Taxpayer is an Indiana business which sells, services, and installs furnaces and air conditioning equipment. The Department of Revenue ("Department") conducted an audit review of Taxpayer business records and sales/use tax returns. The audit concluded that Taxpayer owed additional sales/use tax.
Taxpayer disagreed with the assessment and submitted a protest to that effect. In addition to filing the protest, Taxpayer delivered to the Department's Legal Division numerous documents which – according to Taxpayer – would refute the original audit's assessment.
Taxpayer's objection was that "the discrepancies are related to all the Duncan Supply invoices for the years in question. The statements did not show the sales tax paid on it but upon looking at the actual sales, the sales tax amount was on there."
Those records were transferred to the Audit Division which conducted a supplemental review. That successive review found that the amount of the assessment should be reduced based on those supplemental documents.
Taxpayer remained unsatisfied.
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Taxpayer argues that it does not owe tax because it pays sales tax each and every time it acquires materials used to fulfill lump sum construction contracts.
At the outset, it is useful to set out the Department guidance on this issue found in Sales Tax Information Bulletin 60 (April 2011), 20110427 Ind. Reg. 045110247NRA.
If a construction contractor purchases construction materials pursuant to a lump sum contract, the construction contractor pays either (1) sales tax at the time the construction materials are purchased; or (2) use tax at the time the construction materials are incorporated into real property if the contractor purchased or acquired the construction materials exempt from sales tax and the owner of the real property could not have purchased the materials exempt from sales tax (as evidenced by a customer's properly completed ST-105 General Sales Tax Exemption Certificate).
Taxpayer maintains that it paid sales tax on all of the materials it bought to complete its lump sum contracts and that all of the contracts it enters into with its customers are lump sum contracts. According to Taxpayer, the evidence establishes that it owes neither sales nor use tax.
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According to the audit report, "It should be noted that the [T]axpayer did not remit any Use Tax to the Department." Taxpayer agrees that it did not remit use tax during the audit years.
Since Taxpayer did not collect sales tax from its customers and did not self-report sales tax, Taxpayer must have – by simple elimination – paid sales tax to its vendors each and every time it purchased materials incorporated into the lump sum contracts Taxpayer indicates it entered into with its customers.
However, the audit report found that Taxpayer engaged in both "time and material" contracts and "lump sum" contracts. In addition, the audit found that some of Taxpayer's vendors charged sales tax and some did not.
The audit found instances of "numerous missing invoices evidenced by many gaps in the numeric sequence of the sales invoices made available."
The supplemental audit addressed Taxpayer's initial objection that the additional assessment is entirely attributable to a misreading of the invoices received from Duncan Supply. The Department stated that it "was in agreement that an additional $734 sales tax paid to vendors should be allowed as credit in the audit report." However, the supplemental audit found that there was no evidence – as Taxpayer asserted – that Taxpayer did not "mark-up" the cost of the materials consumed in completing lump sum jobs. In addition, the Department's supplemental audit was unable to verify or document "over $100,000 in purchases" and noted the absence of original documentation such as "general ledgers, trial balances, [and] job folders."
Taxpayer asks that the Hearing Officer conduct yet a third audit of Taxpayer's records, make a competent decision that both the original audit and supplemental audit were faulty, and conclude that Taxpayer has met its statutory burden of demonstrating that the additional assessment of sales/use tax was "wrong." The Department must decline Taxpayer's invitation. The original audit began December 2011 and concluded July 2012; the supplemental audit conducted an extensive review of the documentation provided subsequent to the original audit. The administrative hearing is not an appropriate venue to second-guess the result of those audits where a Taxpayer has not made a compelling, documented argument that the assessment was wrong.
