Taxpayer, an Indiana company, manufactures various lead-based chemicals. Taxpayer does not produce end products, but rather produces chemicals that other manufacturers use in their respective processes to obtain certain desired qualities in the manufacturers' final products. Taxpayer's customers typically purchase Taxpayer's products exempt from sales tax because the customers purchase the items as raw materials for their own respective production processes and because Taxpayer typically ships its products out of state.
Pursuant to a sales and use tax audit for the years 2008, 2009, and 2010, the Indiana Department of Revenue ("Department") assessed Taxpayer additional sales tax, penalty, and interest on steel drums Taxpayer purchased to hold Taxpayer's products for shipping to Taxpayer's customers.
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Taxpayer argues that steel drums it uses to fill with its lead-based chemicals to sell to customers enjoy an exemption under IC 6-2.5-5-9 . Taxpayer states that it only receives a small number of the steel drums back from customers. Taxpayer also alleges that federal laws and regulations regarding the nature of Taxpayer's products prohibit customers from returning the steel drums. Therefore, Taxpayer argues, the steel drums should be considered nonreturnable containers.
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During the audit, Taxpayer's shop manager deemed the steel drums as returnable. Taxpayer stated that Taxpayer or Taxpayer's accounting representative wanted to look into more information regarding the steel drums. However, Taxpayer did not provide further information to the Department prior to the Department's completion of the audit.
During the administrative hearing, Taxpayer echoed the shop manager's statements, deeming the drums returnable. But Taxpayer argued that the steel drums do not come back to Taxpayer. Further, Taxpayer averred that federal regulations prohibit the return of those drums that contained lead-based materials shipped outside the United States.
The Department requested that Taxpayer provide the alleged federal rules or regulations, as well as any other information that Taxpayer thought supported Taxpayer's arguments. While the Taxpayer subsequently provided a schedule showing that some of the subject steel drums were not returned, Taxpayer did not provide any other information that contradicted the Department's determination that the steel drums were customarily returnable. Taxpayer did not provide evidence sufficient to show that the Department's assessments were inaccurate.
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The Department issued ten percent negligence penalties for the tax years in question. Taxpayer protests the imposition of the penalties.
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Taxpayer has met its burden of proof to show that the deficiencies it incurred are due to reasonable cause and are therefore not subject to a penalty under IC 6-8.1-10-2.1 (a).
