Taxpayer protests a portion of the Department's proposed assessments of use tax for the tax years 2009-11. The Department based its determination of the amount of use tax due on a sample and projection calculation of Taxpayer's ordinary purchases and on an item-by-item review of Taxpayer's capital purchases. The Department reviewed the purchases and imposed use tax on items of tangible personal property ("TPP") upon which sales tax had not been paid at the time of purchase. Taxpayer protests that some of the items listed as taxable were actually exempt from sales and use tax.
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The first category of items under protest includes some, but not all, of the items included in the sample and projection calculations as taxable. The Department used a sample of Taxpayer's purchases and reviewed those purchases to determine if Taxpayer had any taxable purchases upon which sales tax had not been paid at the time of purchase. The Department then determined a percentage of those purchases upon which use tax was due ("Compliance Percentage") and applied that percentage via a projection method to Taxpayer's total purchases for all three audit years. Taxpayer states that some of the items included as taxable in the Department's calculations were actually exempt and that the resulting percentage of use tax due was too high.
After review of the items under protest in this category, the Department agrees that most of those items are not subject to use tax. However, the Department is not convinced that all of the items listed by Taxpayer should be removed from the projection calculations. Specifically, the two purchases found at Strata 6 Sort 91 and Strata 6 Sort 122 were bin layer systems which Taxpayer states were shipped out of state. Taxpayer states that, since the two purchases were equipment which was shipped out of state they should be exempt from sales and use tax. A review of the documentation supplied in the protest process shows only that the two purchases were billed to Taxpayer's Indiana address. Taxpayer provided a tool room log and pictures of the items in question but was unable to provide shipping documentation. The documentation provided does not establish that the purchases were shipped out of state. Neither do the pictures establish that the items in question were used during the production process. Taxpayer has not met the burden of proving these portions of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).
Therefore, all items listed by Taxpayer as non-taxable in the sample and projection sample population except the two purchases found at Strata 6 Sort 91and Strata 6 Sort 122 will be reclassified as non-taxable and the Compliance Percentage will be recalculated. Once the Compliance percentage is recalculated, it will be applied to Taxpayer's total purchases to determine use tax due for the three audit years.
The second category of items under protest consists of capital assets upon which the Department determined that use tax was due. Taxpayer protests that one of these items did have sales tax paid at the time of purchase. During the protest process, Taxpayer supplied the relevant invoice which does show that sales tax was paid at the time of purchase. Use tax is therefore not due on this purchase. Also, Taxpayer states that a data entry error on page 16 of the audit report incorrectly listed a particular purchase as $261,510.00 when the actual amount of the purchase was $2,651.10. Taxpayer supplied the relevant invoice which confirms that the amount of the purchase was $2,651.10.
Taxpayer also states that one purchase (reference number 31877) was for production equipment which was shipped out of state to other facilities. As explained above, the documentation does not establish that the equipment was shipped out of Indiana. Neither does the documentation establish that the equipment was directly used in the direct production of tangible personal property, as required by IC § 6-2.5-5-3(b). Also, Taxpayer states that a vacuum system is used fifty percent to pull raw materials out of storage and fifty percent to move work-in-process. The supplied documentation does not establish this percentage, therefore Taxpayer has not established that the vacuum system meets the requirements of IC § 6-2.5-5-3(b).
Therefore, Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) regarding all capital expense items listed as non-taxable in its protest with the exception of the purchase under reference number 31877 and the vacuum system. Taxpayer did not meet the burden of proving the proposed assessments wrong with regards to those two items. The Department will change the data entry error to show the correct amount of $2,651.10.
In conclusion, Taxpayer is sustained regarding the items listed as taxable in the Department's sample and projection calculations with the exception of the two purchases found at Strata 6 Sort 91 and Strata 6 Sort 122. The Department will reclassify the remaining protested transactions as non-taxable, will recalculate the compliance percentage, and will reapply the resulting percentage to Taxpayer's total transactions for the three tax years at issue. Taxpayer is sustained regarding the capital asset purchases with the exception of the purchase under reference number 31877 and the vacuum system. The Department will reclassify the remaining items as not subject to use tax. The Department will perform these adjustments via a supplemental audit.
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In this case, Taxpayer incurred assessments which the Department determined were due to negligence under 45 IAC 15-11-2 (b), and so was subject to penalties under IC § 6-8.1-10-2.1(a). While Taxpayer was sustained in part in Issue I above, there are significant amounts of remaining use tax due. Therefore, the negligence penalty was properly imposed. Again, the Department may not waive interest. However, since Taxpayer was partially sustained in Issue I above, penalty will be recalculated after the Department's recalculation of base tax.
