Friday, March 30, 2012

Revenue Finds Coatings Firm Liable for Use Taxes on Utilities, Packaging Supplies and Labeling Materials

Taxpayer applies liquid coatings to customer-owned steel and aluminum coils. This continuous process starts after the coil is unwound, cleaned, pretreated, coated, cured, and re-wound. Thereafter, coated coils are banded, covered, and placed on pallets for shipment back to its customers.

Pursuant to [an] audit, the Department determined that Taxpayer did not pay sales tax on certain purchases of tangible personal property, including, but not limited to, natural gas, water, packaging supplies, and labeling materials.


Taxpayer explained that it purchased natural gas and water from a supplier ("Vendor") – a company which previously owned the facility where Taxpayer operates. …  Taxpayer asserted that Vendor was a party in [a] case, in which the Indiana Utility Regulatory Commission determined that Vendor is a public utility pursuant to IC § 8-1-2-87.5.


Taxpayer's reliance is misplaced. Whether Vendor is a person engaged in transportation of gas and subject to Title 8 of the Indiana Code, Utilities and Transportation, is beyond the scope of this tax protest. Specifically, 45 IAC 2.2-4-11(d) and Information Bulletin 55 explain, in relevant part, that "public utilities" means any organization which is engaged in the furnishing or selling of natural gas or water, and "having the right of eminent domain or subject to government regulation in connection with the furnishing of public utility services."


Additionally, IC § 6-2.5-4-5(c)(3) is only applicable when a purchaser uses the utilities "in manufacturing, mining, production, refining, oil extraction, mineral extraction, irrigation, agriculture, or horticulture." Specifically, Information Bulletin 55 explains that "[t]o qualify for the exemption, the listed utility must be consumed as an essential and integral part of an integrated process which produces tangible personal property" and "[t]his exclusion does not apply to utilities used in processing another's product." Taxpayer, an industrial processor, applies coating materials to the customer-owned coils. Thus, the Department must respectfully decline Taxpayer's invitation to apply IC § 6-2.5-4-5(c)(3).


The Department's audit [also] assessed Taxpayer additional use tax on the purchases of packaging supplies for which Taxpayer did not pay sales tax at the time of its purchases.


IC § 6-2.5-5-9(d) states:  Sales of wrapping material and empty containers are exempt from the state gross retail tax if the person acquiring the material or containers acquires them for use as nonreturnable packages for selling the contents that he adds.

45 IAC 2.2-5-16[(d)(1)] explains:  To qualify for this exemption, nonreturnable wrapping materials and empty containers must be used by the purchaser in the following way:   (A) The purchaser must add contents to the containers purchased; and  (B) The purchaser must sell the contents added.
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In this instance, Taxpayer acquired the steel and aluminum coils owned by its customers; Taxpayer provided industrial processing or servicing, including applying coatings on its customers' steel and aluminum coils; and Taxpayer transferred the steel and aluminum coils back to its customers to be sold by its customers. Thus, Taxpayer is an industrial processor pursuant to 45 IAC 2.2-5-10(a) and IC § 6-2.5-4-2(c). The statute specifically excludes an industrial processor from being considered as a retail merchant making a retail transaction when the three statutory requirements are met. Thus, the Department is not able to agree that "Taxpayer sells coatings which it applies to steel and aluminum coils on behalf of its customers."

In short, Taxpayer's purchases of packaging supplies were taxable. Since Taxpayer did not pay sales tax at the time of its purchases, use tax is properly imposed.

The Department's audit assessed use tax on Taxpayer's purchases of labeling materials, including items used for bar coding, paper for invoicing and packing slip information, and adhesive plastic folders used to hold the items mentioned.

45 IAC 2.2-5-10[(j)], in relevant part, states:  Machinery, tools, and equipment used in managerial sales, research and development or other nonoperational activities are not directly used in processing or refining and, therefore, are subject to tax. This category includes, but is not limited to machinery, tools, and equipment used in any of the following activities: management and administration; selling and marketing; exhibition of manufactured or processed products; safety or fire prevention, equipment which is not essential and integral to the production process; space heating; ventilation and cooling for general temperature control; illumination; heating equipment for general temperature control; and shipping and loading.


While the labeling materials may be considered essential to the conduct of Taxpayer's business because their use is required by practical necessity, but they do not have an immediate effect upon the tangible personal property being processed. The labeling materials thus were used for managerial purpose, i.e., inventory control, and/or other nonoperative activities, i.e., shipping. Therefore, the Department is not able to agree that Taxpayer is entitled to an exemption on its purchases of the labeling materials.

Since Taxpayer did not pay sales tax at the time of its purchases, use tax is properly imposed.

http://www.in.gov/legislative/iac/20120229-IR-045120085NRA.xml.pdf