Office of the Commission Utah State Tax Commission
210 North 1950 West Salt Lake City UT 84134
Re: Request for Private Letter Ruling Concerning Goldback Legal Tender and Tax Status
Honorable Commissioners:
I serve as general counsel for both the UPMA as well as Goldback Inc., distributor of the Goldback TM as a privately issued, Utah local currency. I am writing to request a Private Letter Ruling from the Commission regarding the 1 susceptibility to Utah sales tax of a transaction by which Goldback coin is exchanged for U.S. legal tender. In addition, I would appreciate the Commission’s thoughts on the Goldback’s qualification as Utah Specie Legal Tender (SLT).
As you may be aware, local currencies generally function as a complement to the national currency, to which their value is typically pegged. Such currencies aim to encourage spending with locally owned businesses in order to better retain money within the community. While local currencies circulate in 38 states at present, to our knowledge, none existed in Utah until the recent launch of the Goldback. Moreover, because the Goldback’s gold content automatically pegs its value to the 2 U.S. Gold Dollar, rather than the Federal Reserve Note, the Goldback has emerged as a groundbreaking alternative.
In large measure, this project rests upon the legal framework Commissioners Valentine and Rockwell helped establish by means of the passage of the Utah Specie Legal Tender Act (SLTA) in 2011, with important amendments following in 2012. The Goldback was specifically created to rely upon and fit within the framework of the SLTA in order to facilitate its adoption as a local currency capable of claiming Utah legal tender status for the reasons detailed below.
As background, we note that the Goldback employs cutting edge, patented technology which deposits gold one atom at a time onto a proprietary polymer substrate to produce a series of paper-thin, rectangular coins in denominations of one, five, ten, twenty-five and fifty. One Goldback contains 1/1,000th of a troy ounce of 24 karat gold. The other denominations have proportionately greater gold content, up to the fifty, which contains 1/20th of an ounce—exactly half the gold content of the smallest gold coin minted by the U.S. government. Thus the Goldback, back fills the smaller denominations needed to create a truly workable gold currency system. The pure gold contained within each Goldback is fully recoverable by means of vaporizing the coin’s front and back coatings in a super-heated crucible.
As Utahns, including members of the United Precious Metals Association (UPMA), have worked to popularize the use of specie legal tender over the past half decade or so, the lack of a truly convenient, tangible medium of exchange in commercially viable denominations has hampered the use of physical coin in daily transactions. The Goldback addresses that problem by providing a workable precious metals based system to support broader adoption of gold money in Utah. 3
Federal Rules
The United States Constitution grants Congress the power to “coin money, regulate the value thereof and of foreign coin.” It also prohibits States from “coining money or making anything but 4 gold and silver coin a tender for payment of debts.” 5
Prior to the adoption of the Constitution, each state had been issuing its own paper currency more or less continuously for nearly a century. Having witnessed the ravages these fiat currencies wreaked on American society, delegates to the Constitutional Convention were strongly inclined towards restricting emissions of paper currencies in America, especially by states. They also hoped to foster commerce via a uniform federal gold and silver currency and prevent states from abusing paper currency laws to impair contractual obligations. Accordingly, they expressly limited state sovereign authority by prohibiting the states’ right to “coin money.” In order to understand these powers and prohibitions, it is important to understand what the delegates meant by “coin.”
When the Constitution was written and ratified, the verb “to coin” did not exclusively connote the manufacture of metal tokens as we often infer it to mean today. The current edition of the Merriam-Webster dictionary defines coin as “a usually flat piece of metal issued by governmental authority as money” or simply “metal money,” the latter definition implying precious metal content since without governmental authority non-precious metal has no value as money. But in the 1828 Noah Webster dictionary, one definition of “coin” was “that which serves for payment.” Coin was also defined therein as “primarily, the die employed for stamping money” and any “money stamped.” While the definition refers to metallic coins as an example, it also notes that “formerly, all coin was made by hammering; but it is now impressed by a machine or mill. Current coin is coin legally stamped and circulating in trade.” Thus, paper money could be “coined” by the use of a stamp marking it as money.
