Excerpts of Revenue's Determination follow:
Taxpayer is an Indiana business which acquires, refurbishes, and markets used sports stadium seating. Taxpayer acquires the seating from various stadiums throughout the United States.
The seats are disassembled on-site and shipped back to Taxpayer's location. Taxpayer removes paint from the metal parts. If the metal parts contain lead paint, the lead paint is "abated" pursuant to various environmental regulations. The metal and plastic parts are repainted, reassembled, boxed, and shipped to the person who purchased the seat.
The sales take place in two stages. In the first stage – even though the refurbished seats are held by Taxpayer – the seating remains the property of the stadium owner or team. Interested customers interact with the stadium (or team) placing orders and paying the stadium or team for that order. When the order is placed, Taxpayer is directed by the stadium owner or team to ship the refurbished seating to the stadium's or team's customers. The customer pays the stadium/team and the stadium/team keeps the money it earns.
After a set period of time, any remaining seats become the Taxpayer's property. Taxpayer continues to sell the refurbished seats, but now the customer deals directly with what are now Taxpayer's customers. Customers acquire the seating from Taxpayer, customers pay Taxpayer for the seating, and Taxpayer keeps the money it earns from selling the seating directly to its customers.
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Taxpayer argues that when it refurbishes used stadium seating on behalf of the stadium owner or the team, the equipment and supplies used to refurbish the seating are exempt pursuant to the manufacturing exemption under IC § 6-2.5-5-3. As explained by Taxpayer:
The first customer is the stadium who wants to have their seats (seats owned by the stadium) remanufactured into a product they can sell and help raise funds to pay for new seats or a new stadium. The stadiums do not have this ability, so they contract with [Taxpayer] who will drop ship the remanufactured seats to the stadiums' customers at the stadiums' directions.
The audit report recognized that Taxpayer sold the seating by means of two different business models.
In the analysis of the [T]axpayer's operations, there are two components. The [T]axpayer refurbishes seats owned by the stadiums and also refurbishes seats owned and sold by the [T]axpayer. In the case of the seats owned by the stadiums, the [T]axpayer is not refurbishing the seats as a normal part of the life cycle of the seats. The stadium is not a manufacturer so the [T]axpayer cannot be acting as an industrial processor. When the seats were installed in the stadiums, recycling them and reselling them was not part of the normal life cycle. In this case, the [T]axpayer is acting as a service provider for the stadiums performing extraction and refurbishing of the seats much like a furniture refinisher.
The audit did agree that Taxpayer was acting as a "manufacturer" when it sold refurbished seats for which it had acquired ownership, which were sold to Taxpayer's own customers, and where Taxpayer earned the money from selling the refurbished seats. As stated in the audit report:
However, in the instances of the seats which are owned and sold by the [T]axpayer, the [T]axpayer is acting as a manufacturer that is remanufacturing the seats that are sold to end users and resellers. Therefore, the [T]axpayer was allowed a percentage of the manufacturing exemption to the extent of the seats owned by the [T]axpayer that were refurbished.
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The issue is whether Taxpayer is entitled to the "industrial processor" exemption when it refurbishes used stadium seats owned by the stadium or team.
Taxpayer cites to Rotation Products Corp. v. Indiana Dep't of State Revenue, 690 N.E.2d 795 (Ind. Tax Ct. 1998), which involved a taxpayer that claimed the equipment and consumption manufacturing exemptions. Taxpayer believes it meets the standard set out in that case.
According to Rotation Products, IC § 6-2.5-5-3(b) "cover[s] a host of different activities and factual situations. There are innumerable ways to produce other tangible personal property, and the exemption provisions cannot be expected to give a precise answer to each factual situation that arises." Rotation Products, 690 N.E.2d at 798. According to Rotation Products, a taxpayer is eligible for the exemption based on "whether the activity was directly involved in the creation of a product." Id. at 799. To make this decision, the Rotation Products court established a four-part test as follows:
1) The substantiality and complexity of the work done on the existing article and the physical changes to the existing article, including the addition of new parts;
2) A comparison of the article's value before and after the work;
3) How favorably the performance of the remanufactured article compares with the performance of newly manufactured articles of its kind; and
4) Whether the work performed was contemplated as a normal part of the life cycle of the existing article. Id. at 802-03.
