Wednesday, April 23, 2014

Revenue Finds Taxpayer Sufficiently Showed Bungees Purchased for Resale But Failed to Show Air Powered Mist Coolant was Used in Direct Production of Goods

Excerpts of Revenue's Determination follow:

Taxpayer manufactures and installs floating dock systems, boat lifts and the like. The Indiana Department of Revenue ("Department") conducted a sales and use tax audit of Taxpayer for the 2010 through 2012 tax years. The Department's audit found that Taxpayer had made taxable sales and did not have a record of exemption certificates for any of those sales. The audit also found that Taxpayer did not pay sales tax on items purchased. Therefore, pursuant to the audit, the Department assessed Taxpayer additional sales and use tax.

The Department found that Taxpayer purchased machinery and equipment without paying sales tax at the time of purchase, and assessed use tax on the purchases. Taxpayer maintains that purchase of bungee cords is exempt because they were resold to customers, and that its purchase of the air powered mist coolant is exempt because it is used in the direct manufacturing of its customers' products.

Taxpayer asserts that an air powered mist coolant it purchased without paying sales tax is directly used in its manufacturing process. Taxpayer uses the air powered mist coolant to cool a horizontal drill Taxpayer uses to make posts for docks. Generally, all purchases of tangible personal property by persons engaged in the direct production, manufacture, fabrication, assembly, or finishing of tangible personal property are taxable.45 IAC 2.2-5-8(a). However, IC 6-2.5-5-3(b) provides in relevant part:

[T]ransactions involving manufacturing machinery, tools, and equipment are exempt from the state gross retail tax if the person acquiring that property acquires it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property. (Emphasis added).

Accordingly, tangible personal property purchased for use in the production of a manufactured good is subject to sales and use tax unless the property used has an immediate effect on and is essential to the production of the marketable good. Thus, it is only the property that has an immediate effect on and is essential to the direct production of a marketable good that is exempt. However, Taxpayer has not sufficiently explained how the "air powered mist coolant" has an immediate effect on the posts or crossbars of a dock.

Taxpayer purchased bungee cords, which it claims to have resold to its customers so that they could attach boat canopies cover to a frame. IC 6-2.5-5-8(b) provides in pertinent:

Transactions involving tangible personal property . . . are exempt from state gross retail tax if the person acquiring the property acquires it for resale, rental, or leasing in the ordinary course of the person's business without changing the form of the property.

In the course of the protest process, Taxpayer provided documentation supporting its position that the bungee cords were purchased for resale. After a review of the documentation, Taxpayer has established that the sales in question were for resale and so were eligible for the exemption provided under IC 6-2.5-5-8(b). Taxpayer has met the burden of proving the imposition of use tax on its purchases of bungee cords incorrect, as required by IC 6-8.1-5-1(c).

During the course of the administrative hearing, Taxpayer's representative explained that Taxpayer could provide exemption certificates for some of its customers. Taxpayer asked that the Department adjust the audit assessment to reflect the fact that it was not required to collect sales tax from the customers represented by the exemption certificates.

Taxpayer is correct that under certain circumstances, a retail merchant such as Taxpayer is not required to collect sales tax. Under IC 6-2.5-8-8(a), "A person . . . who makes a purchase in a transaction which is exempt from the state gross retail tax and use taxes, may issue an exemption certificate to the seller instead of paying the tax." Once the purchaser provides the exemption certificate, the retail merchant is under no obligation to collect sales tax on the transaction. IC 6-2.5-8-8(a) states that, "A seller accepting a proper exemption certificate under this section has no duty to collect or remit the state gross retail or use tax on that purchase."

Taxpayer belatedly provided exemption certificates purportedly relevant to some of the challenged assessments. However, the certificates presented are not contemporaneous to the transactions at issue. For example, Taxpayer supplied a Form ST-105 dated March 24, 2013; however, the transactions at issue occurred prior to March 2013. Therefore, Taxpayer has not met its burden under IC 6-8.1-5-1(c) of demonstrating that the original sales tax assessments were incorrect.
Taxpayer was informed that it would have to request that its purportedly exempt customers fill out an AD-70 form, which is the form used to allow exemption after the transaction has occurred. Taxpayer has been given the opportunity to provide AD-70 forms. The Department is prepared to accept the exemption certificates Taxpayer has presented, on condition that if the exemption certificate is dated after the particular transaction(s) occurred, that exemption certificate must be accompanied by a properly completed AD-70. Taxpayer provided several completed AD-70 forms. Taxpayer's file will be returned to the audit division for a supplemental audit of the documentation provided.

Additionally, Taxpayer provided two invoices for a customer for whom they could not obtain an AD-70. While Taxpayer acknowledges that without the exemption certificate or an AD-70 the majority of the invoice items are subject to sales tax, Taxpayer notes that the separately stated labor charges should not be subject to sales tax. However, the amount cited by the Taxpayer includes separate charges for "dock assembly" and "installation." The "installation" charge would not be subject to sales tax because "installation charges that are separately stated on [an] invoice" are not "gross retail income" subject to sales tax.IC 6-2.5-1-5. The "assembly" charge would be subject to sales tax, because "bona fide charges which are made for preparation, fabrication . . . finishing, completion . . . or other service performed in respect to the property transferred before its transfer and which are separately stated on the transferor's records" are taxable. IC 6-2.5-4-1(e)(2).

Accordingly, Taxpayer's protest is sustained in part and denied in part. Taxpayer's protest is denied to the extent that AD-70 forms are not presented to the Department for the transactions, or that the nonexempt customer mentioned above paid for anything but "installation" charges. However, Taxpayer's protest is sustained to the extent that a properly completed AD-70 form is presented to the Department, subject to the results of a supplemental audit consistent with the above, and to the extent that separately stated charges were made for "installation" for the otherwise nonexempt customer.