Taxpayer is an Indiana business which manufactures
"vibratory feeding" equipment. The Indiana Department of Revenue
("Department") conducted an audit review of Taxpayer's business
records. The audit resulted in the assessment of sales/use tax.
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Taxpayer purchased items from a particular on-line vendor.
This particular vendor sold it supplies in various mixed "lots." Each
particular "lot" contained more than item.
Taxpayer paid a single price for each purchase invoice even
though the purchase invoice represented the purchase of multiple items
contained in a single "lot."
Some of the items in a particular "lot" were purchased
and incorporated into one of Taxpayer's manufactured products. The other items
in that particular "lot" were discarded because they could not be
incorporated into one of Taxpayer's manufactured products.
For example, Taxpayer might purchase a particular
"lot" from the on-line vendor. The total price of the "lot"
was $100 but the "lot" consisted of three items; the first item cost
$10, the second item cost $30, and the third item cost $60. However, Taxpayer
purchased the $100 "lot" with the intention of discarding the first
two items.
In reviewing the invoices from this particular on-line
vendor, the audit found that "[T]axpayer failed to keep some of the
invoices documenting purchases made from this vendor." The audit concluded
that without the invoices, "[T]he taxability of the purchases could not be
verified."
The audit assessed use tax on the total price for each
invoice issued by this particular on-line vendor. In the example cited above,
the audit assessed use tax on the entire $100 charge because Taxpayer did not
maintain or retain record of which items were incorporated into one of
Taxpayer' s manufactured products and which items were discarded. There is no
disagreement that items incorporated into one of Taxpayer's products would have
been exempt but that the discarded items were subject to Indiana's use tax.
Taxpayer disagrees with the audit's conclusion taxing the
full price on each invoice stating that approximately 80 percent of the
purchases consisted of items incorporated into Taxpayer's manufactured products
and that the tax should only have been assessed against the 20 percent of the
purchases which were discarded.
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There is no dispute that Taxpayer is in the business of
manufacturing "vibratory feeding" equipment and that it sells this
equipment to its customers. There is no dispute that items purchased and
incorporated into this equipment are exempt pursuant to IC § 6-2.5-5-6. There
is also no dispute that it is likely some of the items purchased from the
on-line vendor were actually incorporated into Taxpayer's products because the
on-line vendor sold Taxpayer such mundane items as cylinders, valves, and
electrical components which are just the sort of items a manufacturer might
typically purchase for use in the production of its manufactured goods.
The issue is whether Taxpayer has established that 80
percent of the items were used in an exempt fashion. As with any "proposed
assessment," it is the Taxpayer's responsibility to establish that the
existing tax assessment is incorrect. As stated in IC § 6-8.1-5-1(c), "The
notice of proposed assessment is prima facie evidence that the department's
claim for the unpaid tax is valid. The burden of proving that the proposed
assessment is wrong rests with the person against whom the proposed assessment
is made."
Taxpayer explains that it arrived at its determination in
the following manner:
The [vendor's] invoices placed a value on every item within
the package and the sum of the individual values totaled the total purchase
price for the package. We have randomly selected three test months from each
year to review the invoices in detail. [] Our review entailed looking at each
package to determine the useful and unwanted items. We then used the [vendor's]
value on the invoice to allocate the purchase price to the useful and unwanted
items within the package. The allocated cost for the three months was then
added together. The total of the useful items were divided by the total of all
the items to determine a percentage for the three months.
Taxpayer explained that its representative chose the three
sample months by randomly drawing selections "out of a hat" and that
its methodology reduces the proposed assessment by approximately $2,800.
Indiana law imposes on Taxpayer a requirement to maintain
adequate, source documentation. IC § 6-8.1-5-4(a) states:
Every person subject to a listed tax must keep books and
records so that the department can determine the amount, if any, of the
person's liability for that tax by reviewing those books and records. The
records referred to in this subsection include all source documents necessary
to determine the tax, including invoices, register tapes, receipts, and
canceled checks.
As noted above, the Department concedes that it is
reasonably certain that items purchased from the on-line vendor were
incorporated into Taxpayer's equipment but the issue is whether Taxpayer's
calculation is correct and the Department's is wrong. In this case, Taxpayer
must resort to an "after-the-fact" calculation because Taxpayer did
not maintain the required source documentation conclusively establishing what
items were entitled to the exemption and what items were not. As such, the
Department is unable to sustain Taxpayer's protest. Taxpayer's
"back-of-the-envelope" calculation may be valid but it is does not
meet the standard establishing that the audit assessment was wrong.
