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Taxpayer protests the calculation of sales tax. Taxpayer states that the sales tax audit sample is not a fair representation of the audit periods. The Department notes that a notice of proposed assessment is prima facie evidence that the Department's claim for the unpaid tax is valid, as provided by IC § 6-8.1-5-1(c). The burden of proving the proposed assessment is incorrect rests with Taxpayer.
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During the Department's audit all sales records were available to the auditor, but, due to the volume of invoices, the auditor chose to use a sample method rather than go through all of the invoices. IC § 6-8.1-3-12. Taxpayer argues that an audit sample period which consisted of only the first four months of the tax year 2008 was not a fair representation of the sales for the remainder of 2008, and all of the years 2009 and 2010. Taxpayer states that because of the economy and the mix of work processed for exempt customers throughout the three year period, a sample method of two months from each year would have been more accurate. Taxpayer notes that a customer that makes up twenty-seven (27) percent of the sample had reduced sales throughout the rest of 2008 and all sales in 2009 and 2012 with this customer were less than one (1) percent.
Taxpayer did not show, however, that sales to this customer were an aberration as compared to other periods. There could have been other customers in other time periods that had a similar impact on alternate sample periods. The Department has the authority to use methods considered necessary to determine a taxpayer's proper tax liability as provided by IC § 6-8.1-4-2. As noted above, it is Taxpayer who must show that the assessment is wrong and there is nothing in the statutes or regulations circumscribing an auditor's choice of time frames for projecting results unless a taxpayer can show that the method was unreasonable. It does not matter that Taxpayer's business with a specific customer was larger during the projection period than the entire audit period. The only relevant fact is that there was a transaction with the client during the projection period and Taxpayer has not demonstrated that this was an aberration as compared to other sample periods.
Therefore, based on the above, and due to the volume of invoices, the Department's method of choosing a specific time period from the overall audit period was reasonable.
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Taxpayer protests the imposition of sales tax on shipping charges. Taxpayer argues that because their delivery is done through third parties 95 percent of the time, the shipping charges should be exempt. Additionally, Taxpayer believes that the sales tax should not be charged on deliveries because the delivery charge is stated separately on the invoices.
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Taxpayer does not cite to any legal authority for its contentions. IC § 6-2.5-1-5(a) states clearly that delivery charges are considered part of the "gross retail income" and are therefore taxable – the fact that they are separately stated makes no difference. Again, Taxpayer has not cited to any statutes, regulations, or Indiana case that support the Taxpayer's position.
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Taxpayer argues that an exemption certificate that was submitted at the time of the audit was not taken into consideration.
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The exemption certificate provided by the Taxpayer was not fully filled out by the client. Sections with pertinent information such as the clients name, address, TID, and the completion date of the certificate, were left blank. As a result, the exemption certificate cannot be considered "a fully completed exemption certificate." Therefore, Taxpayer's protest that it had an exemption certificate from a client is respectfully denied.
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The Department's audit assessed sales tax on a maintenance agreement because "in the case of purchase agreements or option warranties, it is presumed that tangible personal property is in the form of updates that will be transferred and software maintenance agreements are to be subject to use tax."
Taxpayer protests the imposition of tax on the maintenance agreement. Taxpayer argues that no tangible personal property was exchanged under the agreement and therefore the maintenance agreement was merely for maintenance services. Taxpayer explains that it paid a flat monthly rate for three hours of maintenance consulting services. Taxpayer explained that it paid an additional hourly fee for additional time it spent on a project, as well as for any tangible personal property it received.
Taxpayer has documented that the service agreement was for three hours of consulting services, was paid monthly, and any time tangible personal property was purchased from the consulting company, sales tax was paid on the purchase at that time.
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The Department assessed use tax on a stacker forklift, waste toner cartridges, and a dehumidifier. Taxpayer argues that these items are exempt from use tax.
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A commercial printer is, therefore, entitled to an exemption for machinery, tools, and equipment that are directly used to perform the activities previously set out. This includes equipment (computers, scanners, etc.) that is used to perform what is commonly referred to as "prepress activities," which include the receiving, processing, moving, storing, and transmitting, either physically or electronically, of copy elements and images to be reproduced and plate-making or cylinder-making. Exempt prepress activities do not include drafting of copy or the creation of artwork for reproduction.
