Taxpayer is in the business of processing coal. Taxpayer does not own the coal it processes. Taxpayer has one customer for its processed coal; at all times, this particular customer owns the coal.
The audit report explains that coal is delivered to Taxpayer by rail car. The coal is dumped into a 60 foot deep "dumper house" and passes through a device for screening the coal. The screening device consists of a row of iron or steel bars and is called a "grizzly." The audit report notes that the "grizzly helps break the coal up as it falls into the dumper house."
From the dumper house, the coal is transported by means of a conveyor belt to the "stacker." Based on certain specific qualities, the coal is then sorted and separated into six piles; each of the six piles contains coal of a specific type and quality. As needed, the coal is then moved back onto a conveyor belt to the "crusher house." At the crusher house, the coal is blended and crushed while on "conveyor belt four."
The audit concluded that conveyor belt four "is the only belt where any type of processing or refining is taking place."
According to the audit report, once the coal has been blended and crushed, it is transferred by means of another belt "where it is sprayed with dust [and] fire suppression so it doesn't freeze or blow away." From there, the coal "travels through several other conveyor belts for storage or back to the customer."
The audit report concluded that "[T]axpayer's exemption only applies to their blending and crushing process, which happens on conveyor belt [four]."
Taxpayer disagrees with the audit's conclusion arguing that its purchases of "capital assets, supplies, materials, machinery, tools, and equipment" are exempt from tax pursuant to IC § 6-2.5-5-3 and
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In reviewing Taxpayer's objection, it is important to note that the question of whether or not Taxpayer is or is not an "industrial processor" is not at issue; the audit found – and the Taxpayer produced substantial, detailed evidence at hearing – that the customer's coal has been substantially changed in form, quality, and composition and that Taxpayer falls squarely within the definition of an "industrial processor."
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Taxpayer provides an explanation of the steps involved in coal processing as follows:
Taxpayer provides an explanation of the steps involved in coal processing as follows:
• Seven different "special types of coal" are delivered by railcar;
• While still in the railcar, the coal is treated with a chemical spray;
• The coal filled railcar "run[s] over gas-fired thaw pits;"
• Taxpayer tests the coal "for its composition and other characteristics to determine its suitability... and the specific blending and crushing process;"
• Coal filled railcars enter the Dumper House where the railcars are sprayed with a dust suppressant and connected to a "rotary dumper;"
• The rotary dumper turns the railcar over allowing the coal to fall into a 100 foot deep pit;
• According to Taxpayer, the previous chemical and heat treatment allow the coal to fall freely into a 100 foot deep pit;
• At a depth of 20 feet, the pit contains a "grizzly" deck which consists of a 20 by 60 foot metal grid with 12-inch openings;
• According to taxpayer, the grizzly "breaks enormous lumps of coal... into smaller pieces that can be transported [and] blended with other coals. According to Taxpayer, "[T]he grizzly acts as a filter, catching plant and animal life... and other foreign debris...."
• After falling through the grizzly, the coal falls another 80 feet to the bottom of the pit. A backhoe further breaks up the coal. The backhoe "feeds the coal onto Conveyor Belt [One] after it is treated with a chemical spray;
• Conveyor Belt One transports the coal underneath magnets which remove foreign metals;
• Conveyor Belt One transports the coal to Transfer Tower One;
• From Transfer Tower One, the coal is transported by Conveyor Belt Two to the Traveling Stacker;
• The Traveling Stacker "moves up and down" Conveyor Belt Two and sorts the coal into seven different piles each pile containing a specific grade or type of coal;
• From each coals piles one through six, Conveyor Belt Three (containing "sub conveyors") removes coal from the bottom of each pile in "sequence and quantity determined by the type of coal being processed" and is fed onto Conveyor Belt Four. According to Taxpayer, "Precision in the blend of coals on [Conveyor Belt Four] is crucial;"
• Taxpayer also maintains a "seventh pile of coal" which is not accessed by Conveyor Belt Three. According to Taxpayer, coal is drawn from the seventh pile of coal as needed and is transferred to Conveyor Belt Four by means of a wheel loader;
• Conveyor Belt Four transports the blended coal to transfer chutes containing various screens, crushers, and magnets before being dropped onto a vibrating screen to "separate remaining debris;"
• The vibrating screen separates coal by size allowing only coal fragments smaller than two inches to pass through the screen;
• The sorted and sized coal is transferred to the Crusher House;
• From the Crusher House, the coal is loaded onto Conveyor Belt Five;
• While being transported on Conveyor Belt Five, the coal is treated with "chemical foam or water suppressant" before being fed into Transfer Tower Two;
• From Transfer Tower Two, the coal is transferred by means of Conveyor Belt Nine for temporary storage in a 3,000 ton silo;
• From the 3,000 ton silo, the coal is released "through a vibrating feeder" to Conveyor Belt Ten which returns the coal back to Transfer Tower Two. The "vibrating feeder" assures that the different grades and types of coal are thoroughly blended into a "homogenous mix;"
• From Transfer Tower Two, the coal passes through a chute and onto Conveyor Belt Six on which it is transported to Transfer Tower Four;
• According to Taxpayer, the coal is "manipulated, turned, and passed through another transfer chute and onto" Conveyor Belt Seven and directed to Transfer Tower Three;
• In Transfer Tower Three, the coal is mixed and transferred onto Conveyor Belt Eight which transports the coal to its customer's East and West silos.
