Taxpayer is an international corporation headquartered in Indiana. Taxpayer is engaged in the business of manufacturing and distributing medical implants and instruments utilized in medical industries. Taxpayer has manufacturing facilities in Indiana. After an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer owed additional use tax and made assessments of tax and interest for the 2008, 2009, and 2010 tax years. The Department found that Taxpayer had made purchases of tangible personal property without paying sales tax at the time of purchase or remitting use tax to the Department. Taxpayer protests the assessment of tax on its purchases of prototypes.
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The Department found that Taxpayer had purchased certain items without paying sales tax at the time of purchases, and assessed use tax on the purchases. Taxpayer asserts that the Department erred in determining that its purchases of prototypes are subject to sales and use tax. Taxpayer believes that its purchases of completed prototypes from outside vendors are eligible for the "research and development equipment exemption."
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Taxpayer asserts that the prototypes qualify for the "research and development equipment exemption." Taxpayer maintains that even though it accounts for its prototypes by expensing them, the prototypes qualify as equipment because they have a useful life of much longer than one year.
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Notwithstanding that the research and development exemption is to be applied narrowly, it remains that IC § 6-2.5-5-40 provides an exemption for "research and development equipment" in certain circumstances. The Department notes that IC § 6-2.5-5-40(b) provides a specific definition of what constitutes "equipment" for purposes of the Indiana research and development equipment exemption. Specifically, the exemption applies when the "research and development equipment:" (1) consists of or is a combination of "laboratory equipment, computers, computer software, telecommunications equipment, or testing equipment;" (2) has not previously been used in Indiana for any purpose; and (3) is acquired by the purchaser for the purpose of research and development activities devoted directly to experimental or laboratory research and development for new products, new uses of existing products, or improving or testing existing products. The legislature specifically used the term "research and development equipment" and included only equipment that fits into the five specifically listed categories.
Therefore, regardless of whether or not the prototypes meet the generic definition of equipment, the prototypes must fit into one of the five specifically listed categories of equipment that are used to perform the research and development activities–i.e., "laboratory equipment, computers, computer software, telecommunications equipment, or testing equipment." However, the prototypes–i.e., the products that are being tested themselves–do not fit into any of the listed categories. If the legislature wanted these types of items to be included in the exemption, the legislature would have not only enacted the provisions in the statute that exempted the categories of equipment that are used to perform the research and development testing, but would have also included a category for the items that make up the tested product themselves like the legislature did when enacting the manufacturing exemptions. See IC § 6-2.5-5-6 (enacting a manufacturing exemption that includes the tangible personal property that is incorporated as a material part of the manufactured product). See IC § 6-2.5-5-3 (enacting a manufacturing exemption that includes manufacturing machinery, tools, and equipment that are used to manufacture the product). See also IC § 6-2.5-5-5.1 (enacting a manufacturing exemption that includes the tangible personal property that is consumed during the manufacture of a product).
Taxpayer invites the Department to expand the statutory definition of "research and development equipment" to include its purchases of prototypes as purchases of one of the five categories of exempt equipment. Taxpayer, therefore, invites the Department to exceed the statutory authority granted in IC § 6-2.5-5-40. Taxpayer has not referenced any statute or regulation which clearly requires the Department to grant, or which allows the Taxpayer to claim such an exemption for its prototypes. In fact, the originally proposed statutory language attempted to exempt a broader category of purchases by referring in general to all purchases of "tangible personal property," including items such as utilities in the definition. S.B. 649, 1999 Gen. Assem., Reg. Sess. (Ind. 1999). However, this broad exemption was not enacted by the legislature. The legislature, after considering this broad exemption, enacted a narrow exemption that included only "equipment" that is defined in five specific categories. If the "research and development equipment exemption" is to be broadened to include the prototypes–i.e., the products that are being tested themselves, such action must come from the Indiana General Assembly. See also H.B. 1369, 2012 Gen. Assem., Reg. Sess. (Ind. 2012) (attempting to amend IC § 6-2.5-5-40 to include tangible personal property in general in which the bill did not leave committee.) See also H.B. 1171, 2013 Gen. Assem., Reg. Sess. (Ind. 2013) (attempting to amend IC § 6-2.5-5-40 to include tangible personal property in general in which the bill did not leave committee.)
