Taxpayer is an Indiana company, which manufactures and sells ready-mix concrete to retail customers. Taxpayer delivers concrete in ready-mix trucks. Taxpayer also sells concrete related items, which include "sprayers, sealers, form release, drain tile, rebar, wire mesh, steel/wood stakes."
The Indiana Department of Revenue ("Department") conducted a sales/use tax audit of Taxpayer's business records for 2008, 2009, and 2010 tax years ("Years at Issue"). Pursuant to the audit, the Department determined that Taxpayer sold certain tangible personal property to its customers without collecting and remitting the sales tax. The Department's audit also determined that Taxpayer purchased and used certain tangible personal property in the course of its business activities without paying sales tax or remitting use tax. In addition to imposing sales tax, the Department assessed Taxpayer use tax on several items which Taxpayer purchased and used in the course of its business activities.
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Claiming the manufacturing exemption, Taxpayer offered the basis of its protest of the assessment on the Items at Issue in three (3) categories. This Letter of Findings addresses each of categories as follows:
A. Repair parts.
Taxpayer claimed that the repair parts, which included "PVC," "Analog Cards," "Surge Protectors," "Loadcell Simulator," "Butterfly Valve, Actuator," were exempt for two reasons. First, Taxpayer asserted that "the items were billed to the entity that is actually responsible for the operation of the concrete plants and production process" and the entity was exempt. Second, Taxpayer maintained that these "repairs to the plant... are cost[s] incurred in the direct production of concrete." To support its protest, Taxpayer provided an exemption certificate of the entity, its purchase invoices, its billing invoices to the entity, and three video clips showing the equipment at its plant. Taxpayer, however, did not provide documentation to demonstrate its use of "PVC," "Analog Cards," "Surge Protectors," "Loadcell Simulator," "Butterfly Valve, Actuator."
Upon reviewing Taxpayer's documentation, the Department is not able to agree with Taxpayer's assertion that the repair parts were exempt on the ground that Taxpayer billed an entity which claimed exemption. First, Taxpayer here is a concrete manufacturer. Taxpayer purchased the items and used the items. Taxpayer did not resell those items at retail transactions. Thus, whether the entity was exempt is beyond the scope of this protest.
Even if, assuming that Taxpayer purchased and resold the items to the entity which claimed exemption, its documentation failed to substantiate that the sales were exempt. Specifically, Taxpayer's purchase invoices contained itemized charges for each of the items purchased. For example, Taxpayer's purchase invoices showed that it purchased "Elbow" for "$20.50, "PVC" for $26.30," and "Surge Protectors" for $776.44"; no sales tax was paid. But, Taxpayer's two billing invoices (numbers 2093 and 2269) demonstrated that it billed the exempt entity, in the total amount of "$22,429.03" (Invoice 2093) and "$10,718.47" (Invoice 2269) each for a line item of "7690 plant repair, misc. supplies for plant repairs." Both billing invoices did not have itemized details as to the items used for repairs. Thus, in the absence of other supporting documentation, the Department is not able to agree with Taxpayer's assertion that the repair parts were exempt because Taxpayer billed an entity which claimed exemption.
The Department is also unable to agree with Taxpayer that the "repairs to the plant... are cost[s] incurred in the direct production of concrete." As discussed above, only when the use of the tangible personal property has met the "double direct" test, is Taxpayer entitled to the manufacturing exemption. Taxpayer's documentation showed that it purchased the repair parts, including "Elbow" for "$20.50, "PVC" for $26.30," and "Surge Protectors" for $776.44"; however, its documentation did not explain how the items were used in its plant. Given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that the repair parts were directly used in Taxpayer's direct production.
In short, Taxpayer's documentation failed to substantiate its assertion that the repair parts were exempt. Since no sales tax was paid at the time of the purchases, use tax is properly imposed.
