Taxpayer is an out-of-state Subchapter S Corporation.
Taxpayer provides "asset retirement" services, including, but not
limited to, "structural demolition," "selective
demolition," "asbestos abatement," "foundation
removal," "waste segregation/disposal," "salvage
segregation/recycling," and "tank decommissioning," throughout
the United States.
In December 2009, Taxpayer filed one claim for refund of
sales/use tax ("Claim One," Claim Number 278628) that it paid during
tax year 2006. In December 2010, Taxpayer filed another claim for refund of
sales/use tax ("Claim Two," Claim Number 287434) that it paid during
tax year 2007. The Indiana Department of Revenue ("Department")
initially reviewed both claims and granted the refunds, but subsequently
assessed Taxpayer when the refunds were found to have been erroneously granted.
…
Taxpayer asserted that it was entitled to the refunds
pursuant to statutory exemptions outlined in IC § 6-2.5-3-2(e) and IC §
6-2.5-5.
…
A. Claim Number 278628 ("Claim One").
The Department determined that a refund of $36,168.84 was
granted in error because Taxpayer's purchases were not exempt from Indiana
sales/use tax.
Taxpayer, to the contrary, stated that it was entitled to
the refund of the sales/use tax it paid on its purchases of equipment,
including "Scrap Handling Magnet," "Generator,"
"Genesis Shear," "Hydraulic Breaker," pursuant to IC §
6-2.5-3-2(e) and IC § 6-2.5-5-3. Taxpayer explained that it provides
"comprehensive asset retirement services for customers" and that the
contracts (between Taxpayer and its customers) "often require
environmental remediation and metal processing." Taxpayer thus claimed
that it "produces... scrap" which was sold to "mills" or
"metal brokers." Taxpayer further asserted that the "machinery
and equipment [which it purchased] for its scrap-producing activities [were]
initially delivered to their yard" in Indiana and were "shipped and
used outside of Indiana" after its employees at the Indiana facility
modified the machinery and equipment. Thus, Taxpayer maintained that it was
entitled to the refund on the equipment used in Indiana pursuant to IC §
6-2.5-5-3(b) and that it was entitled to the refund on the equipment used
outside of Indiana pursuant to IC § 6-2.5-3-2(e).
...
...
Indiana imposes use tax on tangible
personal property which the purchaser stores, uses, or consumes in Indiana. IC
§ 6-2.5-3-2(e) provides an exclusion for the use tax when all three
requirements are satisfied: (1) the property is delivered into Indiana by or
for the purchaser of the property; (2) the property is delivered in Indiana for
the sole purpose of being processed, printed, fabricated, or manufactured into,
attached to, or incorporated into other tangible personal property; and (3) the
property is subsequently transported out of state for use solely outside
Indiana.
Taxpayer's documentation, however, demonstrated various
discrepancies. For example, Taxpayer provided a copy of its purchase invoice,
dated "January 26, 2007," which showed that Taxpayer purchased ten
(10) "Generator[s]" for $219,990 ($21,999 for each Generator).
Taxpayer manually noted one of the Generators as "Generator #00890"
on that invoice. Taxpayer's documentation, however, also showed that Generator
#00890 was already in Pennsylvania on "January 10, 2007." Thus,
Taxpayer's documentation failed to demonstrate that it met the above mentioned
requirements outlined in IC § 6-2.5-3-2(e). Given the totality of the
circumstances, in the absence of other supporting documentation, the Department
is not able to agree that Taxpayer demonstrated that it was entitled to the
refund pursuant to IC § 6-2.5-3-2(e).
...
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Taxpayer claimed that it was entitled to the refund of the
sales/use tax paid on its equipment used in Indiana based on manufacturing
exemptions under IC § 6-2.5-5.
...
Taxpayer, in this instance, referring to Cave Stone and
Rotation Products Corp. v. Indiana Dep't of State Revenue, 690 N.E. 2d 795
(Ind. Tax Ct. 1998), asserted that it "is a re-manufacturer, not a scrap
'recycler'." Taxpayer, in relevant part, explained that:
[Its] production process begins with the extraction of
materials such as plate and structural steel from existing structures and
buildings. In the current form, the steel is providing structural support for
the bridge or building. However, the metal is not currently sellable because it
may be encased in concrete and other materials. [Its] production process
removes the concrete from its raw materials and transforms it into prepared
grades of iron and steel for use in foundries, mills, and smelters of its
customers. Consequently, [its] processed scrap metal must meet particularized
customer specifications and industry standards. Most of its products – scrap
bundles, scrap shredded, scrap turning, copper scrap, scrap heavy melting –
must meet size, density, content, and metallurgical requirements. It is also
required to provide certification with all shipments that the product meets
specifications.
Taxpayer also outlined six steps of its "manufacturing
process of ferrous material," as follows:
(1) Locate source of raw material. Three examples of
locations of raw materials are buildings, tanks, and bridges.
(2) Contaminants such as wood, drywall, brick, and
concrete need to be removed from ferrous material.
(3) Ferrous material must be reduced to manageable-sized
pieces.
(4) Ferrous material is then sorted into four main
categories which include plate and structural, heavy melt, sheet product,
and rebar.
