Wednesday, March 20, 2013

Revenue Finds Lawn Care Service Failed to Collect Sales Tax from Customers

Excerpts from Revenue's Determination follow:

Taxpayer is an Indiana qualified subchapter S corporation that primarily provides insect and pest eradication services for commercial and residential customers. As of 2007, Taxpayer also provides lawn treatment services for commercial and residential customers. The Department of Revenue ("Department") conducted an audit review of Taxpayer's business records which resulted in the assessment of sales/use tax.
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The Department assessed Taxpayer sales tax on its lawn care services because Taxpayer had not collected and remitted sales tax when it provided those services to its customers. Taxpayer protested the assessment of sales tax on these transactions arguing that it was providing a service and had already itself paid sales tax on the chemicals it used in providing its lawn care services.
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The provision of lawn care services is subject to sales tax as described in Sales Tax Information Bulletin 21 (May 2002), 25 Ind. Reg. 3939, as follows:

Sales by a Lawn Care Company

The relationship between a lawn care company and its customer is contractual. The customer agrees to pay a set price and the company agrees to apply the necessary chemicals to a lawn for its proper care and maintenance. The chemical cannot be purchased separately from the company and applied by the customer. A unitary transaction is the purchase of tangible personal property and services under a single agreement for which a total combined charge is calculated. A retail unitary transaction is a unitary transaction that is also a retail transaction. A retail transaction means a transaction that constitutes selling at retail. A lawn care application is a retail transaction because the lawn care company acquires tangible personal property (chemicals) and transfers them to its customers for consideration in the ordinary course of its regularly conducted business.

The sales tax is imposed on the gross retail income received in a retail unitary transaction. The gross retail income received includes the price of the property transferred plus any bona fide charges made for preparation, fabrication, alteration, modification, finishing, completion, delivery, or other service performed in respect to the property before its transfer. Because the chemicals are not transferred until they are applied to the lawn, the application charges are included in the company's gross retail income. Therefore, the entire contract price is subject to the Indiana sales tax.

Purchases by a Lawn Care Company

The purchase of chemicals by a lawn care company to be later furnished to a customer for lawn care treatment is a sale for resale and therefore exempt from the Indiana sales tax.

The purchase of tangible personal property other than chemicals for use in the lawn care business, such as chemical applicators, sprayers, and transport vehicles, is subject to the Indiana sales/use taxes.
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Taxpayer protests that it thought it was providing a service which was taxed similarly to its pest and insect eradication service. Taxpayer stated that on that basis, it paid sales tax when it purchased chemicals for its lawn care business and then did not charge its lawn care customers for the chemicals when it provided its services.

Taxpayer states that it does not understand why pest control and lawn care businesses are taxed differently. At the time of the audit, Taxpayer was not registered for Indiana gross retail tax since pest control businesses are not required to charge sales tax on their applications, but instead are required to charge sales tax on the chemicals when purchased from their vendors.

Lawn care companies, on the other hand, are required to charge sales tax on each application in accordance with Sales Tax Information Bulletin 21. Lawn care companies can purchase their chemicals exempt from sales tax as they are purchased for resale to their customers. Taxpayer provided the Department's auditor with sales tax invoices showing that it paid sales tax on chemicals when Taxpayer purchased the chemicals from its vendors. The Department's audit properly credited the sales tax paid by Taxpayer on these purchases in making its assessment of additional tax owed.

Taxpayer has not shown that the Department's assessment is incorrect.