Significantly, the phrase "coining paper money" appeared in a pamphlet regarding the woolen trade published at the turn of the 18th century. In 1720, economist John Law suggested "coining notes of one pound." Still later Daniel Defoe wrote of how tradesman "coined bills payable from one to another." Anglo/American case law of that era contains references to "notes coined" and "coining notes." In response to the Declaration of Independence, John Schebbeare derided the colonies for "coining paper money." In 1784, debates in the Irish parliament included reference to "coining paper into money." Also, attributed to the famous American patriot Thomas Paine is the accusation that "[o]f all the sorts of base coin, paper-money is the basest." 6
The delegates considered and specifically rejected including an outright prohibition of federal paper currency in the Constitution. The general understanding was that paper currency was to be 7 ; issued during times of national emergency only. For the first century of our country's existence, Congress faithfully adhered to the founders' "exigencies only" proviso for the use of fiat paper currency. For example, although Congress resorted to fiat currencies during the Revolutionary War, the War of 1812 and the Civil War, they always returned the nation to sound precious metal coinage during peacetime. Each time an unbacked fiat currency was introduced the dollar's purchasing power plummeted. Even so, when specie money was restored, the dollar rebounded in short order.
State Rules
Gold and silver monetization by means of recognizing precious metal coin constitutes a Constitutionally reserved state power. The Utah Supreme Court has similarly observed: “The clause 8 [U.S. Const. Art. I Sec. 10] is not a directive to the states to deal only in gold or silver coin; rather, it is simply a restriction on states establishing any legal tender other than gold or silver coins.” 9 Acting within the boundaries of their reserved powers, the states have broad discretion.
Exercising its constitutionally reserved powers is exactly what is accomplished by the Specie Legal Tender Act, which reads in pertinent part as follows:
Subject to Subsection 59-1-1502(3), as used in this part, “specie legal tender” means gold or silver coin that is issued by the United States. 10
(3) Gold or silver coin or bullion, other than gold or silver coin that is issued by the United States, is considered to be specie legal tender and is legal tender in the state if:
(a) a court of competent jurisdiction issues a final, unappealable judgment or order determining that the state may recognize the gold or silver coin or bullion, other than gold or silver coin that is issued by the United States, as legal tender in the state; 11
Or, in its simplest form: “Gold...coin or bullion...is legal tender in the state if...a court of competent jurisdiction issues a final, unappealable judgment or order determining that the state may recognize the gold or silver coin or bullion...as legal tender in the state.” (Ibid.) In adopting this language, the legislature essentially agreed to recognize as legal tender whatever the Utah Courts may deem proper. Fortunately, as of the adoption of the SLTA, the Utah Supreme Court had already spoken on this subject. The Legislature was apprised of this precedent and other related authorities by way of the 21-page analysis entitled State Monetary Authority which I introduced in committee on March 2, 2011 and subsequently distributed to many members of the Legislature and Legislative Counsel. In 1984 the Supreme Court had issued its final, unappealable judgment concerning the use of bullion as money in Utah in a case regarding whether bullion used as money was subject to Utah State Sales Tax:
“The question on this appeal is whether rare United States coins, foreign coins, and precious
metals are money or “tangible property” ... This is a case of first impression in Utah. Other
jurisdictions have held that such items are not money, but are tangible property subject to
sales tax. Those jurisdictions have ruled that whether a sales tax is applicable turns on
whether the transaction is a commodity or a money transaction ... a Michigan appellate
court held that ‘where Krugerrands are transferred as a medium of exchange ... the coins
remain intangible personal property, not subject to tax.’... We agree with this analysis...12”
Although in the specific facts before the Court, the taxpayer was not using the coins in question as money, the Utah Supreme Court nevertheless ruled that in Utah where gold coin is used as a medium of exchange it is non-taxable money.
This ruling clearly establishes that there will be cases where coin could be either treated as physical property (e.g. a collectible) or an “intangible property” (e.g. a means of storing value specifically as a medium of exchange), depending upon the intentions of the parties to a transaction. Of course, this same potential “dual” nature also applies to other forms of legal tender, such as federal reserve or other government issued or authorized currency, as well as other potential collectibles such as new stamps. Usually, the purchaser knows the purpose of the transaction, but it can also be inferred from context such as whether stamps come in a regular sheet or roll or are sold singly surrounded by cellophane and a commemorative cover. A two dollar bill may be of special value to a collector but it will not buy more in a store than two one dollar bills, even though it may cost more to buy one in a collector’s shop. Similarly, a person may keep the first dollar earned in business to frame in a store, yet will freely spend the rest earned in a transaction.