Taxpayer must satisfy all of the above to be considered a remanufacturer or "processor" of stadium seats.
Taxpayer meets the first test because Taxpayer's stadium seats undergo a substantial change. Not only are the parts disassembled, cleaned, and painted, Taxpayer adds replacement parts as necessary. The seats were originally mounted on the stadium's vertical concrete riser; in effect, the stadium seats, as removed from stadium, do not have "legs" and would not support themselves in an individual consumer setting. Therefore, Taxpayer must modify and add four legs to each seat.
Taxpayer meets the second test because the value of the seating, as removed from the stadium, is negligible. Discarded seats which are not remanufactured have little or no value; in some cases, these seats are disposed of in a landfill. Remanufactured seats are sold to individuals for whatever price can be obtained depending on the public's interest in the team or stadium.
Taxpayer meets the third test because, upon removal from the original stadium, the seats are not functional because the seats have no standard legs. The Taxpayer adds value to the recycled seats because it designs, fabricates, and attaches legs rendering the recycled seats usable for the consumer. Because certain of the seats contain lead paint, the seats are unmarketable in their original condition.
Taxpayer meets the fourth test because the seats undergo a transformation from a commercial product installed in large stadiums to an individual consumer item which is a process not within the normal or expected lifecycle of this particular product. The items were built as seating in sports stadiums; as refurbished, the seats are sold as fan souvenirs. See Mechanics Laundry & Supply, Inc., v. Indiana Dept. of State Revenue, 650 N.E.2d 1223, 1229 (Ind. Tax Ct. 1995) (holding that laundering shirts did not constitute production within the meaning of the sales tax exemption).
Taxpayer has met its burden of demonstrating that refurbishing used stadium seating – ownership of which is retained by the original stadium or team – is exempt. Under IC § 6-2.5-4-2, Taxpayer qualifies as an "Industrial Processor" because Taxpayer acquires the seating from its owner, provides "industrial processing" of the seats, and transfers the seating back to the owner for sale to the owner's customers.
The audit division is requested to review the original audit to the extent warranted by this Letter of Findings. It should be noted, that the exemption does not apply to equipment and supplies used either before or after the actual and immediate refurbishment of the stadium seats.
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Taxpayer purchased "Gaylord Bins" which "are [] pallet-size box[]es used for storage and shipping of bulk quantities." Wikipedia: Bulk Box, http://en.wikipedia.org/wiki/Bulk_box . (last visited August 10, 2013).
Taxpayer purchased the bins to "bring the seats to [Taxpayer's location]. However, after bringing the seats to [Taxpayer], the bins, while, in Indiana were and are used to temporarily store and move hundreds of pieces of seats, parts, arms, etc. while work-in-process."
In addition, Taxpayer seeks an exemption for a forklift because "it is constantly moving the Gaylord bins full of work in process around the warehouse through the various stages of the production process.
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Taxpayer has failed to provide sufficient information necessary to establish that either the Gaylord boxes or the forklifts are "directly used in the production process" or that either have an "immediate effect on the article being produced."
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Taxpayer's remanufactured stadium seats are typically sold in sets of two or three. As discussed above, Taxpayer adds legs to the seats in order for the seats to be used by the casual, ordinary, consumer of these seats. The legs are then permanently mounted on a sheet of plywood which is intended to add stability to the seats.
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Taxpayer has provided information sufficient to meet its burden under IC § 6-8.1-5-1(c) of demonstrating that the plywood sheets – which are purchased, cut, and permanently attached to Taxpayer's refurbished stadium seats – become an integral part of the product being sold to its customers.
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Taxpayer believes that it is entitled to abatement of the ten-percent negligence penalty because "Taxpayer was a new business running all across the country, removing tens of thousands of seats." According to Taxpayer, it purchased items of equipment on an ad hoc basis in out-of-state locations where Taxpayer hired hundreds of temporary employees to remove the stadium seats in the extremely limited period of time permitted to remove the stadium seating.
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The Department believes that Taxpayer erred in determining its sales and use tax liability. However, there is insufficient information to establish that Taxpayer's position was so egregious as to constitute "willful neglect." Based on a "case-by-case" analysis and after reviewing "the facts and circumstances of each taxpayer" the Department agrees that the ten-percent negligence penalty should be abated.
