Wednesday, June 18, 2014

Revenue Finds that Taxpayer Failed to Prove Wrapping and Packaging Equipment Entitled to Manufacturing Exemption

Excerpts of Revenue's Determination follow:

An out-of-state business operates an Indiana location which is here designated as "Taxpayer." Taxpayer is a shipping and wholesale company which packages and delivers out-of-state business's products.

The Department of Revenue ("Department") conducted an audit review of Taxpayer's business records. The audit resulted in an assessment of additional sale/use tax. Taxpayer disagreed with the assessment and submitted a protest to that effect.

Taxpayer argues that the Department should not have assessed tax on its purchase of wrapping equipment, packaging equipment, and the parts for that equipment.

In order for Taxpayer's purchase of wrapping and packaging equipment to qualify for the exemption, both the regulation and the statute require that the equipment at issue be "directly used" in "direct production." That means that the equipment or device must have an "immediate effect" on the manufactured items being produced by Taxpayer.

In Taxpayer's case, Taxpayer has failed to produce evidence establishing that the wrapping and packaging equipment is "directly used" in the "direct production" of the production of the products it sends to its various customers. To the contrary, the information provided by Taxpayer indicates the production of the items which Taxpayer delivers occurs elsewhere.

Bearing in mind that it is the Taxpayer's responsibility to establish that the assessment was "wrong" and that exemptions are "strictly construed against the taxpayer," the Department is unable to agree that the wrapping and packaging equipment are exempt from Indiana's sales and use tax.

Taxpayer purchased two "classifiers" from Vendor. The transaction was with Vendor on September 19, 2008. Taxpayer argues that assessment of tax on the two purchases is barred by the three-year statute of limitations.

It is clear from the information provided by Taxpayer that the retail transaction occurred on September 19, 2008. However, there is nothing to indicate when the two "classifiers" were first used in a taxable fashion such that the items became subject to use tax under IC § 6-2.5-3-2. If the two classifiers were simply placed into inventory or storage at the time they were acquired in September 2008, there would be no taxable incidence until the time the two items were removed from inventory and placed into use.

Without additional information, it is not possible to sustain Taxpayer's argument.

Taxpayer maintains that the Department's audit made errors in determining the amount of tax due.

A. Capital Asset Purchases:

Taxpayer maintains that audit included in its report a transaction with Flex-Pac twice. Taxpayer is correct. The transaction is included on page eight of the audit report once under "Flex-Pac" as the vendor and once again listed as "unknown vendor." The error should be corrected.

Taxpayer made purchases from WW Grainger and submitted invoices establishing that tax was paid at the time of the original transaction. To the extent that the Grainger invoices verify that tax was paid at the time of the original transactions, Taxpayer's protest is sustained.

B. Statistical Sample:

In reviewing Taxpayer's potential use tax liability, the Department employed a statistical sample. As explained in the audit report, at the time the statistical sample was conducted, "The [T]axpayer could not (did not) provide invoices or copies of invoices; therefore, the auditor was unable to complete an accurate review for compliance for state purposes."

In its protest, Taxpayer states the audit's sampling was "inconsistent and unfair" and took "exception to the Department's assessment of tax on credit cards and electronic data interchanges in which tax was paid directly to the vendor."

At the outset, it should be noted that Taxpayer has provided nothing which supports its claim that the sampling methodology was in any way "skewed," "inconsistent," or "unfair." To the contrary, the methodology described in the audit report appears entirely even-handed. Nonetheless, Taxpayer has provided copies of invoices which correspond to items contained within the sample. Those invoices indicate that sales tax was paid at the time of the original transactions.

The Audit Division is requested to review the newly submitted invoices and to make whatever adjustments to the original assessment as may be warranted.