Tuesday, June 10, 2014

Revenue Rejects Taxpayers Argument Delivery of Sand and Rock Part of Taxable Transaction

Excerpts of Revenue's Determination follow:

Taxpayer is a local, Indiana contractor. Among other services, Taxpayer installs pre-built "pole buildings." Taxpayer also performs concrete work and installs waterway and other drainage facilities. Taxpayer invoices its customers using "lump sum" and "time and material" contracts. The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's business records.

According to the Department's audit report, "[T]he [T]axpayer made sales and deliveries of yellow rock and dirt." The report noted that Taxpayer billed customers at what was called a "flat rate" which included a delivery charge. Treating these sales as the transfer of "tangible personal property," the audit assessed sales/use tax "where no tax was collected and no valid exemption certificate was obtained from the customer."

Taxpayer argues that the delivery of "yellow rock and dirt" was not subject to tax. Taxpayer explains that it has an agreement with a local stone quarry by which Taxpayer receives the "yellow rock and dirt" free of charge. However, the unwritten agreement purportedly provides that Taxpayer is not allowed to charge his customers for the "yellow rock and dirt." As explained in Taxpayer's protest letter:

[T]he [T]axpayer is only allowed to charge the customer a hauling fee for the use of his truck and use of his equipment to load and unload the dirt. There is no sales transaction involved for the materials[,] only for the service of hauling rock and stone.

The issue is whether the "yellow rock and dirt" transactions constitute the taxpayer sale of tangible personal property or whether Taxpayer is merely providing its customers an exempt service.

Taxpayer was able to provide copies of the original invoices, a statement from the quarry owner stating that the "yellow rock and dirt" is "a waste product," and a copy of Taxpayer's rate chart setting out prices for delivery and labor charges. However, the nature of the transactions is plain on the face of Taxpayer's own invoices. Taxpayer acquired rock and sand and delivered rock and sand to its customers. In the ordinary course of Taxpayer's business, Taxpayer acquired tangible personal property and transferred ownership of that property for consideration. In essence, Taxpayer's customers wanted rock and sand; Taxpayer acquired rock and sand; Taxpayer delivered rock and sand and charged – typically – a single unitary price for the rock and sand. As such the price charged is subject to sales tax under 45 IAC 2.2-1-1(a) which states:

For purposes of the state gross retail tax and use tax, such taxes shall apply and be computed in respect to each retail unitary transaction. A unitary transaction shall include all items of property and/or services for which a total combined charge or selling price is computed for payment irrespective of the fact that services which would not otherwise be taxable are included in the charge or selling price. See also IC § 6-2.5-4-1(a) ("A person is engaged in selling at retail when, in the ordinary course of his regularly conducted trade or business, he . . . acquires tangible personal property for the purpose of resale . . . and transfers that property to another person for consideration.")

The Department has no reason to doubt Taxpayer's intentions but its determination on this issue is circumscribed by the documentation available, Taxpayer's burden of proving that the assessment is wrong, and any reasonable application of the law.