Tuesday, July 15, 2014

Revenue Finds a Non-Motorized Trailer is Not of the Same Character as Motorized Vehicle for Purpose of "Like Kind Exchange"

Excerpts of Revenue's Determination follow:

In 2011, Taxpayer purchased a CAT 740 articulated dump truck for a combination of a cash down payment and an equipment trade. After reviewing the three pieces of equipment traded in for the purchase of the "articulated dump truck," (a CAT grinder and two CAT 627s) the Department's auditor denied the deduction for the trade-ins "due to the fact that it was not a like- kind exchange." Taxpayer agreed that one of the three items, the CAT grinder, did not qualify for the "like-kind" exchange, but disagreed with the Department's treatment of the two CAT 627s. The Department's Audit Summary stated that "the [T]axpayer traded in scrappers and road graders on the purchase of a dump truck" and "[n]either a road grader nor a scraper qualifies as a dump truck" and cited to IC § 6-2.5-1-6 and 45 IAC 2.2-3-20 in support of its finding.

Taxpayer protests that the equipment it traded in as part of its purchase of the CAT 740 qualifies as a "like-kind exchange" and is therefore exempt from sales tax and use.

Taxpayer argues that the exchange should be considered a "like-kind exchange and therefore deductible from the taxable sales price," because "both assets are motorized vehicles used to transport dirt during the operation of the landfill." At the hearing Taxpayer elaborated that both types of vehicles have similar large rubber tires (presumably indicating the function of the vehicles), are of articulated construction (which Taxpayer explained means they pivot independently off the bed) and are used to move dirt at the landfill. According to Taxpayer the CAT 627 scrapers have a pan that drops down to scrape the dirt and the CAT 740 is loaded with an excavator.

Sales Tax Information Bulletin 28S (December 2009), 20100127 Ind. Reg. 045100029NRA), and Sales Tax Information Bulletin 28S (September 28, 2011), 20110928 Ind. Reg. 045110549NRA, the versions of the Information Bulletin 28S in effect during the audit years, provided that:

The deduction for a trade-in allowance applies only to "like-kind exchanges" where the motor vehicle or trailer to be traded in is owned and titled in the name of the customer. A like-kind exchange means a motor vehicle traded for another motor vehicle or a trailer traded for another trailer. A trade-in of a motor vehicle for a trailer is not a "like-kind exchange" and is not deductible in the calculation of the amount of the taxable gross retail income received by the dealer. Non-like-kind exchanges are merely another form of a payment to the dealer and do not reduce the dealer's gross retail income.

As the regulation states and the Information Bulletin elaborates, the property must be "of the same kind or character." For instance, as the Information Bulletin quoted above illustrates, a non-motorized trailer does not qualify for a "like-kind exchange" with a motorized vehicle. In this instance, Taxpayer has met its burden to show that the CAT 627s qualify for "like-kind" exchange with the CAT 740 because both these types of vehicles were used for similar purposes at Taxpayer's landfill. Landfill industry literature points to the fact that in recent years "articulated dump trucks" have replaced "scrapers" to perform similar functions (name of website, http://www.mswmanagement.com/ MSW/Articles/3751.aspx?format=2, last accessed April 16, 2014). For purposes of the "like-kind exchange" deduction in the taxable retail price of an item, the item does not have to be exactly the same as the item being traded-in, as long as the item being replaced and the item being traded in are generally of the same kind or character.

Based on the above, Taxpayer has met its burden to show that the Department's imposition of use tax on the exchange of the CAT 627s for the CAT 740 was incorrect.

The Department's audit assessed use tax on materials used to build a "cell" at Taxpayer's landfill. According to the Department's Audit Summary, "cells" are the areas that landfills build for the disposal of trash. Materials used in the construction of Taxpayer's "cell" included Geotextile liners, pipes, pumps, discharge kits, etc. The Department's Audit determined Taxpayer did not remit sales tax or use tax on these items and therefore assessed use tax based on the retail price of the items. During the audit, Taxpayer stated that these items were purchased pursuant to a lump-sum contract and that the contractor had presumably already paid sales tax on the items when the contractor purchased them for Taxpayer's cell construction project. Taxpayer therefore protested the assessment of use tax on construction materials consumed in a lump-sum contract by its subcontractor.

According to the Department's Audit Summary:

The taxpayer also stated that he will call the vendor to verify that they paid the tax. The auditor requested any documentation that would verify that no additional tax was due on these purchases before the audit was closed. The auditor also pointed out that a 2010 invoice from the same vendor with the same materials had Indiana sales tax charged by the vendor on the selling price of the materials, and the taxpayer did pay the invoice total including the sales tax. The purchase invoices clearly list the purchase of materials only from the vendor [i.e., no sales tax was included]. No lump sum contract was provided, and no documents were provided as evidence that a lump sum contract for an improvement to realty occurred regarding the purchases taxed in the audit. The fact the vendor may have paid tax on some of the cost of their purchases for resale is not relevant, as the vendor must collect tax on the selling price of materials when selling materials at retail.

Taxpayer asserts that it hired a subcontractor to perform its construction work on a lump-sum basis. Taxpayer mentions that the contractor purchased the construction materials from a vendor to incorporate into real property as part of the lump-sum contract. The invoices Taxpayer presented during the audit and again at the hearing list charges for materials and labor separately. There is no indication on those invoices that sales tax was charged to Taxpayer by the contractor/vendor. Taxpayer did not provide any additional documentation showing that the contractor paid sales tax itself on those items or showing that the contractor remitted use tax to the Department on those items.

Therefore, Taxpayer has not provided sufficient evidence to establish that the construction materials it purchased were not subject to sales and use tax. Taxpayer has not met the burden imposed by IC § 6-8.1-5-1(c).