Taxpayer is a company operating a casino in Indiana. The Indiana Department of Revenue ("Department") conducted a sales and use tax audit. As a result of the audit, the Department assessed use tax against Taxpayer. Taxpayer protested the assessment. As part of its protest, Taxpayer filed a Claim for Refund, GA-110L, for various claimed overpayments.
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Taxpayer protests the imposition of Indiana use tax on various items used in food preparation and in food delivery.
The first set of items Taxpayer protests is various cooking items. In its protest, Taxpayer lists "an oven drip tray, cutting boards, pizza pans, mixing bowls, bamboo steamers, stainless inserts pans, non-stick frying pans, stainless steel food pans, and a conveyor toaster." Taxpayer also lists a tank and cylinder for supplying carbon dioxide for beer and carbonated beverages.
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Of the items listed, the oven drip tray, cutting boards, pizza pans, mixing bowls, bamboo steamers, stainless inserts pans, non-stick frying pans, and stainless steel food pans do not act directly upon the food item. Instead, the heat from stoves and other heating appliances act upon the food to produce other tangible personal property. Thus, Taxpayer has not established that it is entitled to an exemption under IC § 6-2.5-5-3 for production of food with regard to these items. Further, Taxpayer has not established that the items are rendered unusable after the items' first use, which is required for exemption under IC § 6-2.5-5-35(a)(1).
With regard to the "conveyor toaster," Taxpayer has provided sufficient factual grounds to demonstrate how the conveyor toaster is directly used in the direct production of other tangible personal property. Thus, Taxpayer's protest is sustained with regard to the conveyor toaster.
With regard to the carbon dioxide for carbonated beverages, Taxpayer has demonstrated that the carbon dioxide is used to convert syrup and water into a consumable beverage. As such, the carbon dioxide is directly consumed in the direct production of consumable beverages within the meaning of IC § 6-2.5-5-6. However, in order to qualify for a manufacturing exemption, Taxpayer must sell the beverages in question. See 45 IAC 2.2-5-14 (b).
However, Taxpayer has not established that the carbon dioxide tanks are directly used in direct production and thus Taxpayer is denied with regard to the tanks. Further, with regard to the nitrogen used in beer, Taxpayer has not established that the nitrogen is directly used in the direct production of other tangible personal property.
Taxpayer protests the Department's assessment of use tax on items it claimed were used or consumed by a guest's first use during occupation of hotel rooms. In particular, Taxpayer protests a list of items from one vendor.
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In this case, Taxpayer has provided one vendor's invoices for the items Taxpayer is protesting. Taxpayer has provided sufficient information to demonstrate that it uses items such as lotions and soaps in its lodgings and that the items are consumed or otherwise rendered unusable by guests during the occupation of rooms. Taxpayer's protest is sustained.
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Taxpayer protests the imposition of use tax on replacement parts. In particular, Taxpayer protests that the parts in question were used on exempt equipment and therefore the replacement parts themselves are exempt from sales and use tax.
The issue is twofold. The first issue is whether an exemption applies to a replacement part used on exempt equipment. The second issue is whether the underlying equipment itself is exempt.
Under 45 IAC 2-2.5-8 (h)(2), replacement parts for production equipment qualify for sales and use tax exemption. This exemption would apply to the extent the machinery in question is used in production, similar to the examples of computers and other partially exempt and partially taxable items listed in 45 IAC 2.2-5-8 (c) and (g). Thus, if a range or stove is seventy percent exempt, a replacement part is seventy percent exempt.
For this issue, Taxpayer has not provided sufficient information to conclude that the equipment in question was exempt. Therefore, Taxpayer has not established that the replacement parts for that equipment were exempt.
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Taxpayer protests the imposition of use tax on maintenance contracts. The issue is whether the various protested maintenance contracts were properly subject to Indiana sales and use tax.
The first type of maintenance contract is for items other than computer software.
The Department's audit imposed sales tax on Taxpayer's sales of optional/extended warranty contracts. Taxpayer, to the contrary, asserted that it was not responsible for sales tax on its sales of the optional/extended warranties.
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Because of the delayed publication of Sales Tax Information Bulletin 2 (December 2006), the Department's guidance and interpretation on this issue relevant to the years for which Taxpayer was audited is found in Sales Tax Information Bulletin 2 (May 2002) which states that "Optional warranties and maintenance agreements that contain the right to have property supplied in the event it is needed are not subject to sales tax." Id. Therefore, Taxpayer was not required to remit sales or use tax on the warranties/maintenance agreements it purchased during the audit period.
