Wednesday, July 23, 2014

Revenue Finds Drying Crates Essential Part of Manufacturing Process for Animal Feed

Excerpts of Revenue's Determination follow:

Taxpayer is an Indiana farm market retailer. The Indiana Department of Revenue ("Department") conducted an audit of the tax years 2010, 2011, and 2012. As a result of that audit, the Department issued proposed assessments of base tax and interest.

The Department's audit found that Taxpayer sold "decorative pumpkins" without collecting sales tax. Taxpayer claims that its sales of pumpkins are exempt because pumpkins are food and the sale of food is exempt from sales tax. Taxpayer states "[t]he pumpkins are sold in exactly the same state as they are just before they are picked from the vine in the pumpkin field."

The sale of pumpkins is a retail transaction subject to Indiana sales tax. See IC § 6-2.5-1-2; IC § 6-2.5-4-1; IC § 6-2.5-1-27; 45 IAC 2.2-4-1. The issue here is whether Taxpayer's sale of pumpkins is exempt from sales tax.

The general rule is that "[s]ales of food and food ingredients for human consumption are exempt from the state gross retail tax." IC § 6-2.5-5-20(a). Taxpayer has demonstrated that the pumpkins it sells are food for human consumption and has met its burden to show that the Department's proposed assessment is incorrect. Taxpayer's sale of pumpkins is exempt from sales tax, and Taxpayer's protest is sustained regarding the sale of pumpkins.

Taxpayer protests the imposition of use tax on the purchase of drying crates and office furniture. 

1. Drying Crates

Taxpayer purchased crates to dry ear corn used for animal feed ("drying crates"). The Department's audit determined that these were taxable purchases because Taxpayer failed to demonstrate that the drying crates were purchased in a casual sale and that their purchase qualified for an exemption. Taxpayer did not provide documentation to adequately support this assertion at the hearing.

Taxpayer argues that the drying crates "are exempt from Indiana use tax under the Code because they are an essential and integral part of [Taxpayer's] production process." The audit report disagreed stating that the "crates are merely being used as a holding container where ambient air can flow through them to dry the corn," and found that "[t]he crates are subject to tax." The issue is whether Taxpayer's purchase of the drying crates is exempt from use tax.

Taxpayer references the equipment exemption in IC § 6-2.5-5-3. To claim the exemption, a taxpayer must first demonstrate that it produces tangible personal property, as it is clear that "without production there can be no exemption." Indianapolis Fruit, 691 N.E.2d at 1384. It is undisputed that Taxpayer produces ear corn for animal consumption.

The drying crates are "open on all sides to allow air flow, supplied by drying fans, to go through the crate and dry the corn." Taxpayer provided photographs depicting the drying crates and fans used to dry the ear corn. If not dried thoroughly before it is packaged, the ear corn "will rot in the package and be completely wasted." The drying crates are essential and integral to Taxpayer's production of ear corn for animal consumption. Because the drying crates are an essential and integral part of Taxpayer's production process, they are used directly in the direct production of tangible personal property and are exempt. Taxpayer's protest is sustained.

2. Office Furniture

Taxpayer purchased office furniture. At the time of the audit, Taxpayer argued but failed to demonstrate that sales tax had been paid at the time of purchase of the office furniture. Consequently, the audit report found that because sales tax had not been paid, the purchase of the office furniture was subject to use tax.

Retail transactions ordinarily subject to use tax will be exempt if sales tax was paid at the point of purchase. IC § 6-2.5-3-4; 45 IAC 2.2-3-4. At the administrative hearing, Taxpayer provided a copy of an invoice showing the purchase of the office furniture. On this invoice, Taxpayer has demonstrated that it paid the sales tax at the time it purchased the office furniture. Therefore, Taxpayer has met its burden to show that the Department's proposed assessment is incorrect. Taxpayer's protest is sustained.