Friday, February 14, 2014

Revenue Finds Taxpayer's Software was Tangible Personal Property and GPS Units Installed in Cars were not "Purchased for Resale"

Excerpts of Revenue's Determination follow:

Taxpayer operates a new and used car dealership in Indiana, with a service and body shop department. The Indiana Department of Revenue ("Department") conducted income, withholding, tire fee, auto rental excise tax, and sales and use tax audits of Taxpayer for the years 2010 and 2011. There were no adjustments pursuant to the income tax, withholding tax, tire fee, or auto rental excise tax audits. The sales and use tax audit resulted in the assessment of additional use tax, penalty and interest. Taxpayer agreed to some of the use tax issues and remitted partial payment. Taxpayer protested the use tax assessments on several computer based information technologies, as well as GPS units that it installed in automobiles it sold.

Taxpayer purchased several different computer based information technologies, such as internet-based information platforms and computer software programs for different business functions, without paying sales tax or self-assessing use tax. The Department's audit determined that use tax should be imposed on those items. Taxpayer maintains that the software and web-based platforms were exempt from sales or use tax.
Taxpayer apparently believes that the 13 programs that it purchased, or purchased access to, represent transactions in which Taxpayer paid for a service and not tangible personal property. During the hearing, Taxpayer provided 9 invoices. However, in many instances, it is unclear on the face of the invoice what exactly Taxpayer purchased.
Following the hearing, the Department asked Taxpayer to provide copies of user agreements, maintenance agreements, or service agreements showing terms of the various software licenses. Taxpayer did not submit documents in response to the Department's request.
As noted above, it is the Taxpayer's responsibility to establish that the proposed tax assessment is incorrect. IC § 6-8.1-5-1(c) states that, "The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made."
Based on the information found on the face of each invoice and on the supplemental information provided by Taxpayer during the administrative hearing, the Department is unable to agree that Taxpayer has met its burden of demonstrating that the invoices provided demonstrate that the transaction is not subject to sales or use tax. The invoices are either insufficiently detailed to understand the underlying transaction, or clearly indicate Taxpayer purchased tangible personal property such as pre-written software.
Taxpayer purchased GPS units that it installed on customer's vehicles it sold as a requirement of financing the vehicle. The purpose of installing the GPS units was for Taxpayer to be able to locate the vehicles if the customer did not follow through with their payments. The audit determined that these GPS units were subject to use tax. Taxpayer maintains that the purchase of GPS units was a sale for resale, since the GPS units were installed and sold with the car, and therefore not subject to tax.
Accordingly, for items to be sold in a retail transaction, the items must be listed separately on the invoices–i.e., the GPS units separate from the vehicle. In the instant case, Taxpayer has not demonstrated that it was selling the GPS units themselves by showing there was itemized consideration for the GPS units, nor has Taxpayer demonstrated that there was separate bargaining for them. After the hearing, the Department requested sample invoices of automobile purchases to customers for whom a GPS unit was included in order to see how the units were being sold to its customers; however, this information was not provided.
The GPS units are also not a material part of the vehicles Taxpayer sells. See Miles, Inc. v. Indiana Dep't of State Revenue, 659 N.E. 2d 1158, 1164 (Ind. Tax Ct. 1995) (explaining that while each chemical or ingredient in the Alka-Seltzer is a "material part" of or essential to the product, the coupons that are inserted into the packaging are not a "material part" of or essential to the product because the coupons do not impact the product's effectiveness and have an undertaking that is vastly different from the products "task of alleviating physical maladies.")
Taxpayer provided no information to show that the GPS units were being resold to their customers, and therefore has not met its burden of proof required under IC § 6-8.1-5-1(c). Based on the above, the purchase and use of the GPS units does not qualify for exemption from sales or use tax. Since Taxpayer did not pay sales tax at the time of the purchase of the GPS units, use tax is properly imposed.