• According to Taxpayer, "Only a homogenous mix of coal, blended to [Customer's] specifications and of the correct size and moisture content is delivered to the [East and West] silos.
Taxpayer argues that the Department wrongly concluded that industrial processing begins while the coal is on Conveyor Belt Four and ends at the Crusher House. Taxpayer maintains that processing begins before the coal arrives at Conveyor Belt Four and that processing continues after the coal leaves the Crusher House.
Taxpayer has provided original documentation, charts, diagrams, photographs, and detailed explanations by persons closely associated with its coal processing operation. Taxpayer maintains that the coal processing begins "immediately after the coal arrives at the facility" and that its "integrated process ends when the coal is delivered to the East and West Silos."
Taxpayer has provided original documentation, charts, diagrams, photographs, and detailed explanations by persons closely associated with its coal processing operation. Taxpayer maintains that the coal processing begins "immediately after the coal arrives at the facility" and that its "integrated process ends when the coal is delivered to the East and West Silos."
Taxpayer is correct in part; equipment and devices involved in the coal processing preparatory steps are not entitled to the exemption because these items do not have an immediate effect on the processed coal. As explained in
Nonetheless, the Department is prepared to agree that the "integrated production process" begins at the point where the coal is initially sized, manipulated, and sorted at its "grizzly" because the "grizzly" has an immediate effect on the coal itself; coal which arrives at the grizzly substantially changed from coal which leaves the "grizzly." It is at this point where Taxpayer's "integrated production process" begins because the "grizzly" causes a "substantial change" in the "form, composition [and] character" of the coal itself.
The equipment and devices which follow continue within that integrated process and are also entitled to the exemption.
However, the Department is unable to agree with Taxpayer's contention that its coal processing continues until the coal is delivered by means of Conveyor Belt eight to its customer's East and West Silos; in reality, Transfer Tower Three marks the final point at which the coal undergoes any "substantial change" having been "mixed and turned" while within that tower. Equipment and devices subsequent to Transfer Tower Three are not entitled to the exemption because the "integrated production process" has concluded and the coal has been altered "to its completed form...."
Taxpayer operates an integrated coal processing operation; the processing of the coal begins at the "grizzly" and continues up to and including Transfer Tower Three. Specifically included within that "integrated operation" are a Komatsu Crawler bulldozer ("used to maintain the six piles of coal formed by the Traveling Stacker....") and a Komatsu Wheel Loader (used to push "work-in-process coal back to the middle of the six piles" and used to "transport work-in-process coal in [the] seventh pile to the coal feedunits."). See
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According to a sample invoice provided by Taxpayer, it paid for "semi truck rental" from a third party vendor. The audit report characterized the equipment as "lowboys." According to the audit report, "The vendor did not charge sales tax on the equipment rentals during 2009 through 2010."
According to a sample invoice provided by Taxpayer, it paid for "semi truck rental" from a third party vendor. The audit report characterized the equipment as "lowboys." According to the audit report, "The vendor did not charge sales tax on the equipment rentals during 2009 through 2010."
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Taxpayer provided an invoice along with "copies of slip tickets" which purportedly support the invoice charges. Taxpayer explains that, "[Taxpayer] and the equipment operator use these tickets to sign off and approve the description of equipment used, the time for which it was used, and the applicable rate." Taxpayer believes that the documentation establishes that the vendor's operator maintains control and possession of the vehicles, that the operator is "necessary" for the operation of the vehicles, and that Taxpayer "never operates any gear lever, wheel, or other control on the equipment." In addition, Taxpayer has provided an affidavit from the vice-president of a company which purportedly supplied Taxpayer's coal processing facility with "hauling and trucking services." The affidavit indicates that the equipment supplied by vendor "required special licenses and training to operate," that vendor "always provided an operator with the equipment," and that the vendor's employees "were the only individuals to operate the equipment."
