Taxpayer makes custom flexible
packaging and custom signs. The Indiana Department of Revenue
("Department") conducted a sales and use tax audit for the tax years
2008 through 2010. As a result of the audit, the Department issued proposed
assessments for sales and use tax. Taxpayer protested the proposed assessment.
…
Regarding labels, the Audit Report
stated that:
Assessments are being made on labels
which are placed on cardboard boxes used for shipping. The labels are both
shipping labels and "Caution" and "Do Not Double Stack"
labels. The labels are not affixed on the product being produced, but placed on
the cardboard boxes which are used to protect the product during shipping.
Taxpayer describes the labels
thusly:
These are labels that we use in the
production of our products. They are placed on the outside of our shipping
cartons to notify the various carriers that the pallets cannot be double
stacked in the trailers. This is a precaution that we must take to protect the
plastic bags we produce during shipping.
…
In the Taxpayer's case, the labels
are not incorporated as a material part of the property. The labels are used on
the shipping cartons, not the product itself. Therefore the labels do not meet
the requirements of IC § 6-2.5-5-6 and 45 IAC 2.2-5-14(d). Taxpayer's protest of this
issue is denied.
The Audit Report states that
"taxpayer was not charged sales or use tax on annual software maintenance
agreements" and then cites to Sales Tax Information Bulletin 2. Given that
Taxpayer's audit period was from 2008 to 2010, the version of Sales Tax
Information Bulletin 2 that the Auditor relied upon was not in effect for the
audit period.
…
The copy of the "Service Level
Agreement" provided by Taxpayer states in pertinent part: "Warranty
and Maintenance customers are entitled to receive free basic classroom
training, software updates, telephone and web support for the [] System
Software licensed directly from [Company S]." Emphasis added.
Taxpayer states that it did not
receive updates, but Taxpayer did not provide any documentation to that effect.
Taxpayer has not demonstrated that no updates were actually received pursuant
to the software maintenance agreement. Thus, Taxpayer has failed to meet its
burden of proof under IC § 6-8.1-5-1(c). Taxpayer's protest of this issue is
denied.
Next, Taxpayer argues that
"[m]aterials to replace lights on the shop floor" should be exempt.
Taxpayer states that "the lights are 30 ft. above the floor and require
specialized equipment to allow access to the lights when the bulbs need to be
replaced." Taxpayer states that the lights "illuminate the work area
below."
…
As 45 IAC 2.2-5-8(c)(4)(F) shows, ceiling lights for
illumination in the plant area are taxable. Therefore, materials used to
replace the lights are taxable. Taxpayer's protest of this issue is denied.
Taxpayer states that the floor mats
are "used by our pressmen as they work by the printing press." At the
hearing, Taxpayer stated the employees that work on the press stand on the
floor mats. The Department finds that the floor mats are taxable under 45 IAC 2.2-5-8(c)(4)(B). Taxpayer's protest is
thus denied.
Taxpayer at the hearing stated that
the computers are used to capture information for various jobs. In subsequent
correspondence to the Department, Taxpayer describes the "computers,
monitors and printers" as "used in the production process to print
out job specifics and allow the production workers to log in and out of
individual jobs. This tracks the work time and is also used as a time
clock."
45 IAC 2.2-5-8(c)(6) states: "A computer is
used to process accounting, personnel, and sales data. The computer is taxable
because its use in this manner is not an integral and essential part of the
integrated production process." Thus Taxpayer's use of the computer
"to log in and out of individual jobs" for tracking work time is
taxable. Regarding any other potential uses of the computer, Taxpayer failed to
develop its argument regarding how the capture of information by the computer
is exempt.
Taxpayer argued at the hearing that
the floor fans are used to dry the screens that have been cleaned with water in
the screen printing operation. In follow-up correspondence, Taxpayer stated the
"floor fans are used to dry the screens used in production in our screen
printing operation."
…
The floor fans are not directly used
in the direct production process. Furthermore, the floor fans are akin to
maintenance equipment found in 45 IAC 2.2-5-8(h).
…
In its original protest letter,
Taxpayer listed as an item being protested "[m]aterials to repair bailer [
sic]" and stated "Bailer [ sic] is used in production." At the
hearing, Taxpayer stated that it gets plastic and cardboard, that Taxpayer
bales this scrap material and then sells it.
…
Taxpayer states that it sells the
scrap, but the Department notes that the scrap is not a "product"
manufactured by Taxpayer. The scrap is a by-product of Taxpayer's process–in
other words the scrap is not an item that is manufactured by the transformation
of component raw materials into a distinct product. In Letter of Findings
04-20100485 (January 13, 2011), 20110323 Ind. Reg. 045110137NRA, which dealt
with a baler issue involving a different taxpayer, the Department stated:
Taxpayer did not substantially
change or transform the scrap cardboard paper. Taxpayer simply repackaged the
scrap cardboard paper in bales after its manufacturing process is completed and
its finished products were produced. As provided by Rotation Products and North
Cent. Industries, a taxpayer's activities must result in something new in order
to qualify for the exemption found in IC § 6-2.5-5-3(b). Taxpayer's activities
result in repackaging of the same scrap cardboard paper, from unbaled to baled.
There is nothing new produced.
