...
Taxpayer protests including certain items in the assessment for use tax. Taxpayer claims that the assessment included packaging materials exempt from use tax. Taxpayer would receive bulk packages of materials from its customer and would transfer those materials to smaller, customized packages for Taxpayer's customer's clients. Taxpayer argues that these packaging materials are exempt from use tax because they were incorporated as a material part of a product Taxpayer assembled for sale. Taxpayer also claims that the assessment included nonreturnable packaging used to ship the packaging to Taxpayer's customer's clients should have been exempt from sales and use tax. Taxpayer argues that lumber which was used to make containers to ship packaged items is exempt because it adds contents to the containers and sells those contents. The Department notes that the burden of proving a proposed assessment wrong rests with the person against whom the proposed assessment is made, as provided by IC § 6-8.1-5.1(c).
...
Taxpayer acquired packaging materials in a retail transaction and did not pay retail sales tax on those materials. Use tax was assessed for these packaging materials but Taxpayer argues that these materials fall within an exemption. Taxpayer argues that the packaging materials that it acquired to package the items it received from its customer are exempt under IC § 6-2.5-5-6, which states:
Transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property acquires it for incorporation as a material part of other tangible personal property which the purchaser manufactures, assembles, refines, or processes for sale in his business. This exemption includes transactions involving acquisitions of tangible personal property used in commercial printing.
Taxpayer argues that IC § 6-2.5-5-6 applies because it acquired packaging materials that were a material part of Taxpayer's product: a packaged item. However, the Department determined that Taxpayer did not in fact sell a product but rather provided a service. Since the Department determined that Taxpayer provided a service, the Department also determined that Taxpayer should have paid sales tax on the purchase of those items.
...
...
Taxpayer states that it sold a product, but was unable to provide any documentation to establish that it ever took title to the materials which it packaged. Taxpayer states that it "takes possession" of the materials. The Department notes that Taxpayer has provided no documentation to suggest, let alone establish, that Taxpayer ever owns the materials. There are no invoices to show that it paid for the materials. Neither are there any invoices to show that it charged anyone for the materials.
Taxpayer states that the Indiana Supreme Court's decision in Indiana Dep't of State Rev. v. AOL, LLC, 963 N.E2d 498 (Ind. 2012), supports its position that it is a retail merchant selling at retail and that the materials used in the packages are eligible for exemption. In AOL, the Court wrote:
Here, we think the assembly houses and letter shops were selling at retail. The assembly houses and letter shops acquired tangible personal property when they took possession of the individual components. That they did so for the purpose of resale is clear not only from the fact that neither AOL nor any third-party contractors ever paid any sales or use taxes on the raw materials, but also–and more importantly–from the fact that the assembly houses and letter shops completely consumed the raw materials, regardless of who provided them, to produce a separate and distinct final product that previously did not exist at all. AOL may have had title in the raw materials, but it could not have title in the final products until they came into existence. As AOL paid consideration and received title to goods in which it previously had none, we think a sale of goods occurred. The assembly houses and letter shops transferred that property to a person for consideration, its changed form notwithstanding, when they mailed the CD–ROM packages and promotional materials to AOL's prospective and current members at AOL's request and in exchange for payment from AOL.
Id at 504.
Taxpayer misunderstands the court's explanation in AOL. AOL and/or the assembly houses had purchased raw materials without paying either sales or use tax on those purchases. The assembly houses then, ". . .[C]ompletely consumed the raw materials, regardless of who provided them, to produce a separate and distinct final product that previously did not exist at all." Id. at 504. In the instant case, taxpayer did not consume the raw materials provided by its customer. Rather, Taxpayer repackaged the raw materials without any change in the character of those materials. Taxpayer did not produce a distinct final product. Also, the assembly houses and letter shops in AOL transferred the property to a person for consideration, its changed form notwithstanding, when they mailed the CD–ROM packages and promotional materials to AOL's prospective and current members at AOL's request and in exchange for payment from AOL. In the instant case, Taxpayer did not provide any evidence that it transferred the property to a person for consideration.
In conclusion, Taxpayer provided a service to its customer. Taxpayer did not produce a product. Taxpayer repackaged its customer's product. Taxpayer's reference to the decision in AOL does not support its protest. Taxpayer has not met the burden of proving the proposed assessment wrong, as required by IC § 6-8.1-5-1(c).
