The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's business records. The audit resulted in the assessment of additional sales/use tax. ...
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Taxpayer purchased business furniture from an Indiana vendor. Taxpayer argues it should have been provided a "credit" for taxes paid on the purchase of the furniture because the property was destined to be shipped to and used at out-of-state locations.
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Taxpayer indicates the purchase of furniture from Business Furniture was not subject to sales tax because – although the furniture was purchased from an Indiana vendor – Taxpayer never took possession of the furniture in Indiana and that the documentation provided establishes that the furniture was delivered to Taxpayer's out-of-state locations.
Taxpayer is correct; the Business Furniture invoice does establish that some of the furniture was delivered to Missouri and some of the furniture was delivered to South Carolina. IC § 6-2.5-13-1 provides that the underlying retail sale should be "sourced" to those states.
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Taxpayer was assessed tax on the sale of software to a Financial Institution. Taxpayer maintains that the software was eventually resold to third-party Leasing Company which presented the Financial Institution an exemption certificate. The exemption certificate asserts that the transaction between the Financial Institution and the third-party is exempt because the third-party will subsequently resell the software back to the Financial Institution. Taxpayer believes that the initial transaction between itself and the Financial Institution should, therefore, be exempt.
As Taxpayer explains:
Taxpayer would like to clarify this transaction. The software was sold to [third-party Leasing Company] for which an exemption certificate has been provided; however, the invoice incorrectly listed [Financial Institution]. [Financial Institution] did not purchase the software to lease to [third -party]. [Third-party] purchased the software to lease to [Financial Institution]. Payment of the software was made by [Financial Institution] which is the parent of [third-party]. Taxpayer can supply information related to the payment to support that the original transaction was to [third-party] who paid through its parent for the software.
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Although the documentation does not specifically support Taxpayer's contention, Taxpayer states that – in reality – it did not sell the software to Financial Institution even though Financial Institution paid for the software. Taxpayer states that Financial Institution paid for the software prematurely and that the actual transaction was between Taxpayer and third-party Leasing Company. Taxpayer explains that it sold the software to Leasing Company which then either sold or leased the software back to Financial Institution. Since Leasing Company subsequently provided Taxpayer an exemption certificate, Taxpayer believes it was not required to pay tax on the original transaction.
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Taxpayer argues that the Leasing Company's exemption certificate, should be applied to what is – on its face – a transaction between itself and Financial Institution. As explained in the original Letter of Findings and is restated here:
Specifically, Taxpayer explains that its "sale was to [third-party Leasing Company] and not [Financial Institution] and [third-party] resold or leases the software to [Financial Institution].
... In this case, although the transaction is well documented, the documents do not reflect what is purportedly the parties' actual business intentions.
Taxpayer states that it has established an essentially combined, integrated relationship between the different parties who claim either a primary or secondary interest in the software transaction and that Taxpayer is entitled to claim the exemption permitted under IC § 6-2.5-5-8(b) because the software was eventually the object of a leasing transaction entered into between third-party Leasing Company and Financial Institution.
Again, the Department must disagree. As noted above in Part I, IC § 6-2.5-2-1, imposes the tax on retail transactions made in Indiana unless an exemption is applicable. In other words, the tax is imposed on the retail transaction and not on the tangible personal property – in this case software – which is the subject of the transactions. In this case, the transaction consists of an agreement or exchange between Taxpayer and the Financial Institution and not between and any of the interested parties.
Taxpayer seeks an interpretation of both the statute imposing the tax and on the exemption statue which allows for an exception from imposition of the tax by means of an exemption certificate issued by third-party Leasing Company. Taxpayer asks too much. Indiana law has long held that, "The statutes of this state relating to the assessment and collection of taxes are liberally construed in favor of the taxing powers. Fell v. West, 73 N.E. 719, 722 (Ind. App. 1905)" and that – as noted above – "tax exemptions are strictly construed in favor of taxation and against the exemption." Kimball Int'l Inc., 520 N.E.2d at 456. Taxpayer's argument meets neither test and Taxpayer has not met the statutory burden of establishing that the assessment is "wrong." IC § 6-8.1-5-1(c).
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The audit assessed sales tax on the price Taxpayer paid to a company here referred to as "Vendor I."
Taxpayer disagreed with the assessment on various grounds. Taxpayer argued a different entity would ultimately pay use tax on these same transactions. Taxpayer explained that it has "provided unequivocal proof" that any Indiana sales tax due on invoices issued by "Vendor I" from 2008 through 2010 will be paid to the Department through an audit of "Vendor I".
Taxpayer made a third argument related to the nature of the transaction between itself and "Vendor I" by which Taxpayer acquired pre-written software. Taxpayer argued that the price it paid allows it to access the pre-written software by means of "cloud computing" and that the pre-written software is therefore not subject to tax.
