Taxpayer is an Indiana company that produces dry milled corn
products. The Indiana Department of Revenue ("Department") conducted
a sales and use tax audit of Taxpayer for the years 2009 through 2011. As a
result of the audit, Taxpayer was assessed additional use tax on several items
it had purchased without paying sales tax and on which it had not self-assessed
and remitted use tax. Taxpayer was also assessed interest.
...
The Department assessed use tax on what Taxpayer describes
as four magnets it claims are used in its corn milling production process. The
magnets are referenced as two invoices totaling $34,428 on page 5 of the
Department's audit report. Subsequent to the hearing, Taxpayer provided
additional documentation which included photographs and narrative explanation
of the use of the magnets in Taxpayer's corn milling process. Taxpayer states
that three of the magnets (invoice number 140338) are used to remove any remaining
metal pieces from the milled corn prior to bulk storage of the milled corn. The
fourth magnet (invoice number 140339) is used to detect any remaining metal
pieces in the milled corn as the stored milled corn is loaded in bulk form into
transport vehicles.
...
The issue is whether the specific items of equipment are
exempt because these items of equipment are "directly used in the
production process because they have an immediate effect on the article being
produced." IC § 6-2.5-5-3(b). The determining factor is when Taxpayer's
production process is deemed to be end; i.e., when is the Taxpayer's milled
corn in its final, marketable form?
As stated previously, Taxpayer sent in additional
documentation and explanation of its production process which demonstrate that
three of the magnets at issue are used during the production process where the
corn has been milled but not yet placed in storage. These three magnets check
the milled corn for metal pieces before the milled corn is placed in storage.
These magnets are components of tubes through which different milled corn
products flow on the way to conveyors that transport the product to storage. If
metal pieces are found in the milled corn, that batch is returned for further
processing.
The fourth magnet is used when the stored milled corn is
removed from storage for loading into transport trucks. Taxpayer refers to 45 IAC
2.2-5-8(d) which states that the "integrated production process ends
at the point that the production has altered the item to its completed form,
including packaging, if required." Taxpayer argues that the trucks are the
"packaging." Taxpayer states that its customers pay for this
packaging just as they would 50 pound bags which also can be used for
packaging. Beyond this contention, Taxpayer did not present evidence that
demonstrates that the trucks act as packaging. The trucks are a means of
transporting Taxpayer's bulk product, as evidenced by the fact that the trucks
do not remain with Taxpayer's customers. The fourth magnet is used in
post-production and is therefore not exempt from sales or use tax.
Taxpayer has met its burden to show that three of the four
magnets are directly used in Taxpayer's direct production process and therefore
exempt from sales tax and use tax. In its supplemental audit, the Department
will remove the items on invoice number 140338 from the assessment of tax. The
fourth magnet (invoice number 140339) remains subject to tax.