The audit division is requested to review the original assessment of tax on the sale of warranties/maintenance agreements to its customers based on Sales Tax Information Bulletin 2 (May 2002) in effect during the audited years and to make whatever adjustment is appropriate. Taxpayer shall provide a copy of the relevant maintenance agreements to the Department's Audit Division no more than thirty (30) days after this Letter of Findings is issued. If Taxpayer does not provide the agreements to the Department within this time period, Taxpayer's protest is denied.
Taxpayer also raised an alternative contention that the maintenance contracts are for equipment use for exempt purposes under IC § 6-2.5-5-3. To the extent Taxpayer's protest relates to exempt equipment, Taxpayer's protest is sustained even if the maintenance agreement would otherwise be taxable under Sales Tax Information Bulletin 2 (May 2002).
The second type of maintenance contract is computer software maintenance agreements. Pursuant to IC § 6-8.1-5-1(c), all tax assessments are presumed accurate, and the taxpayer bears the burden of proving that an assessment is incorrect.
Taxpayer purchased various software "maintenance agreements." During the audit, the Department found instances where Taxpayer had purchased software "maintenance agreements" without paying sales tax at the time of purchase, and assessed use tax on the purchases.
Taxpayer maintains that since the software "maintenance agreements" do not contain a provision which guaranteed that Taxpayer would automatically receive software updates and upgrades, the software "maintenance agreements" are not subject to Indiana sales/use tax.
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Taxpayer has provided information that, according to Taxpayer, demonstrates that the software maintenance contract was for support services only and that no tangible personal property is provided. Taxpayer states "[representative] confirmed by calling the vendor that the purchase of the software maintenance was for support only." Absent a written statement from the vendor or information such as web pages from the vendor's website, the Department lacks sufficient legal and factual grounds to conclude that the transaction should not have been subject to Indiana use tax.
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Taxpayer protests the imposition of use tax on certain delivery charges. In particular, Taxpayer protests that it purchased items exempt from Indiana sales and use tax and, along with the items, incurred delivery charges. The issues are twofold. The first issue is whether the delivery charges are exempt when the delivery charges are for the delivery of tax exempt items. The second issue is whether the items on which the assessment for delivery charges was based were in fact exempt from sales and use tax.
In general, IC § 6-2.5-1-5(a)(4) treats "delivery charges" as gross retail income. However, if the tangible personal property is exempt, the relevant exemption extends to the entire purchase price–the "gross retail income"–associated with the item, including delivery charges.
With regard to the actual exemption for the items in question, Taxpayer has not provided sufficient information to conclude what the exempt use of the property was. Taxpayer's protest is denied.
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Taxpayer protests the imposition of use tax on what it describes as "royalties." Taxpayer leases various slot machines from third parties. As part of the lease with the third parties, Taxpayer pays a monthly fee along with a daily royalty fee. The issue is whether the daily royalty fee–separately stated from the monthly fee–is part of the lease stream for the tangible personal property.
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In this particular case, Taxpayer provided a copy of the purchase order for various games. Page three of the purchase order states: "[Third-party Brand] royalty fees are due & payable in conjunction with the sale of [Third-party Brand] video products. These fees are payable by [Vendor] to [Third party] in accordance with the terms of the applicable trademark licensing agreement and no portion of these fees is retained by [Vendor]."
In this case, Taxpayer has provided sufficient information to conclude that the royalties paid with regard to games and which were entirely remitted to a third-party vendor did not represent the sale of tangible personal property or of any taxable transaction under IC § 6-2.5-4. Taxpayer is sustained with regard to any royalties for games which were in turn entirely remitted to a third-party vendor. With regard to any other amounts claimed to be royalties, Taxpayer has not provided sufficient legal or factual grounds to conclude that these amounts represented anything other than lease payments for tangible personal property.
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Taxpayer states that it self-assessed Indiana use tax on tobacco that it gave away as a complimentary item. However, Taxpayer states that it self-assessed the tax on its retail value of the tobacco. Instead, Taxpayer asserts that it should have self-assessed the tax on the value at which Taxpayer purchased the tobacco. In other words, if Taxpayer purchased tobacco at three dollars but would have resold the tobacco at five dollars, Taxpayer self-assessed use tax and remitted use tax on the five dollar retail value. Taxpayer now asserts that the three dollar purchase price was the proper measure of Indiana use tax.
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Taxpayer has provided sufficient legal grounds to determine that the proper measure of use tax for complimentary merchandise is Taxpayer's own purchase price. However, the amount of refund, or assessment offset, is subject to review by the Department's Audit Division.
