Thursday, May 22, 2014

Revenue Finds Clear Wrap, Pallet Slipsheets, Stretch Film and Hand Wrap Exempt from Tax as Nonreturnable Wrapping Materials

Excerpts of Revenue's Determination follow:

Taxpayer develops, manufacturers, sells, and distributes prescription pharmaceuticals. Taxpayer has an Indiana location.

The Department of Revenue ("Department") conducted an audit review of Taxpayer's sales tax and business records.

During the course of its business, Taxpayer purchased various packaging materials which it uses to deliver pharmaceuticals. Taxpayer maintains the purchases are exempt.

Taxpayer maintains that its wrapping and packaging material qualify for the exemption found at IC § 6-2.5-5-9.

Taxpayer has provided sufficient documentation to establish that its purchase of "Clear Wrap," pallet slipsheets, stretch film, and hand wrap, are exempt from sales/use tax because the items constitute "nonreturnable wrapping materials . . . ." used to transport its pharmaceuticals to its various customers. However, the Department is unable to agree that Taxpayer has established that the "bubble wrap" is exempt because it is unclear if the bubble wrap functions as an "enclosure" or "container."

Taxpayer believes that it is entitled to abatement of the ten-percent negligence penalty because Taxpayer "has demonstrated the necessary ordinary business care to warrant the waiver of the ten percent negligence penalty." Taxpayer indicates that it timely filed "all their Indiana sales and use tax returns in a timely manner during the audit period" and that "it established use tax procedures to self assess use tax when the proper amount of sales tax is not charged on their purchase."

"Corporation was unclear on many of the issues raised by the audit." According to the "Audit Progress Report," the penalty was imposed because the "Taxpayer had no use tax self-assessment policy in place prior to [the] audit" and because "Taxpayer failed to remit use tax on all taxable purchases, where sales tax was not paid to the vendor."

Given the number of items for which taxpayer failed to self-assess use tax, and the fact that the taxpayer had no established internal procedure by which to self-assess use tax, the Department is unable to agree that the taxpayer exercised ordinary business care in determining its use tax liabilities.

The Department believes that taxpayer made substantial errors in determining its sales and use tax liability. However, there is insufficient information to establish that Taxpayer's actions constituted "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.