To facilitate its business, Taxpayer purchases or leases various types of equipment, including semi-tractors and dump trucks ("Trucks"). Taxpayer uses the Trucks to haul Materials for itself and its affiliates. Taxpayer also offers Trucks to transport property of others, including contractors. Contractors often directly purchase tangible personal property from quarries or suppliers ("Suppliers"); thus, Taxpayer simply transports the contractors' purchases from the Supplier's locations to the job sites designated by the contractors. For customers who do not purchase directly from Suppliers, Taxpayer purchases the Materials from Suppliers, resells (with markups), and delivers the Materials to the customers. In those instances, Taxpayer charges the customers one price, which consists of costs of Materials, markups, and delivery. Periodically, based on its billing codes, Taxpayer bills its customers the total amount due, in aggregate.
The Indiana Department of Revenue ("Department") conducted a sales/use tax audit of Taxpayer's records for tax years 2008, 2009, and 2010. The audit determined that, in general, Taxpayer, as a retail merchant, properly collected and remitted sales tax on the tangible personal property it sold. However, the audit determined Taxpayer failed to pay sales/use tax on some of the tangible personal property it purchased and used in the course of its business.
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During the audit, the Department found that Taxpayer purchased the Items at Issue without paying sales tax or self-assessing and remitting use tax on those purchases. The Department reviewed Taxpayer's use of Trucks based on mileage. The audit, with Taxpayer's apparent consent, selected and examined its business records of the second quarter, 2008; the third quarter, 2009; and the fourth quarter, 2010. Specifically, the audit reviewed the driver's daily trip sheets and the information within a file named the "Sales Tax Audit Analysis" ("Summary"), which contained lists of all 2008-2010 invoices in an Excel spreadsheet compiled by Taxpayer. The audit found that not every Truck was predominantly used in public transportation. Thus, the audit granted exemption to Trucks which were documented to be predominantly used in transporting property of others (namely, third parties) and assessed tax on the remaining Trucks. Additionally, the audit found that the Items at Issue contained expense items, the use of which Taxpayer did not identify nor relate to specific Trucks. The Department also could not verify the use of those unidentifiable expense items. After considering all the records, the Department concluded that it was justified in granting a 38 percent exemption concerning those unidentifiable expense items and assessed use tax at 62 percent.
Taxpayer, to the contrary, claimed that it was entitled to a public transportation exemption on all purchases of the Items at Issue pursuant to IC § 6-2.5-5-27 and Indiana case law. Taxpayer asserted that it predominantly used the Items at Issue based on "income" from hauling property of others, in aggregate, as compared to the total income from hauling.
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Accordingly, pursuant to the above mentioned statutes, regulations, and case law, a taxpayer is not required to be in the business of transporting property of others to claim the public transportation exemption. The taxpayer is entitled to the public transportation exemption on its purchase of an item only when the taxpayer demonstrates that the item is directly and predominantly used to transport property of others for consideration. When in doubt, the courts examine the actual use of the item in question. There are various ways to show the item qualifies for "predominant use," including miles traveled, the ratio of time spent, volume, or income derived from the use of the item in question.
In this instance, to determine whether the Items at Issue were exempt, the Department's audit examined Taxpayer's records of "semi-tractors and dump trucks [related to] the actual usage of the equipment (mileage)" and granted the public transportation exemption to some Trucks where the records supported that those Trucks were predominantly used to haul property of others. Also, the Department determined that "[t]he expense items under this adjustment could not be specifically identified to a specific truck therefore an exempt percentage was applied."
Taxpayer disagreed, claiming that the Department is prohibited from using an item-by-item basis to calculate the exempt/taxable mileages traveled, as compared to the total mileages traveled, in determining whether Trucks were exempt and the unidentifiable expense items were 38 percent exempt. Asserting that it was entitled to the exemption on all purchases related to the Items at Issue, Taxpayer argued that, as a matter of law, "the Tax Court has always made such determination based on the aggregate use of the taxpayer's property at issue, not on the item by item basis used in the preliminary audit report." Taxpayer stated that it predominantly used the Trucks based on the total income generated by providing public transportation and thus all items directly related to public transportation were exempt, which included fuel, uniforms, supplies, and unidentifiable expense items. Thus, Taxpayer believed that the audit erroneously assessed sales/use tax on some Trucks and the unidentifiable expense items. Taxpayer also claimed that, as a matter of fact, the audit cannot solely rely on the information contained in the driver's daily trip sheets because the information was insufficient to determine whether the Trucks were used to transport property of others based on the mileages.
