Taxpayer is a medical
practice in Indiana. As part of its medical practice, Taxpayer will
periodically request imaging for its patients. Taxpayer entered into a contract
with an unrelated third party ("Imaging Company") to provide imaging
equipment and operators.
The Indiana Department of
Revenue ("Department") audited Taxpayer and determined that the
contract between Taxpayer and the Imaging Company constituted a lease of
tangible personal property. The Department assessed use tax on Taxpayer's
payments pursuant to the contract.
...
Taxpayer protests the
assessment of additional use tax on payments made pursuant to a contract with
Imaging Company. The issue is whether the contract between Taxpayer and Imaging
Company is a lease of tangible personal property.
...
IC § 6-2.5-1-21 states:
(a) "Lease" or
"rental" means any transfer of possession or control of tangible
personal property for a fixed or indeterminate term for consideration and may
include future options to purchase or extend. "Lease" or "rental"
does not include:
(1) a transfer of
possession or control of property under a security agreement or deferred
payment plan that requires the transfer of title upon completion of the
required payments;
(2) a transfer of
possession or control of property under an agreement that requires the transfer
of title upon completion of required payments and payment of an option price
that does not exceed the greater of one hundred dollars ($100) or one percent
(1 [percent]) of the total required payments; or
(3) providing tangible
personal property along with an operator for a fixed or indeterminate period,
if:
(A) the operator is
necessary for the equipment to perform as designed; and
(B) the operator does more
than maintain, inspect, or set up the tangible personal property.
(b) "Lease" or
"rental" includes agreements covering motor vehicles and trailers in
which the amount of consideration may be increased or decreased by reference to
the amount realized upon sale or disposition of the property as defined in 26
U.S.C. 7701(h)(1).
(c) The definition of
"lease" or "rental" set forth in this section applies
throughout this article, regardless of whether a transaction is characterized
as a lease or rental under generally accepted accounting principles, the
Internal Revenue Code, the uniform commercial code (IC 26-1), or other provisions of federal,
state, or local law.
(d) This section applies
only to leases or rentals entered into after June 30, 2003, and has no
retroactive effect on leases or rentals entered into before July 1, 2003.
(Emphasis added).
The Department cited
to 45 IAC 2.2-4-27(d)(3)(A), which states:
The renting or leasing of
tangible personal property, together with the services of an operator shall be
subject to the tax when control of the property is exercised by the lessee.
Control is exercised when the lessee has exclusive use of the property, and the
lessee has the right to direct the manner of the use of the property. If these
conditions are present, control is deemed to be exercised even though it is not
actually exercised.
IC § 6-2.5-1-21 was enacted
effective January 1, 2004. However, 45 IAC 2.2-4-27 was promulgated in 1982
and has not been revised or repealed.
On rehearing, Taxpayer
asserts that the "lease" requires the provision of an operator.
According to Taxpayer, Taxpayer's personnel are not qualified to operate the
machinery. Instead, Imaging Company's personnel operate the machinery. Taxpayer
argues that the element of control over the operator under 45 IAC 2.2-4-27 is irrelevant to the
analysis of IC § 6-2.5-1-21. As such, according to Taxpayer, the contractual
requirement for Imaging Company to provide an operator–who "is necessary
for the equipment to perform as designed" and who "does more than
maintain, inspect, or set up the tangible personal property"–precludes the
contract from being considered an otherwise taxable "lease" within
the meaning of IC § 6-2.5-1-21.
In this particular case,
Taxpayer has provided sufficient information that Imaging Company provided both
equipment and operators who are "necessary for the equipment to perform as
designed" and who do "more than maintain, inspect, or set up the
tangible personal property" within the meaning of IC § 6-2.5-1-21.
Therefore, the contract in question is not a "lease" as defined under
IC § 6-2.5-1-21, and Taxpayer is sustained.
However, it is important to
note that the addition of IC § 6-2.5-1-21 has a secondary impact. For lessors
such as Imaging Company, who may have been exempt on tangible personal property
purchases based partly on the exercise (or lack of exercise) of control as
provided under 45 IAC 2.2-4-27, the exemption provided under
IC § 6-2.5-5-8 no longer applies to property purchased for "lease"
with an operator as provided under IC § 6-2.5-1-21(a)(3).