The original Letter of Findings rejected both of the arguments. The argument open for consideration is whether or not Taxpayer was purchasing an exempt service or was it purchasing software and hardware.
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As before, Taxpayer asks for a review of its "Master Service Agreement" with "Vendor I" and the invoices it received from "Vendor I." Taxpayer is correct in that its business relationship with "Vendor I" does require "Vendor I" to provide services to Taxpayer. The "Master Service Agreement" states that, "[Vendor I] agrees to provide the services provided for in and subject of the Agreement . . . ." However, the invoices establish that "Vendor I" is also selling Taxpayer tangible personal property such as cabinets, computer servers, and computer software.
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As before, Taxpayer asks for a review of its "Master Service Agreement" with "Vendor I" and the invoices it received from "Vendor I." Taxpayer is correct in that its business relationship with "Vendor I" does require "Vendor I" to provide services to Taxpayer. The "Master Service Agreement" states that, "[Vendor I] agrees to provide the services provided for in and subject of the Agreement . . . ." However, the invoices establish that "Vendor I" is also selling Taxpayer tangible personal property such as cabinets, computer servers, and computer software.
In the original Letter of Findings, The Department agreed with Taxpayer to the extent that "Vendor I" was selling Taxpayer exempt services. However, the Department was unable to agree with Taxpayer's assertion that "We do not receive any tangible personal property from [Vendor I]." A cursory review of the documents provided indicates that Taxpayer bought and paid for such items as a "processing node," "Microsoft server," "cabinet," "MS Basic DR," "External WAN switch port," "2x4 Core Processor," Colocation Cabinet," and "Microsoft Virtual Machine." These items represent taxable tangible personal property subject to the sales tax. As provided in IC § 6-2.5-1-27:
"Tangible personal property" means personal property that: (1) can be seen, weighed, measured, felt, or touched; or (2) is in any other manner perceptible to the senses. The term includes electricity, water, gas, steam, and prewritten computer software.
The "Vendor I" invoices contain separately stated specific costs for items which are clearly "services" such as "storage," "24x7 support," and "Managed Services." The audit division was asked to review the "Vendor I" invoices and remove from the assessment those amounts clearly attributable to Taxpayer's acquisition of exempt services. That review has been accomplished and the service charges removed.
The Department is unable to agree that Taxpayer should not be required to pay sales tax or self-assess use tax on the purchase of the various items of tangible personal property acquired from Vendor I and reiterates the decision set out in the original Letter of Findings.
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Taxpayer provides software and/or services to a call center. The software is purportedly available to Taxpayer's call center customers. The software is located on computer servers. The computer servers are not sold but remain in Taxpayer's possession.
Taxpayer argues that the software and servers are not subject to sales tax because the software and servers are directly used in the production of the "tangible personal property." As explained by Taxpayer:
Taxpayer would contend servers and company purchased software such as firewall software are used directly in the production of cloud access software. Without the servers and underlying software, the service could not be provided. It is the interaction of source code and other software products that are managed through the servers which produce a viable cloud product. If [T]axpayer used the servers to burn code on a disc there would be no question that the machine would qualify as production equipment. The servers in the case of hosted software do not act any differently.
Elsewhere, Taxpayer further explains that:
[Taxpayer] believes that any tangible personal property (i.e. computer hardware, computer software, software maintenance agreements, etc.) which is necessary to proving prewritten computer software via "cloud computing" should be excluded from Indiana sales tax . . . .
The original Letter of Findings rejected the argument. While agreeing that computer software constitutes "tangible personal property" under IC § 6-2.5-1-27, the Letter of Findings explained as follows:
[T]he Department is unable to agree that either Taxpayer's software or servers have an active and direct effect on the software Taxpayer presumably provides its customers. (A "server" is simply a device "that manages centralized data storage or net communications resources." The American Heritage Science Dictionary, http://dictionary.reference.com/browse/server (last visited December 09, 2012)). Taxpayer provides its customers various services, and the exemption to which Taxpayer resorts requires the production of tangible personal property.
Taxpayer suggests that its computer equipment and ancillary supplies would be exempt if the computers were "burning" computer code unto disk, after, disk, after disk; perhaps so, but Taxpayer here is acting as a service provider whereby it manages, integrates, and "hosts" customer information.
Taxpayer asks that the Department extend the "manufacturing exemption" found at IC § 6-2.5-5-3(b). Indiana law provides the standard by which the exemption is provided. "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." RCA Corp., 310 N.E.2d at 101. The Department is unable to agree that Taxpayer's interpretation and application of IC § 6-2.5-5-3(b) clearly falls "within the exact letter of the law."
