Taxpayer is an Indiana company, which sells cubed ice and drinking water from automated vending machines ("Vending Machines"). The Vending Machines, which use the water purchased from the local water utility, manufacture and dispense cubed ice and drinking water for sale. Customers can purchase cubed ice or drinking water by inserting cash into money acceptors located at the front of the Vending Machines.
In late 2012, the Indiana Department of Revenue ("Department") audited Taxpayer's business records for the tax years 2010 and 2011. Pursuant to the audit, the Department determined that Taxpayer failed to remit the proper amount of sales tax on its sales of the cubed ice and drinking water. The Department's audit also determined that Taxpayer purchased certain tangible personal property to be used in the course of its business without paying sales tax or self-assessing use tax. As a result, the Department assessed additional sales tax, use tax, penalty, and interest.
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The Department's audit, after examining Taxpayer's records, determined that Taxpayer did not have a reliable method of tracking its sales of cubed ice and drinking water sold from the Vending Machines. As a result, the Department's audit utilized Taxpayer's water purchase invoices (i.e., monthly water bills) to compute the total gallons of water purchased in producing the cubed ice and drinking water for sale and allowed 500 gallons of water per month for shrinkage ("Shrinkage"). The audit considered that the Shrinkage accounted for various causes, including "melting of ice that is stored in the unit after production due to temperature fluctuations, leakage of water from the lines, or external faucets left on by offenders, malfunctioning of the machines and boil water advisories from the utility company."
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In this instance, Taxpayer disagrees with the method used in the Department's audit. Specifically, Taxpayer argues that the Department's audit cannot use its 2010 and 2011 purchase invoices and then arbitrarily allow the Shrinkage to determine the amount of Taxpayer's 2010 and 2011 sales tax on its sales of cubed ice and drinking water. Taxpayer claims that the audit's estimated Shrinkage did not fully consider various reasons which caused the Shrinkage.
Taxpayer further asserts that the audit overestimated Taxpayer's sales for the 2010 and 2011 tax years. Taxpayer states that, in September 2012, it installed monitoring systems in its Vending Machines. The monitoring systems collect "real time" data on the sales of its cubed ice and drinking water. After compiling the data recorded by the monitoring systems from September 2012 through August 2013, Taxpayer presented the information in an Excel summary to support its protest. Taxpayer also submits various photos to demonstrate several circumstances in which the water it purchased was not used to produce saleable cubed ice or drinking water.
Upon reviewing Taxpayer's supporting documentation, however, its reliance is misplaced. First, the Department audited Taxpayer's records for the 2010 and 2011 tax years. Taxpayer, to the contrary, refers to its Excel summary, which contains information from September 2012 through August 2013 to support its contention that the audit assessments were overstated. Thus, Taxpayer's post-audit information is outside the audit and is beyond the scope of the protest.
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In this instance, both Taxpayer and the Department agree that not all of the water Taxpayer purchased was used to produce cubed ice and drinking water for sale. Also, both Taxpayer and the Department agree that Shrinkage occurred for various reasons during the tax years at issue. However, Taxpayer did not maintain adequate records for the tax years at issue so that the Department can determine the proper amount of tax by reviewing Taxpayer's records. Pursuant to the above referenced statutes, if the Department reasonably believes that Taxpayer has not reported the proper amount of tax due, the Department is only required to make a proposed assessment on the basis of the best information available to the Department. Thus, given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden of proof to demonstrate that the proposed assessment is wrong.
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The Department's audit determined that Taxpayer failed to pay sales tax or remit use tax on various tangible personal property it purchased and used in the course of its business, which include a "Sediment Filter," a "Hockey puck lock," a "Sanitation kit," a "Liquid hand sanitizer," a hose, a sanitizing spray bottle, gloves, a glove dispenser, a low ambient valve and heat strip, and a hot water sink ("Items at Issue"). Taxpayer, to the contrary, claims that it was not responsible for the tax because the Items at Issue are used to produce ice and, therefore, were exempt from the sales/use tax.
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In this instance, Taxpayer claims that it was not responsible for the tax because its purchases of the Items at Issue were used in an exempt manner. Taxpayer explains the needs of purchasing and using the Items at Issue. However, upon review, Taxpayer's documentation fails to demonstrate that Taxpayer directly used the Items at Issue in its direct production. As mentioned earlier, "[t]he fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not itself mean that the property 'has an immediate effect upon the article being produced.'" Given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden to demonstrate that the Department's assessment is not correct.
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In this instance, Taxpayer claims that it was not responsible for the tax because its purchases of the Items at Issue were used in an exempt manner. Taxpayer explains the needs of purchasing and using the Items at Issue. However, upon review, Taxpayer's documentation fails to demonstrate that Taxpayer directly used the Items at Issue in its direct production. As mentioned earlier, "[t]he fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not itself mean that the property 'has an immediate effect upon the article being produced.'" Given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden to demonstrate that the Department's assessment is not correct.
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Pursuant to IC § 6-8.1-10-1(e), the Department does not have the authority to waive the interest.
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Taxpayer has provided sufficient documentation establishing that his failure to pay tax or timely remit tax was due to reasonable cause and not due to negligence.
