Taxpayer is an Indiana business which produces pharmaceutical products. The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's business records. The audit resulted in the assessment of additional sales/use tax.
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Taxpayer purchased a standard pharmaceutical reference guide called the "United States Pharmacopeia" (USP). The Department's audit found that Taxpayer was required to pay use tax because sales tax was not paid at the time of the original transaction.
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Taxpayer suggests that the USP is necessary in the production of Taxpayer's pharmaceutical products. Taxpayer is correct to the extent that the state's gross retail tax does not apply to sales of manufacturing machinery, tools, and equipment directly used by the purchaser in the direct production, manufacture, fabrication, assembly, or finishing of tangible personal property. (45 IAC 2.2-5-8 ). However, there is no evidence that the USP directly acts upon or affects Taxpayer's products. The USP may be "necessary" but 45 IAC 2.2-5-10 (g) explains as follows:
The fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not, of itself, mean that the property "acts upon and has an immediate effect on the tangible personal property being processed or refined." Instead, in addition to being essential for one of the above reasons, the property must also be an integral part of an integrated process which produces tangible personal property.
There is no evidence that the USP acts directly upon or affects Taxpayer's pharmaceutical products.
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During the course of the administrative hearing, Taxpayer's representatives provided exemption certificates from two customers. Taxpayer asks that the Department adjust the audit assessment to reflect the fact that it was not required to collect sales tax from the customers represented by the exemption certificates.
Taxpayer is correct that under certain circumstances, a retail merchant is not required to collect sales tax. Under IC § 6-2.5-8-8(a), "A person... who makes a purchase in a transaction which is exempt from the state gross retail tax and use taxes, may issue an exemption certificate to the seller instead of paying the tax." Once the purchaser provides the exemption certificate, the retail merchant is under no obligation to collect sales tax on the transaction. IC § 6-2.5-8-8(a) states that, "A seller accepting a proper exemption certificate under this section has no duty to collect or remit the state gross retail or use tax on that purchase."
Because Taxpayer has belatedly provided exemption certificates relevant to certain of the challenged assessments, Taxpayer has met its burden under IC § 6-8.1-5-1(c) of demonstrating that certain of the original sales tax assessments may be incorrect. Therefore, the Audit Division is respectfully requested to review the newly submitted exemption certificates and to make whatever adjustments as may be found appropriate.
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Taxpayer purchased various items of laboratory equipment and supplies. Taxpayer maintains that it is not required to pay sales tax or self-assess use tax on the purchases. Taxpayer explains, "Our opinion is that all lab tests for ingredients and to produce a product are in-process tests and therefore, exempt from sales/use tax."
The Department's audit report states that "testing must be on done on [Taxpayer's] water and chemicals to ensure it will meet the required quality standard associated with the [pharmaceutical] products they sell." However, the audit determined that only a portion of the equipment was used in Taxpayer's production process citing to 45 IAC 2.2-5-8 (d) as authority. That portion of the regulation states:
"Direct use in the production process" begins at the point of the first operation or activity constituting part of the integrated production process and ends at the point that the production has altered the item to its completed form, including packaging, if required.
The audit concluded that a certain percentage of the testing equipment and supplies are used either before or after Taxpayer's production process and granted a partial sales/use tax exemption to that effect. Taxpayer maintains that the audit erred in determining that a portion of the equipment and supplies were used outside the production of Taxpayer's pharmaceuticals.
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Taxpayer argues that its pharmaceutical production begins at the point raw materials are first introduced into the production facility and presumably ends only when the product is shipped from that facility.
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Taxpayer's pharmaceutical production necessarily has a beginning point and an end-point. Taxpayer disagrees with the audit's interpretation of when and where production begins and when it ends. Although, the laboratory equipment and supplies are certainly not frivolous and very likely "necessary," seriousness of purpose and "necessity are not the exemption's benchmark." See 45 IAC 2.2-5-10 (g). The Department is unable to agree that Taxpayer has met its burden under IC § 6-8.1-5-1(c) of demonstrating that the laboratory equipment and supplies are exempt and that the original assessment was "wrong."
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Taxpayer purchased a battery for its forklift. The audit determined that the forklift – and by necessity the battery – were used in an exempt manner five percent of the time and the remainder of the time was used in a non-exempt manner. Taxpayer disagrees stating that the forklift battery is used in an exempt manner ten percent of the time.
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Taxpayer simply makes a bare statement that the exempt percentage is incorrect but provides nothing to substantiate that assertion. The Department is unable to agree that Taxpayer has not met its burden under IC § 6-8.1-5-1(c) of demonstrating that the forklift is used in an exempt manner ten-percent of the time and not five percent of the time.
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The audit assessed Taxpayer use tax. Taxpayer now argues that the assessments are unwarranted because it can – belatedly – supply documentation which establishes that it paid sales tax at the time Taxpayer acquired the property.
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Taxpayer provided documentation purporting to establish that the audit's assessment of tax should be adjusted to reflect its position that the supplementary documentation establishes that it paid sales tax when it acquired the property.
The audit division is requested to review the documentation and to make whatever adjustment is deems appropriate.
