interstate exemption. If the customer picks up the item in Utah and ships it themselves afterward, the sale is taxable regardless of the item's ultimate destination.

Common questions

Q: Are duty-free "in bond" sales at an airport exempt from Utah sales tax?
A: Yes, because federal customs law requires the merchandise to be delivered directly to the departing passenger or aircraft at the point of exit, making cross-border delivery an essential, unavoidable condition of the sale.

Q: Are duty-free "tax paid" sales treated the same way?
A: Yes, as long as delivery to the passenger or aircraft at the exit point is likewise a required condition of that sale.

Q: If a departing airport passenger buys a book at a regular gift shop, is that sale taxable?
A: Yes. The passenger's intent to leave the state with the item doesn't make it an exempt interstate sale -- only sales where cross-border delivery is a required condition qualify.

Q: Are mail-order sales to out-of-state customers exempt from Utah sales tax?
A: Yes, if the item is delivered by common carrier directly to the out-of-state address. If the customer takes possession in Utah first, the sale is taxable even if they later ship it elsewhere.

Q: Does this ruling apply to my airport retail or duty-free operation?
A: No. It binds the Commission only for the requesting taxpayer and the facts described, and can't be relied on by another taxpayer, though it illustrates how the Commission applies the interstate commerce exemption to duty-free and airport sales.

Citations and references

Statutes and rules:

• Utah Admin. Rule R865-19S-44 (interstate commerce sales exemption test)
• 19 U.S.C. § 1555(b)(3) (federal duty-free merchandise export requirement)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/96-089.pdf

Original ruling text

96-089

Response May 23, 1996

Request

May 3, 1996

XXXXX

Utah State Tax Commission

Advisory Opinion Letters

210 North 1950 West

Salt Lake City. Utah 84134

Re: XXXXX

Utah State Sales Tax Applicability

to the XXXXX

Dear XXXXX

Our client XXXXX opened its duty free store on April 3, 1996 in the XXXXX Concourse of the Salt Lake City, International Airport. XXXXX currently hold the lease contract with Salt Lake City to operate the gifts shops in the Salt Lake City International Airport. The increased number of direct International flights originating in Salt Lake City has prompted XXXXX to open the Duty Free Store. We would like the Utah State Tax Commission to issue a written Advisory Opinion letter on two types of sales that are made through the Duty Free Store to determine if either type of sale is subject to the Utah State Sales Tax.

Sale type #l �In Bond Sales� XXXXX purchase certain foreign goods such as tobacco, alcohol, perfumes, and jewelry without paying any United States Import duties or Foreign Government Export Duties. These purchases are allowed duty free status because they must comply with the rigid U.S. Customs Service, Office of Cargo Enforcement and Facilitation rules and regulations. It is our understanding that these U. S. Custom laws preempt state laws in this area. I have attached a letter from XXXXX, Executive Director of the Salt lake City International Airport Authority to the Utah Alcoholic Beverage Control Commission (UABCC). I would like you in particular to refer to the first paragraph of Exhibit #3. I feel the Sales tax issue is very similar to the UABCC issue. The UABCC has ruled that sales in the Duty Free Store are outside of the scope of their jurisdiction. You may call XXXXX at the UABCC to verify this fact.

XXXXX must keep detail records of sales and inventory controls on these �In Bond� items. Any shortage discrepancies will lose their duty free status and XXXXX will then be responsible for all import and export duties. I had solicited help from XXXXX, Assistant City Attorney for Salt Lake City in this matter. Her letter to me as well as her summary of research are attached as Exhibits # 1, 4 and 5. I was concerned that if you were to read Utah State Tax Commission rule R865-19S-44 (attached Exhibit #6) the �In Bond� items would be subject to the Utah State Sales Tax. I would like you to read the second sentence of the second paragraph of Exhibit #1. All �In Bond� sales are delivered straight from the Duty Free Store to the aircraft which has a direct destination outside of the United States. The buyer is not permitted to take custody of the items until they have arrived at the foreign destination. Again the handling and delivery of the �In Bond� sales are under the control of the Duty Free Store until it is delivered directly by Duty Free Store operator to the aircraft.

I believe the research on exhibits #4 and 5 will support the preemption of state law. I believe the �In Bond� sales should be exempt from the Utah Sales Tax. XXXXX offered her assistance should we need any clarification or additional help.

Sale type #2 �Tax Paid Sales�**** The �Tax Paid� sales are almost identical to the �In Bond� sales except for one issue. A small duty is paid on some items that are purchased by the Duty Free Store. This duty is paid because the duty is insignificant when you compare it to the high duties which are levied on certain goods such as tobacco and alcoholic products. The procedural handling of these items is identical to the �In Bond� items in that they are inventoried with the same controls. These �Tax Paid� items are segregated from all other merchandise sold at all of the other gifts stores at the airport. The items once paid for in the Duty Free Store are delivered directly to the aircraft by the Duty Free Store operator just as the �In Bond� items are.

These �Tax Paid� sales very closely resemble the mail order sales that XXXXX makes through its regular stores at the airport. The mail order sales are purchased tax free and sold tax free because they are sent by a common carrier such as XXXXX to an out-of-state destination. These mail order sales have been exempt from the Utah State Sales tax and this procedure has been validated by the Audit division of the Utah State Tax Commission on recent sales tax audits.

In closing I feel that both the �In Bond� sales and the �Tax Paid� sales are exempt from the Utah State Sales Tax. If you have some reservations on issuing an Advisory Opinion letter exempting both types of sales I would appreciate it if you would contact me regarding those concerns.

Sincerely,

XXXXX

May 23, 1996

XXXXX

Advisory Opinion - Sales from duty free store

Dear XXXXX

We have received your request for an opinion as to the taxability of sales made from the duty free store at the Salt Lake Airport. We find as follows:

Sales made in interstate commerce are not subject to tax. Utah Admin. R. R865-19S-44. A sale qualifies as an interstate sale if (1) the transaction involves actual and physical movement across the state lines, (2) delivery across state lines is an unavoidable condition of the sale, and (3) delivery is an essential, not incidental, part of the sale. As we understand �in bond sales,� they qualify as sales in interstate commerce. Under 19 U.S.C. 1555 (b) (3), the duty-free sales enterprise must ensure that the merchandise it sells will be exported from the customs territory. In the case of duty free shops located in airports, federal law requires the merchandise to be delivered to the departing passenger or aircraft at the point of exit. Delivery across state lines is an essential and unavoidable condition of these sales.

With regard to �tax paid sales,� these sales qualify as interstate sales if, as a condition of sale, the merchandise is delivered to the departing passenger or aircraft at the point of exit. Any other transaction which does not require delivery of the item across state lines does not qualify as an interstate sale. For instance, if a departing passenger purchases a book or magazine from the gift shop before boarding a plane, the sale is a taxable transaction. The fact that the passenger intends to remove the property from Utah after the sale does not convert the sale to an interstate transaction.

As to mail order sales, if an item is delivered by XXXXX to an out-of-state destination via common carrier, the sale qualifies as an interstate sale. If the purchaser takes possession of the merchandise in Utah, then subsequently ships it out of state, the transaction is taxable in Utah.

Thank you for taking the time to put together the background material that accompanied your request letter. Please let us know if we can be of further assistance.

For the Commission,

Alice Shearer,

Commissioner