B. Off-road Diesel Fuel.
Taxpayer claimed that its purchases of the diesel fuel were exempt from sales/use tax because it used the diesel fuel to "run loaders which perform production operations of fine and coarse aggregates to be used in the production of concrete." Taxpayer further explained, in relevant part, that:
The loaders are used to take crude stone and further separate the crude stone to the conveyer processing plant which separates and washes the aggregate into various grades of product. The washed product is then taken by conveyer to a loader to separated stock piles. The stockpiling is part of the production process as it preserves the gradation and keeps the moisture levels to the acceptable standards for the eventual end use – for the production of concrete. This is consistent with the applications already tested and tried in the Calcar Quarries and Meshberger Bros Stone case.
([Taxpayer] - sales tax appeal.doc, September 24, 2012 e-mail attachment).
Taxpayer, however, did not provide any legal analysis as to how the above two cases apply and support its protest in this instance.
Upon reviewing Taxpayer's documentation, the Department is not able to agree with Taxpayer that it directly used the loaders in its direct production of the ready-mix concrete. As discussed above, Taxpayer's manufacturing process begins when the ingredients of ready-mix concrete (raw materials) are blended after the raw materials were weighted (or measured); Taxpayer's manufacturing process ends when the ready-mix trucks deliver the concrete to its customers. "The fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not itself mean that the property 'has an immediate effect upon the article being produced.'" 45 IAC 2.2-5-8 (g). Taxpayer's use of the off-road diesel fuel to operate the loaders may be necessary to prepare its raw materials for its concrete production; however, its use of the loaders and the diesel fuel was, at best, pre-production and not directly used in its direct production. Therefore, Taxpayer's use of the off-road diesel fuel was not exempt under manufacturing exemption.
In short, the off-road diesel fuel Taxpayer purchased and used to operate the loaders was pre-production and, therefore, was subject to sales tax. Since sales tax was not paid, use tax is properly imposed.
C. Office Computers, Supplies, and Equipment.
Taxpayer claimed that it was entitled to 70 percent exemption on the office computers, supplies, and equipment because it purchased the "computer equipment... to be used at approximately 70 [percent] of the time to communicate directly in the production process of ready mix concrete." Specifically, Taxpayer asserted that its use of the office computers, supplies, and equipment "is to communicate with the various concrete plants the correct information to the computers to produce the correct type of concrete." Taxpayer thus maintained that those office computers, supplies, and equipment were exempt at 70 percent because in order to properly produce the concrete to the customers' specification, it used 70 percent of them to transmit the production information electronically and "to monitor the production process" remotely.
Upon reviewing Taxpayer's documentation, however, the Department is not able to agree. First, Taxpayer stated that it was entitled to a 70 percent exemption on the purchases of the office computers, supplies, and equipment. But, Taxpayer did not offer any documentation to substantiate its 70 percent calculation.
Additionally, pursuant to 45 IAC 2.2-5-8 (g), the office computers, supplies, and equipment must have an immediate effect upon the concrete being produced to qualify for the manufacturing exemption under the "double direct" test. Taxpayer stated that it used the office computers, supplies, and equipment "to communicate with the various concrete plants the correct information to the computers to produce the correct type of concrete." Using the office computers, supplies, and equipment "to communicate with the various concrete plants" may be essential to Taxpayer's manufacturing operations; however, Taxpayer's use of those items merely conveys information, i.e., its customers' specification or purchase orders, prior to the commencement of its manufacturing production. Moreover, Taxpayer's documentation failed to demonstrate that it directly used the office computers, supplies, and equipment "to monitor the production process to make sure the production of [various] grades of concrete are being properly produced." "The fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not itself mean that the property 'has an immediate effect upon the article being produced.'" 45 IAC 2.2-5-8 (g). Thus, in the absence of other supporting documentation, the Department is not able to agree with Taxpayer's assertion that it was entitled to 70 percent exemption on its purchases of the office computers, supplies, and equipment.
In short, Taxpayer's documentation failed to substantiate that it directly used 70 percent of the office computers, supplies, and equipment in its direct production. Since sales tax was not paid, use tax is properly imposed.
