The parties agree about how Wendt uses the property at
issue, and they agree that Wendt is generally in the business of providing
public transportation. (See Oral Argument
Tr. at 4-5, 25-26.) The essence of the
parties’ dispute focuses on the proper way to determine whether Wendt’s
purchases of tangible personal property are entitled to the public
transportation exemption. Wendt claims
the property at issue is entitled to exemption because it is predominantly used
or consumed within its integrated public transportation process, while the
Department counters that none of the property at issue is exempt because it is
not directly used to furnish public transportation.
Wendt claims that nearly all of its purchases of tangible
personal property at issue are exempt
because it uses or consumes the property to provide public transportation
in its unique, integrated public transportation process. (See Pet’r Br. at 21-22 (footnote
added).) Wendt describes its integrated process as
encompassing a bundle of services made up of several integrated,
indivisible, and continuous steps that are all necessary or immediately linked
to its provision of public transportation.
(See Oral Argument Tr. at 6, 23; Pet’r Reply Br. at 1-2; Pet’r Br. at
18-20.) Wendt contends that each phase
of its integrated process, beginning at the moment a customer calls for an
estimate and ending with the reassembly of the machinery at the
destination, involves the provision of public transportation. (See Oral Argument Tr. at 4-11.)
The Department responds, however, that Wendt’s services are
provided not as an integrated public transportation process, but as nothing
more than a unique, all-in one business model that offers a menu of à la carte
services, some that are public transportation and some that are not. (See Oral Argument Tr. at 32-38, 41-42;
Resp’t Br. at 5-6 (footnote added).)
Explaining, the Department states that Wendt’s competitors provide many
of the same services on a stand-alone basis, but the property used to provide
those individual services is ineligible
for exemption; thus, Wendt’s similar
services must be ineligible. (See Oral Argument Tr. at 23, 32, 36-41; Resp’t
Br. at 3, 5 (footnote added).) The
Department concludes that given individual scrutiny, not evaluation based on
the relationship to Wendt’s core activity of transporting machinery on the
highways, the property at issue is not exempt because it is not “directly used
or consumed in providing public transportation.” (See Oral Argument Tr. at 23, 36-39
(footnote added)); see also I.C. § 6-2.5-5-27.
Direct Use
As discussed above, Wendt’s property will qualify for
exemption if the evidence shows that it is “necessary and integral” to Wendt’s
provision of public transportation services. See USAir, 542 N.E.2d at 1036. Moreover, the exemption extends to items directly
used in a continuous, integrated public transportation process. See Harbor Belt, 460 N.E.2d at 175. Accordingly, the critical question here is
whether Wendt’s property is necessary and integral to Wendt’s integrated public
transportation process.
Phase 1: Project Planning
As detailed in the
facts above, Wendt claims its
public transportation process begins
when it prepares estimates for potential customers. Wendt’s
estimates are better characterized as sales activity, however, because
they are intended to present the lowest
bid and obtain a customer. (See Resp’t
Des’g Evid. Vol. 2, Ex. 20 at 27-28.) Thus,
while Wendt’s estimates may be connected to its provision of public transportation, they
do not always garner a customer and therefore are not necessary and integral to
furnishing public transportation.
Moreover, this conclusion is consistent with those portions of the
public transportation regulations that deem property used for sales and other non-operational activities, such as
cost projections, ineligible for exemption.
See 45 IND. ADMIN. CODE 2.2-5-61(e), (m) (2001); see also 45 IND. ADMIN.CODE
2.2-5-62 (f), (k) (2001). Accordingly,
the Court finds that preparing estimates is not part of Wendt’s public
transportation process and, therefore, property used in providing these
services is not necessary and integral to Wendt’s integrated public transportation
process.
In this phase, Wendt also plans transportation routes and
obtains travel permits. Both are
necessary and integral to Wendt’s public
transportation process because Wendt could not legally haul oversized machinery
over the highways without travel permits for the route being traveled. Moreover, the public transportation
regulations deem a common carrier’s purchases
of items to comply with federal and state mandates, as
reasonably necessary to the rendering of public transportation. See 45 I.A.C. 2.2-5-61(d); see also 45 I.A.C.
2.2-5-62(e). Therefore, property used to
plan the routes and obtain the travel permits is necessary and integral to
Wendt’s integrated public transportation process.
Phase 2: Pre-transportation
Preparations
As stated in the facts
above, Wendt’s pre-transportation
preparations involve the disassembly, loading, and securing of oversized
machinery onto the flatbed trucks for transport. Disassembly and loading are necessary and
integral to Wendt’s public transportation process because without disassembly,
the machinery would be too heavy for loading and too large
for legal road transport. As just
mentioned, a common carrier’s activities
to comply with legal requirements are necessary and integral to furnishing public transportation. See 45 I.A.C. 2.2-5-61(d); see also 45 I.A.C. 2.2-5-62(e); USAir, 582 N.E.2d at 778 (explaining that the public
transportation exemption extends to
items that are legally required for continued operations). Furthermore, although pre-transportation
activities generally are excluded from the definition of public transportation,
property used for the “loading and unloading of persons or property into or
from transportation vehicles” is expressly included within the scope of public transportation. See 45 I.A.C. 2.2-5-61(f), (j); see also 45
I.A.C. 2.2-5-62(g). Thus, the Court
finds that Wendt’s property used to disassemble, load, and secure its
customer’s machinery for subsequent movement over the highways is necessary and
integral to Wendt’s public transportation process.
