Taxpayer is an Indiana commercial printer which generates billing statements and related products for its clients. In the course of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had not paid sales tax on some transactions upon which tax should have been paid during the tax years 2008, 2009, and 2010. Therefore, the Department issued proposed assessments for use tax and interest for those years.
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Taxpayer protests the imposition of use tax on certain transactions during the tax years 2008, 2009, and 2010. The Department examined Taxpayer's records and used a statistical sample and projection method to determine use tax compliance for ordinary purchases. The Department reviewed capital purchases separately and assessed use tax on a purchase-by-purchase basis. Taxpayer protests that some of the ordinary purchases included as subject to use tax in the Department's projection method were not actually subject to use tax and that the projections need to be recalculated and reapplied. Also, Taxpayer protests that certain capital purchases were not subject to sales or use tax.
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The first category of transactions under protest consists of three transactions for a 120 KVA UPS umbilical power supply. In the course of the protest and hearing process, Taxpayer was able to supply documentation and analysis which establishes that the equipment provides power solely to production equipment.
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[S]ince Taxpayer has established that the umbilical power supply system equipment is used solely to power exempt production equipment, it is exempt as provided in 45 IAC 2.2-5-8 (c). Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) for this portion of its protest.
The second category under protest consists of a single charge listed under "Capital Asset 1091" in the audit report. The charge is for generator equipment used to supply power to Taxpayer's computer room at Taxpayer's production facility. As part of the protest process, Taxpayer provided additional documentation and analysis which supports its position that the generator was used solely to provide backup power to computers directly used in Taxpayer's production process. As discussed above, 45 IAC 2.2-5-8 (c) provides an exemption for such equipment. Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) for this portion of its protest.
The third category under protest consists of rental of server capacity on a third-party MTA Hurricane Server. Taxpayer states that this server is the device upon which Taxpayer's programs generate the billing statements for Taxpayer's clients.
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Taxpayer has provided sufficient documentation and analysis to establish that this server is used solely in its production process. Therefore, the rental of tangible personal property in the form of server capacity is a retail transaction as provided by IC § 6-2.5-4-10(a). Since that transaction involves manufacturing equipment which Taxpayer directly uses to directly process the billing statements for its clients, it is exempt from sales and use tax as provided by IC § 6-2.5-5-3(b).
The fourth category under protest consists of a Storage Area Network ("SAN") server which Taxpayer states is necessary to hold all of the data which it uses to directly produce the billing statements for its customers. Taxpayer explains that none of its other servers have hard drives and so they rely on the SAN to hold all of the operating systems and data directly used in its production process. The data is fed back and forth to the various production servers and since the newly available information shows that the SAN is used exclusively for production purposes, the SAN is exempt as provided by 45 IAC 2.2-5-8 .
The fifth category under protest consists of payments to the vendor "Xiotech" for service to the SAN server discussed above. A review of the documentation supplied during the protest process shows that the service agreement covers service and parts for the SAN server. The Department based its determination that the service contract was taxable on the lack of documentation available during the audit...
It has now been shown that the service agreement covered service and the provision of repair parts to a piece of manufacturing equipment which is directly used in the direct production of Taxpayer's product. As provided by 45 IAC 2.2-5-8 (h)(2), those parts are exempt from tax. Since the service agreement calls for the provision of service, which is exempt, and for the provision of exempt parts, as provided by 45 IAC 2.2-5-8 (h)(2), there is no part of the service agreement which is subject to sales or use tax. Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c).
The sixth category under protest consists of payments to another service vendor. Taxpayer states that the payments were for services only and that the transactions were therefore not subject to sales and use tax. The Department based its determination that the transactions were subject to sales and use tax on the basis that the vendor's service included the provision of tangible personal property in the course of providing data storage services. Taxpayer protests that the data storage is collected and stored throughout the production process.
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[T]he value of tangible personal property transferred in the provision of a service must not exceed ten percent of the service charge in order for the exemption provided by45 IAC 2.2-4-2 to apply. After review of the supporting documentation, Taxpayer has not established that all four requirements of 45 IAC 2.2-4-2 (a) are met and that the data storage service is not properly subject to sales and use tax. Taxpayer has not met the burden imposed under IC § 6-8.1-5-1(c).
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[T]he value of tangible personal property transferred in the provision of a service must not exceed ten percent of the service charge in order for the exemption provided by
In conclusion, Taxpayer has met the burden imposed under IC § 6-8.1-5-1(c) in regards to umbilical power supply system equipment, generator equipment, the rental of an MTA Hurricane Server, the SAN server, and the maintenance agreement with Xiotech. Taxpayer has not met the burden imposed under IC § 6-8.1-5-1(c) in regards to the service agreement with the data storage services vendor. A supplemental audit will use these findings to adjust the use tax calculations for capital assets and the use tax compliance calculations determined via the sample and projection method.
