Taxpayer operates a gas station and convenience store in Indiana. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had not collected sales tax on the sales of various items. The Department therefore issued proposed assessments for sales tax, ten percent negligence penalties, and interest for the tax years 2009, 2010, and 2011.
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Taxpayer protests the imposition of sales tax on its sales related to prepaid phone cards. Taxpayer states that its vendor told Taxpayer that the price of the card already included all of the state and federal tax, and therefore sales tax did not need to be collected.
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Taxpayer was a retail merchant responsible for collecting the sales tax on the sale of the phone cards under IC § 6-2.5-2-1. Therefore, the prepaid phone cards are clearly taxable under IC § 6-2.5-4-13. Taxpayer has not met the burden of proving the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).
Taxpayer protests the imposition of sales tax on its sales related to pre-made frozen sandwiches. Taxpayer explains that it does not make the sandwiches in the shop. Taxpayer further explains that it does not sell utensils with the sandwiches, and that if the customer heats up the frozen sandwiches, then Taxpayer will collect sales tax.
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If the sandwiches are sold frozen, are not prepared at or near Taxpayer's store, and they are not sold with utensils, then the sandwiches would indeed be exempt from sales tax. However, Taxpayer has not provided any documentation or information to substantiate that this was the case, other than its own assertions. Therefore, Taxpayer has not met the burden of proving the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).
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Taxpayer protests the imposition of sales tax on sales of cellular telephones and accessories. In its protest letter, Taxpayer claimed that it does not sell telephone accessories. Taxpayer then said that the vendor instructed Taxpayer that the price included the state and federal tax. Therefore Taxpayer did not collect tax because they believed they were complying with the law.
However, Taxpayer at the hearing again claimed that it does not sell these items at its store, but went on to say that it was actually selling gift cards. Taxpayer claims that these items were actually gift cards, and believes that the cashier(s) rang up the items incorrectly. Taxpayer claims that the buttons for both are near each other on the register.
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Taxpayer has not provided any documentation or information to substantiate that Taxpayer was actually selling gift cards, other than its own assertions. Taxpayer has not met the burden of proving the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).
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Taxpayer protests the imposition of sales tax on its sales related to herbal incense. Herbal incense is a product that is sold in individual packets, and is a combination of herbs and botanicals mixed with chemicals. Herbal incense is ingested or smoked using rolling papers or pipes.
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IC § 6-2.5-5-20(a) provides that "[s]ales of food and food ingredients for human consumption are exempt from the state gross retail tax." IC § 6-2.5-1-20 defines "food and food ingredients" as:
"Food and food ingredients" means substances, whether in liquid, concentrated, solid, frozen, dried, or dehydrated form, that are sold for ingestion or chewing by humans and that are consumed for their taste or nutritional value. The term does not include alcoholic beverages, candy, dietary supplements, tobacco products, or soft drinks.
Therefore, whether or not an item qualifies for the exemption provided by IC § 6-2.5-5-20 is a fact-sensitive issue. In applying any tax exemption, the general rule is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Indiana Dept. of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988). The taxpayer claiming exemption has the burden of showing the terms of the exemption statute are met. General Motors Corp. v. Indiana Dept. of State Revenue, 578 N.E.2d 399, 404 (Ind. Tax Ct. 1991) aff'd 599 N.E.2d 588 (Ind. 1992) (Internal citations omitted). Additionally "[e]xemption statutes are strictly construed because an exemption releases property from the obligation of bearing its fair share of the cost of government." Id.
Taxpayer argues that herbal incense is a "spice," and therefore it is exempt from the sales tax because it is a food or food ingredient. 45 IAC 2.2-5-39 provides that "spices" would be considered a nontaxable food or food ingredient. However, the "herbal incense" would not be considered a "spice." A "spice" is "a pungently aromatic vegetable substance, as cinnamon or nutmeg, used to flavor foods or beverages." Webster's II New Riverside University Dictionary 1119 (1st ed. 1988). The herbal incense is not used to flavor food or beverages, nor is it a vegetable substance.
Further, the "herbal incense" is also not "consumed" by Taxpayer's customers. To "consume" means "to eat or drink up." Webster's II New Riverside University Dictionary 303 (1st ed. 1988). The herbal incense is smoked and inhaled, not eaten or drunk.
For these reasons, Taxpayer has failed to meet its burden of proof under IC § 6-8.1-5-1(c) to show that the herbal incense would be exempt from sales tax.
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In this case, Taxpayer incurred a deficiency which the Department determined was due to negligence under 45 IAC 15-11-2 (b), and so was subject to a penalty under IC § 6-8.1-10-2.1(a). Taxpayer has not established that its failure to pay the deficiency was due to reasonable cause and not due to negligence, as required by 45 IAC 15-11-2 (c).