Regardless of how it is received, either physical property or intangible property, even after being used as money in one transaction, may be converted into investment property thereafter, and held for capital appreciation of one form or another. However, when property is held only for capital appreciation, the property is treated as taxable property.
The ruling of the Thorne court informs our decisions that purpose and use are primary considerations for how to treat potentially dual nature property. Simply put, Utah has recognized that gold is money whenever it is actually used as such. The Goldback is specifically designed to circulate as money and underscores this point with the following relevant legends prominently displayed on the physical gold media: “For Circulation in Utah”; and “voluntary, local currency”. Moreover, to date we have had dozens of Utah businesses formally agree to accept Goldbacks as payment for goods and services, many of whom are listed here.
Federal Oversight of State Rules
Following the adoption of the U.S. Constitution, the issue of a state's right to declare gold and silver coin a tender for payment did not come before the United States Supreme Court until 1869. In 13 that case Lane County had tendered tax receipts to the State of Oregon in the form of treasury notes authorized under federal legal tender laws passed in 1862. However, an Oregon state statute required payment of such taxes in gold or silver coin. In upholding the Oregon law, the U.S. Supreme Court held:
“If, therefore, the condition of any State, in the judgment of its legislature, requires the
collection of taxes in kind, that is to say, by the delivery to proper officers of a certain
proportion of products, or in gold and silver bullion, or in gold and silver coin, it is not easy
to see upon what principle the national legislature can interfere with the exercise, to that
end, of this power, original in the States, and never as yet surrendered. 14”
A Colorado statute declaring that "gold and silver coin issued by the government of the United States shall be a legal tender for payment of all debts..." has faced only one constitutional challenge since it became valid Colorado law in 1893. Significantly, that case was decided during the 15 1965-1985 mintage moratorium when the federal government had suspended the federal production of gold and silver coinage. Yet even in that context, the court did not invalidate the state statute, but simply held that state-authorized gold and silver coin circulates alongside the U.S. dollar as a non-exclusive medium of exchange. 16
Similarly, a statute passed by the Missouri legislature in 1939, with related versions of the law extending back to 1877, provides that "[t]he silver coins of the United States are hereby declared a legal tender, at their par value, fixed by the laws of the United States, and shall be receivable in payment of all debts, public or private, hereafter contracted in the State of Missouri..." Like the 17 Colorado law, this statute has had only one published constitutional challenge since its passage, which likewise failed. 18
Both of these cases challenging state statutes were handed down in an era of resurgent interest in specie money which occurred in the wake of the 1982 Gold Commission Report. The commission candidly observed that:
“In addition to the compelling economic case for the gold standard, a case buttressed by both
historical and theoretical arguments, there is a compelling argument based upon the
Constitution. The present monetary arrangements of the United States are unconstitutional
—even anti-constitutional— from top to bottom19”
In light of the foregoing precedents and authorities, there appears to be no credible basis for challenging a state's right and Constitutional authority to declare gold and silver coin to be legal tender, including the statutory framework established in Utah’s own legal tender statutes.
As noted above, the Goldback, the value of which is determined specifically by its actual gold content, falls well within Utah’s statutory grant of legal tender status. We respectfully request a private letter ruling acknowledging that Goldback may be treated as gold coin or bullion deemed legal tender in the state of Utah to the extent that it is to be used as a medium of exchange. We also respectfully ask for your confirmation that the Goldback falls under applicable sales tax exemptions set forth in UCA §59-12-104(50)-(51), either as legal tender, or as an exempt gold product, respectively.
Thank you for your assistance and consideration. I look forward to your forthcoming Private Letter Ruling in due course. In the meantime, should you need clarification with regard to any of the foregoing, or sample Goldbacks to examine, please do not hesitate to ask.
Best regards,
Lawrence D. Hilton
General Counsel