(5) Once ferrous material is sorted into four main
categories, materials must then be processed to the customer's specification.
An example of this would be plate and structural being processed to a 2 × 2
× 2 specification.
(6) Once material has been processed to the customer's
specifications, it is held for future loading and shipping to the customer.
(Emphasis added).
To support its protest, Taxpayer submitted additional photos
showing its use of the equipment such as demolishing buildings and bridges as
well as cutting and moving the debris and scrap. Additionally, Taxpayer
provided sample invoices demonstrating that it sold "scrap plate and
structural" as well as "iron or steel scrap" to its customers,
the steel production companies. Taxpayer, however, declined to provide any copy
of contracts it executed with the owners who used Taxpayer's "asset
retirement" services (i.e., the sources of Taxpayer's raw materials) and
its customers who purchased the scrap metals, claiming they were confidential.
Taxpayer's reliance is misplaced. Taxpayer may argue that it
"begins its manufacturing process with the removal of its raw materials
(i.e., the concrete-encased steel) from existing structures." Upon
reviewing Taxpayer's documentation, however, its documentation demonstrated
that it was in the business of providing "asset retirement" services
and its equipment was primarily used in destroying, removing, tearing down, or
demolishing existing buildings or bridges, and disposing of the debris as a
result. Unlike the taxpayer in Cave Stone, Taxpayer was not in the business of
mining (or processing) and did not use its equipment to produce
sellable/marketable goods. Taxpayer's documentation demonstrated that it used
its equipment to demolish buildings or bridges and produced "debris"
as a result. Thus, the scrap metals, at best, were byproducts of its
"asset retirement" services – namely, the result of its demolition
activities.
Additionally, the Tax Court in Rotation Products established
a four-part test of determining what repair activity might rise to the level of
remanufacturing; Taxpayer's demolition activities were not repair activities.
Although Taxpayer may argue that its "asset retirement" services were
complex, demolishing buildings or bridges is very different from
"repair" activities. Thus, Rotation Products is not applicable.
Furthermore, Taxpayer may argue that it used the equipment
to reduce the ferrous material to manageable-sized pieces as well as to sort,
cut, and bale the ferrous material to meet its customers' specification, such
as the scrap of "plate and structural being processed to a "2 × 2 × 2
specification." However, simply reducing the size of the scrap metals by
"sorting," "cutting," and "baling" does not meet
the statutory requirement of "substantial change" and
"transformation" of the raw materials into distinct marketable goods
even though Taxpayer claimed that it could sell them to the steel mills.
One man's trash may be another man's treasure. However,
simply separating/removing the unwanted parts, and sorting, cutting, and baling
the salvaged parts (scrap metals) to be sold to the steel mills does not make
Taxpayer a re-manufacturer of the "scrap metals." Thus, given the
totality of the circumstances, in the absence of other supporting
documentation, the Department is not able to agree that Taxpayer demonstrated
that it was engaged in the manufacturing of scrap metal and therefore was
entitled to the manufacturing exemptions pursuant to the above mentioned statutes,
regulations, and case law. Since the Department determines that Taxpayer was
not engaged in the business of "re-manufacture," the Department does
not need to review whether Taxpayer's equipment at issue was directly used in
Taxpayer's direct "re-manufacturing process."
In conclusion, Taxpayer was not entitled to the statutory
exemptions pursuant to IC § 6-2.5-3-2(e) and IC § 6-2.5-5.
B. Claim Number 287434 ("Claim Two").
The Department determined that a refund of $30,237.37
(including interest) was granted in error because Taxpayer's purchases were not
exempt from Indiana sales/use tax.
Taxpayer stated that it was entitled to the refund of Claim
Two for the sales/use tax it paid on its purchases of tangible personal
property within its expense account, including, but not limited to, washers,
locks, o-rings, short rivets, connectors, wirings, filters, plugs, adapters,
rods, mask types, switches, and hoses. Similar to Claim One, Taxpayer claimed
that it was entitled to manufacturing exemptions pursuant to IC § 6-2.5-5-5.1.
As discussed extensively in Part A. 2., the Department
determined that Taxpayer was in the business of providing "asset
retirement" services and was not engaged in re-manufacture. Also, as
discussed in Part A. 2., Taxpayer's documentation demonstrated that its
equipment was primarily used in destroying, removing, tearing down, or
demolishing existing buildings or bridges, and disposing of the debris as a
result. Thus, Taxpayer was not entitled to the exemption for its purchases of
the replacement parts for its equipment used in providing the asset retirement
services.
In short, Taxpayer was not entitled to the exemption under
IC § 6-2.5-5-5.1.
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The Department assessed interest on the tax liabilities.
Taxpayer protested the imposition of interest.
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Pursuant to IC § 6-8.1-10-1(e), the Department does not have
the authority to waive the interest.
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The Department's audit imposed a ten percent negligence
penalty for the tax years in question. Taxpayer protests the imposition of
penalty.
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In this instance, Taxpayer either had paid the sales tax at
the time of its purchases or timely self-assessed the use tax to the Department
during the tax years at issue. Thus, the Department notes that the imposition
of negligence penalty is inappropriate in this case.
In short, Taxpayer's protest of the imposition of negligence
penalty is sustained.