Phase 3: Transportation
This phase
involves the seminal activities of
Wendt’s public transportation process. Wendt hauls its customers’ machinery on
the highways, provides escort services,
and unloads the machinery at the customer’s destination. Hauling oversizedmachinery over the state and
federal highways is necessary and
integral to Wendt’s public transportation process because it embodies the very
essence of public transportation: the
movement of another’s property for consideration. See 45 I.A.C. 2.2-5-61(b), (f); 45 I.A.C.
2.2-5-62(c), (g). Escort services are
required by federal and state law and thus are necessary and integral to the
provision of public transportation. See,
e.g., http:www.in.gov/dor/files/m204.pdf (detailing Indiana’s escort vehicle requirements). In addition, unloading property from
transportation vehicles is expressly included within the scope of public
transportation. See 45 I.A.C.
2.2-5-61(f), (j); see also 45 I.A.C.
2.2-5-62(g). Accordingly, the Court
finds that Wendt’s property used to transport, escort, and secure its
customers’ machinery is necessary and integral to Wendt’s public
transportation process.
Phase 4: Reassembly
As described in the facts above, Wendt reassembles the oversized machinery inside the customer’s
new factory location. Wendt performs its
reassembly services post-delivery, and
reassembly services have no apparent link to any federal or state mandates. Accordingly,
Wendt’s reassembly services are a convenience for its customers that are incidental to its
provision of public transportation and, thus, they fall outside the ambit of
public transportation. See USAir, 582 at
779 (affirming the denial of exemption on certain food items that were
“incidental” to the taxpayer’s transportation service). Moreover, this finding is also
consistent with the public transportation
regulations that do not include post-transportation activities in the
definition of public transportation. See
45 I.A.C. 2.2-5-61(f); 45 I.A.C. 2.2-5-62(g).
Optional Services
During the years at issue, Wendt also provided warehouse storage exclusively for the temporary storage of its
customers’ in-transit property. (See
Resp’t Des’g Evid. Vol. 2, Ex. 20 at 82-85.)
“[T]emporary storage is considered to be an integral part of rendering
public transportation.” 45 I.A.C.
2.2-5-61(g). Therefore, all tangible
personal property used to provide warehouse storage services falls within the
scope of public transportation.
Wendt also transported its customers’ machinery to third
party locations for repair services.
(See Trial Tr. at 59-61.) When a
common carrier moves another’s property over the highways for consideration, it
is providing public transportation. 45
I.A.C. 2.2-5-61(b); 45 I.A.C. 2.2-5-62(c).
Therefore, the property used to
provide Wendt’s transport-for-repair services also falls within the scope of
public transportation.
In this case, the evidence shows that Wendt’s services are
generally provided as a continuous, integrated process of transporting its
customers’ oversized equipment on the highways.
Wendt’s process is integrated because each phase of Wendt’s business is
interrelated and dependent upon the others.
For instance, without disassembling the machinery, it would be too large
for road transport; without escorts accompanying the oversized loads along the
highway, the equipment could not lawfully travel the roads; without using ties
to secure the equipment to the trucks, efficient transportation could not be
accomplished. Moreover, an argument that
others could not qualify for exemption by providing one of Wendt’s component services on a
stand-alone basis does not persuade the Court to disqualify individual elements
of an integrated public transportation process from eligibility for exemption.
Predominant Use
Having decided what property Wendt uses for exempt and
non-exempt purposes, the Court now considers
whether Wendt has shown that it
predominately used the tangible personal property at issue in
providing public transportation. The Court has acknowledged that there are many
ways to show that items are predominantly used in an exempt manner. See Indiana
Waste Systems Ind., Inc. v. Indiana Dep’t of State Revenue, 644 N.E.2d 960,
961-62 (Ind. Tax Ct. 1994). For example,
predominate use may be shown by providing credible testimony, providing the ratio of income derived from
the property’s exempt use to the income derived from its non-exempt use, providing
the ratio of the time spent using the property in an exempt manner to the time it
is used in a non-exempt manner, or
providing a similar ratio calculation based on volume. See id.; Calcar Quarries, 394 N.E.2d at
941.
Here, the evidence at trial established how Wendt used its
property with respect to its public transportation process and optional services. (See, e.g., Resp’t Des’g Evid. Vol. 2,
Ex. 20 at 10-89; Ex. 24 at
5-6, 10-12.) Furthermore,
the uncontroverted testimony of Mr. Jere
Wendt, one of Wendt’s founding partners, established that, during the years at issue, 70 percent of the jobs Wendt performed involved the
provision of public transportation.
(See Trial Tr. at 39-40,
61-73.) The Court not only finds Mr. Wendt’s testimony to be credible,
but also finds that his testimony is corroborated by the
Department’s audit findings.
The auditor’s block sample shows that nearly 70 percent of Wendt’s jobs
involved the exclusive provision of public transportation. Accordingly, the evidence before the Court
leads to only one reasonable conclusion:
between the 2001 and 2004 tax years, Wendt predominately used its
property in providing public transportation, and the Department erred in
concluding otherwise.
For the above-stated reasons, the Court AFFIRMS the Department’s determination that items predominately used for estimate preparations, machinery reassembly, and lawn care were not entitled to the public transportation. All of the Department’s remaining determinations, however, are REVERSED. Accordingly, the Court REMANDS the matter to the Department and ORDERS it to make the necessary
determinations in accordance with this opinion.
http://www.in.gov/judiciary/opinions/pdf/10301201mbw.pdf