Commercial printers are also exempt from sales and use tax on purchases of capital equipment, consumables, and materials used in commercial printing under IC § 6-2.5-5-4, IC § 6-2.5-5-5.1, and IC 6-2.5-5-6 . Like other manufacturers, commercial printers may also be exempt from tax under other sections of the Indiana Code.
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Taxpayer states that the forklift should be exempt because it "is used to unload paper, move skids, and transport to presses and put into racks during the entire manufacturing process." Taxpayer says it should therefore be entirely exempt. In order for a piece of machinery to be exempt it must be directly used in direct production of the Taxpayer's printed materials.
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Taxpayer has provided sufficient documentation to show that the forklift is used in an exempt fashion at least part of the time. Taxpayer's exempt process begins with the placement of paper (or other items) into the printers and ends when the printed materials are in their final form. Any other activities are considered to be pre or post-production. A supplemental audit will determine the percentage of the exemption. Taxpayer however must send in documentation – within thirty (30) days of the date of this Letter of Findings – that shows how much time the forklift is used for each of the operations Taxpayer describes.
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Taxpayer argues that the waste toner cartridge for the colored ink should be exempt. According to Taxpayer, the purpose of a waste toner cartridge is to contain the toner waste collected during the printing process. While containing the toner waste may be necessary, it does not satisfy the "double direct" test provided in IC § 6-2.5-5-3(b) which states that the property must be directly used in the direct production of a product.
Here the waste toner cartridge is not part of direct production. Once the paper has been printed upon, the leftover/waste toner is no longer part of production. Therefore the cartridges used solely for holding toner waste are not directly used in direct production.
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Taxpayer argues that its dehumidifier should be exempt from use tax because it is necessary for climate control in the press room. Taxpayer states that the dehumidifier is necessary for the total manufacturing/printing process because if the paper absorbs moisture it will not process through the printers properly. Taxpayer argues that but-for the dehumidifier Taxpayer would not be able to conduct its business of printing.
In addition to the law stated above, 45 IAC 2.2-5-8 (j) provides:
Machinery, tools, and equipment used in managerial sales, research, and development, or other non-operational activities, are not directly used in manufacturing and, therefore, are subject to tax. This category includes, but is not limited to, tangible personal property used in any of the following activities: management and administration; selling and marketing; exhibition of manufactured or processed products; safety or fire prevention equipment which does not have an immediate effect on the product; space heating; ventilation and cooling for general temperature control; illumination; heating equipment for general temperature control; and shipping and loading.
(Emphasis added).
Therefore, while as a commercial printer, some of the items Taxpayer uses in its production process may qualify for the manufacturing exemption, not all of the items Taxpayer uses will be exempt.
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In Taxpayer's case, the use of the dehumidifier is more like the use of air conditioning in RCA Corp. The dehumidifier may be necessary or even essential to the production process but necessity is not enough to qualify the dehumidifier as exempt as described above in 45 IAC 2.2-5-8 (g).The dehumidifier used in Taxpayer's process dehumidifies the surrounding air, but does not have a direct effect on the product being produced. Only clearly demarcated areas in which there is active manufacturing that depends on a controlled environment are entitled to the exemption. In Taxpayer's facility, the dehumidifiers operate to "condition" the environment within that facility rather than a specific, demarcated area within that facility (as is the case in Kimball).
Taxpayer has not presented any documentation that suggests the dehumidifier is used in a manner more akin to the air makeup units used in Kimball. As a result the dehumidifier does not qualify for the manufacturing exemption.
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Taxpayer protests the imposition of use tax on a portion of the audit labeled "no documentation." During the audit period, Taxpayer had made purchases from various vendors but did not have supporting documentation to show that either sales tax was paid or that the purchase qualified under an exemption. As a result, use tax was imposed.
The purchases in question include payments for web hosting, software, annual membership dues to an organization, French paper, imprinted beads, chocolate coins, imprinted flags and payments for internet service.
Taxpayer has provided sufficient documentation to establish that the French paper, imprinted beads, chocolate coins and flags were all items it printed on. Taxpayer has also provided sufficient documentation to establish that the payments for web hosting, software and annual membership dues were not subject to sales tax.