Taxpayer provided an invoice along with "copies of slip tickets" which purportedly support the invoice charges. Taxpayer explains that, "[Taxpayer] and the equipment operator use these tickets to sign off and approve the description of equipment used, the time for which it was used, and the applicable rate." Taxpayer believes that the documentation establishes that the vendor's operator maintains control and possession of the vehicles, that the operator is "necessary" for the operation of the vehicles, and that Taxpayer "never operates any gear lever, wheel, or other control on the equipment." In addition, Taxpayer has provided an affidavit from the vice-president of a company which purportedly supplied Taxpayer's coal processing facility with "hauling and trucking services." The affidavit indicates that the equipment supplied by vendor "required special licenses and training to operate," that vendor "always provided an operator with the equipment," and that the vendor's employees "were the only individuals to operate the equipment."
Taxpayer is reminded that IC § 6-8.1-5-4(a) requires, "Every person subject to a listed tax must keep books and records so that the department can determine the amount, if any, of the person's liability for that tax by reviewing those books and records. The records referred to in this subsection include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks." The difficulty in arriving at a decision on this matter is compounded by the fact that there was almost no source documentation which establishes the relationship and obligations between Taxpayer and the transportation vendor. Especially in the case of related parties, there is a heightened requirement that the affected taxpayer establish that the parties are not engaged in self-dealing. Nonetheless – based upon the supplemental information provided at and subsequent to the hearing – the Department is prepared to agree that there is sufficient documentation to establish that the transactions at issue involved the rental of equipment along with an associated operator and that the transactions fall within the exemption set out at IC § 6-2.5-1-21(a)(3).
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The audit included as taxable an item designated as "Software with Upgrades" purchased from an automation services company. Taxpayer disagrees with this portion of the assessment on two separate grounds.
The audit included as taxable an item designated as "Software with Upgrades" purchased from an automation services company. Taxpayer disagrees with this portion of the assessment on two separate grounds.
Taxpayer states that the software purchased is exempt because the software is "used to monitor and control various aspects of the production process" pursuant to
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Taxpayer makes a secondary argument claiming that the software purchased "is customer software designed for [Taxpayer] for use in its coal handling plant and developed only for [Taxpayer] unavailable on the general market." Taxpayer points out that IC § 6-2.5-4-1(b) imposes tax on the sale of "tangible personal" property and that IC § 6-2.5-1-27 defines "tangible personal property" as including "prewritten computer software." However, Taxpayer asserts that the software is custom designed software and falls outside the definition of "prewritten computer software."
Taxpayer makes a secondary argument claiming that the software purchased "is customer software designed for [Taxpayer] for use in its coal handling plant and developed only for [Taxpayer] unavailable on the general market." Taxpayer points out that IC § 6-2.5-4-1(b) imposes tax on the sale of "tangible personal" property and that IC § 6-2.5-1-27 defines "tangible personal property" as including "prewritten computer software." However, Taxpayer asserts that the software is custom designed software and falls outside the definition of "prewritten computer software."
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The Department is unable to agree that Taxpayer paid the "automation services company" to write custom-designed software. Although the software may have been configured and adapted to Taxpayer's unique requirements, based upon the documentation provided, Taxpayer acquired software consisting of an amalgamation of pre-written, relatively common, and commercially available computer software which the developer specifically designed, altered, and assembled in such a way as be useful within Taxpayer's coal processing facility. However, the software is not entitled to the sought-after exemption on the ground that it is custom-designed software not subject to tax pursuant to IC § 6-2.5-1-27.
The Department is unable to agree that Taxpayer paid the "automation services company" to write custom-designed software. Although the software may have been configured and adapted to Taxpayer's unique requirements, based upon the documentation provided, Taxpayer acquired software consisting of an amalgamation of pre-written, relatively common, and commercially available computer software which the developer specifically designed, altered, and assembled in such a way as be useful within Taxpayer's coal processing facility. However, the software is not entitled to the sought-after exemption on the ground that it is custom-designed software not subject to tax pursuant to IC § 6-2.5-1-27.
Taxpayer has provided additional information explaining the function and purpose of the computer software. Taxpayer explains that the software is the control room operator's only available interface for the execution of any of the following; "controlling all large scale automated production; configuring all coal handling, crushing, blending, delivery rates, and proportions as well as all automated processes; real time, fault and historical monitoring of every step of all automated coal handling processes; the starting and shutting down of production equipment and machinery with the exception of various E-stop buttons provided in the control room as well as throughout the plant."
A review of the documentation provided and a review of commonly available information describing the function, use, and purpose of the software is sufficient to establish that the computer software functions in such a way as to have an "immediate effect on the article being produced...." The computer software at issue – "Intouch Runtime," "Wonderware Development Studio," and various patches - constitutes an essential and integral part of the integrated process by which Taxpayer processes coal.
Although Taxpayer has not established that the computer software is custom designed, Taxpayer has met its burden under IC § 6-8.1-5-1(c) of establishing that the software components here at issue functions as "an integral and essential part of the integrated production process" by which Taxpayer controls and operates it coal processing facility.
