Taxpayer is an out-of-state corporation in the paint business with Indiana sales and operations. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had not collected and remitted the proper amount of Indiana sales tax as a retail merchant for the tax years 2009, 2010, and 2011. The Department therefore issued proposed assessments for sales tax, ten percent negligence penalty, and interest for all three tax years. Taxpayer protested that the Department's proposed assessments of sales tax were too high. Taxpayer also protested the imposition of the ten percent penalties.
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Taxpayer protests a portion of the Department's proposed assessments of sales tax for the years 2009-11. The Department determined that additional sales tax was due after conducting a sample and projection calculation of Taxpayer's total sales. The Department compared Taxpayer's taxable sales and total sales to arrive at an "error percentage" which was applied to total sales for all three tax years at issue. The resulting number was determined to be taxable sales which were underreported. The Department therefore imposed sales tax on those amounts to arrive at sales tax which should have been collected and remitted. Taxpayer states that several of its customers listed as taxable were actually exempt and should be removed from the Department's error percentage calculations. Also, Taxpayer states that three accounts were internal tracking accounts which did not reflect actual sales to customers. Taxpayer therefore believes that those amounts should also be removed from the Department's error percentage calculations.
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In this case, Taxpayer states that the Department included sales found in its records as taxable which were actually to exempt customers. In support of this position, Taxpayer provided exemption certificates for three customers. The Department refers to IC § 6-2.5-3-7, which states:
(a) A person who acquires tangible personal property from a retail merchant for delivery in Indiana is presumed to have acquired the property for storage, use, or consumption in Indiana, unless the person or the retail merchant can produce evidence to rebut that presumption.
(b) A retail merchant is not required to produce evidence of nontaxability under subsection (a) if the retail merchant receives from the person who acquired the property an exemption certificate which certifies, in the form prescribed by the department, that the acquisition is exempt from the use tax.
(Emphasis added).
Therefore, a retail merchant is not required to collect and remit sales tax on sales to resellers if the retail merchant receives exemption certificates from their customers, as provided by IC § 6-2.5-3-7.
After review of the three exemption certificates provided in the course of the hearing process, the Department is unable to agree that these documents support Taxpayer's position. As provided by IC § 6-2.5-3-7(b), a retail merchant is not required to produce evidence of nontaxability if the retail merchant receives and exemption certificate which certifies that the purchaser is exempt from tax. In this case, the three exemption certificates provided during the protest process are all dated in the year 2012, which is after the audit years. Therefore, Taxpayer, as a retail merchant, did not receive these exemption certificates at the time of the sales and so these exemption certificates do not support Taxpayer's position.
Regarding the three accounts which Taxpayer states reflect internal inventory tracking, Taxpayer has provided additional explanation of the nature of these accounts. The accounts were internal tracking of components which were incorporated into Taxpayer's products and were not sales to Taxpayer's customers. Therefore, the amounts listed in these accounts were not retail transactions subject to sales tax under IC § 6-2.5-2-1.
In conclusion, Taxpayer's protest regarding the three exemption certificates is denied. Those certificates were not received until after the audit period and cannot be accepted. Taxpayer's protest regarding the three internal inventory tracking accounts is sustained. The Department will remove the amounts found in those accounts and will recalculate the error percentage. The recalculated error percentage will be applied to Taxpayer's total sales and revised billings will be sent to Taxpayer reflecting these adjustments.
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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 affirmatively 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).
