Taxpayer is an Indiana company which
manufactures and sells various types of landscaping products, including mulch.
In 2011, the Indiana Department of Revenue ("Department") conducted a
sales/use tax audit for 2009 and 2010 tax years. Pursuant to the audit, the
Department determined that Taxpayer did not pay sales tax or use tax for
tangible personal property, which it purchased and used for its business
activities. As a result, the Department's audit assessed Taxpayer additional
use tax and interest.
…
The Department's audit determined
that Taxpayer purchased the Conveyor without paying sales/use tax and,
therefore, assessed Taxpayer additional use tax. Taxpayer, to the contrary,
claimed that it was entitled to the manufacturing exemption outlined in IC §
6-2.5-5.
…
In this instance, Taxpayer asserted
that it uses the Conveyor to facilitate its manufacturing process. Taxpayer
stated, in relevant part, that:
[It] accepts tree trimmings and
brush [sic] from tree removal companies and landscapers and purchases raw bark
from saw mills and uses these materials to produce mulch. These products are
mixed together and loaded into a tub grinder. The grinder grinds the tree trimmings and bark. The
grinder feeds the materials onto a screener which screens out any unacceptable
materials. Once the product is screened, it is stacked into large pile
approximately 25 feet high by a portable conveyer. The materials then "cook"
in the piles for a period of 3-6 months in which microorganisms work to create
a finish product. (Emphasis
added).
At the hearing, Taxpayer further
explained that it purchased and used the Conveyor to be in compliance with the
Indiana Fire Code. Thus, Taxpayer maintained that its use of the Conveyor
qualified for the manufacturing exemptions. To support its protest, Taxpayer
submitted additional documentation, including a photo and a video clip to
demonstrate its use of the Conveyor. Taxpayer also provided a copy of a letter
("Notice to Correct Violations") from the local fire department and a
copy of a letter from the Office of the State Building's Commissioner, which
approved Taxpayer's application for variances concerning the Indiana Fire Code.
Upon reviewing Taxpayer's
documentation, the Department must respectfully disagree. First, the
Department's audit noted that Taxpayer's "manufacturing process begins
with the grinding of tree trimmings and the tree bark. Colorants can be added
to the mulch during the grinding process to produce black, brown or red color
mulch." Taxpayer's manufacturing process thus ends when its product comes
out of the grinder and is screened. At that point, the mulch becomes saleable.
Taxpayer asserts that it needs to "cook" ("approximately 130 to
150 degrees Fahrenheit") the mulch "for a period of 3-6 months in
which microorganisms work to create a finish product." However, Taxpayer's
documentation failed to support its assertion. Thus, based on the documentation
presented, Taxpayer used the Conveyor to rotate or restack the mulch is, at
best, post-production because the conveyor did not have an immediate effect on
the mulch being produced. Taxpayer's use of the Conveyor at this point is
simply to maintain its inventory prior to the sales.
Additionally, Taxpayer explained
that, prior to its purchase/use of the Conveyor, it used to drive a
loader/bulldozer to compact the pile to control the size of the pile, which
created spontaneous combustion and caused fires. After several fires occurred
and the fire department was called to put out the fires, Taxpayer purchased the
Conveyor to be in compliance with the local fire department's request. However,
the local fire department's letter addressed the issue of Taxpayer's
"storage of mulch," not the Taxpayer's production. Moreover, Taxpayer
is not required to use the Conveyor; rather, the letter referencing the Indiana
Fire Code required that Taxpayer control the size of the piles, have certain
portable fire extinguishers, and have an emergency plan. Furthermore, this
letter was issued in late 2002 and Taxpayer did not purchase the Conveyor until
2009. Thus, the Department is not persuaded by Taxpayer's assertion that it
purchased/used the Conveyor for the purpose of being in compliance with the
Indiana Fire Code.
Even if, assuming that Taxpayer
purchased the Conveyor to be in compliance with the Indiana Fire Code, the Conveyor
is used to control/maintain the size of the pile (storage of the mulch) prior
to sale and to prevent spontaneous combustion, namely "fire
prevention." Pursuant to 45 IAC 2.2-5-8(j), "fire prevention equipment
which does not have an immediate effect on the product" is subject
sales/use tax. Additionally, Taxpayer did not refer to any environmental
quality statutes, regulations, or standards to support its protest. Thus, based
on the documentation presented, Taxpayer has not shown that the Conveyor was
"used and acquired for the purpose of complying with any state, local or
federal environmental [quality] statutes, regulations or standards" as
required by IC § 6-2.5-5-30. Pursuant to 45 IAC 2.2-5-8(g), "[t]he fact that
particular property may be considered essential to the conduct of the business
of manufacturing because its use is required either by law or by practical
necessity does not itself mean that the property has an immediate effect upon
the article being produced."
In short, given the totality of the
circumstances, in the absence of other supporting documentation, the Department
is not able to agree that Taxpayer met its burden. Since Taxpayer did not pay
sales tax at the time of the purchase, use tax is properly imposed.