To support its protest, Taxpayer provided its Summary, an analysis based on its gross income, which also included a description of its billings codes, and an Excel spreadsheet, which contained a list of information of its 2008, 2009, and 2010 invoices. Taxpayer also submitted samples invoices, load tickets, bills of lading, and driver's daily trip sheets, to demonstrate that the information from the driver's daily trip sheets alone was insufficient to determine the use of Trucks.
Taxpayer is mistaken in its analysis and application of the law as well as facts. First, as a matter of law, the court in Wendt stated clearly and specifically, under the "Law-Predominant Use" section, that "the exemption statute has been construed to require an item to be predominantly used, not exclusively used, in public transportation to be exempt." Wendt, 977 N.E.2d at 484-85 (emphasis added); Carnahan Grain, 828 N.E.2d at 468-69; Panhandle Eastern Pipeline, 741 N.E.2d at 818-19; Calcar, 394 N.E.2d at 941. Thus, a taxpayer who claims the public transportation exemption on its purchase/lease of an item must demonstrate that a particular item is predominantly used in transporting others' property to qualify this exemption. In this instance, Taxpayer, during the audit and the protest process, referred to its Summary, asserting that all its purchases of Items at Issue were exempt because its "annual income from hauling for third parties" was 60.2 percent, 58.9 percent and 68.3 percent of its total gross income for the years at issue.
Taxpayer arrived at the percentages mentioned above based on the following steps: (1) classifying its income into three categories: "Excluded Sales," "Trucking for Others," and "Trucking for Taxpayer"; (2) subtracting its costs of Materials and markup (Taxpayer stated that it charged 10 percent markups on each Material resold) from the category of "Trucking for Taxpayer"; (3) totaling income from the "Trucking for Others" and income from "Trucking for Taxpayer" (minus costs of Materials and 10 percent markups); and then (4) comparing the income from "Trucking for Others" and total income from step (3). However, after review, the Department is not able to agree with Taxpayer's method – comparing "annual income from hauling for third parties vs. its total hauling income for each Taxable Year" – because Taxpayer's Summary made no reference to its use of any equipment or Trucks and it also failed to substantiate its claimed cost of Materials and markups.
Unlike the taxpayer in Calcar which maintained separate records for the hauling operation from its other operations, Taxpayer's records showed that it did not separate the accounting records, but charged its customers one price when it sold and delivered the Materials. Taxpayer presented a complex "billing code" system, which showed that it charged its customers based on various circumstances including different services it rendered, different materials it sold, and different methods (by hour or weight) in calculating delivery charges. Assuming that its billing practice is the industry's common practice, Taxpayer offered no documentation to substantiate the costs of Materials and markups, which it excluded, to arrive at its calculation of predominant use. Taxpayer's proposed method based on total income fails because its calculation was not substantiated and its proposed method based on income is similar to the method used by the Department in Carnahan Grain, which was rejected by the Tax Court. In short, Taxpayer's reliance on its "annual income from hauling for third parties vs. its total hauling income for each Taxable Year" method is misplaced.
Taxpayer also mistakenly claimed that the auditor solely reviewed and relied on the driver's daily trip sheets to determine the taxable/exempt mileages when the trip sheets alone did not indicate the ownership of the property being hauled and the miles traveled on each trip. The Department's audit report stated that "[w]hen an item was in question as to whether it was [third] party or hauling of the taxpayer's own product, the ticket numbers on the driver's trip ticket were referenced to the [Summary] provided by the taxpayer." Thus, the audit did not solely rely on the information of the daily trip sheets to arrive at the taxable/exempt mileages of each Truck. The auditor actually referred to Taxpayer's records, including the trip sheets, load tickets, and the information in the Summary compiled by Taxpayer.
Upon review, the drivers' daily trip sheets contained the (1) date, (2) driver's name, (3) truck/trailer number (4) job (starting time and ending time), (5) miles (start and finish), (6) total mileage for different states, (7) location of fuel loaded, (8) ticket number (for each load ), (9) weight of material hauled (for each load), (10) Places (to and from), and (11) time (load and unload), which each driver was required to fill out when he or she delivered on a specific day using a specific Truck. Notably, under the "to" columns, the drivers recorded each customer's name and the locations where the drivers were expected to deliver the property. Referencing Taxpayer's Summary and information available to the Department, the Department is required to use a reasonable method, which includes statistical sampling methods and/or based on the best information available at the time of the audit. IC § 6-8.1-3-12(b); IC § 6-8.1-5-1(b). To meet its burden of proof, Taxpayer must demonstrate that the audit's method was unreasonable. Given the totality of the circumstances and in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden.
In conclusion, Taxpayer bears the burden of proving the Department's assessments were incorrect. Taxpayer's documentation was insufficient to establish that the audit methodology was unreasonable and that it directly and predominantly used the Items at Issue to transport property owned by third parties other than Taxpayer itself for consideration.
