Taxpayer, an Indiana company, is a construction contractor. Taxpayer also manufactures hot mix asphalt materials to be used in the construction of roads, parking lots, and driveways. The Indiana Department of Revenue ("Department") conducted a sales and use tax audit for tax years 2010, 2011, and 2012. Pursuant to the audit, the Department determined that Taxpayer did not pay sales tax or self-assess use tax on certain purchases of tangible personal property used in performing construction contracts, including repair parts for construction equipment, a front-end loader, backhoes, dozers, rollers, calcium trucks/distributors and service trucks off-road diesel fuel, software subscriptions with upgrades, and magazine subscriptions. The Department also determined that Taxpayer did not pay sales tax or self-assess use tax on certain purchases of tangible personal property used at its asphalt plant. As a result, the Department's audit assessed additional use tax and interest. The Department, nonetheless, waived the negligence penalty.
Taxpayer protested the assessment for the following purchases: (1) precast concrete blocks, (2) Cat. 950H and 950F loaders, (3) Cat. CB 24 and DD-90 rollers, and (4) shelters ("Items at Issue").
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The Department's audit determined that Taxpayer did not pay sales tax or self-assess use tax on certain purchases, which it used at its asphalt plant.
Taxpayer, to the contrary, argued that sales/use tax was not due because it was entitled to the manufacturing exemption on the purchases of the Items at Issue pursuant to IC §§ 6-2.5-5-3(b) and 6-2.5-5-5.1(b). In its September 12, 2013, protest letter, Taxpayer explained, in relevant part, as follows:
1. The purchase of precast concrete blocks should be exempt because these blocks were used as the foundation for a shelter that has been determined to be a part of the plant and as such exempt from sales tax. These blocks are a different size than other blocks that were used as the foundations of other shelters determined to be taxable so these particular blocks are known to be part of the exempt shelter. . . .
2. The Cat. 950H & 950F loaders should be exempt because these loaders are dedicated to the charging of the plant with materials. They are used to sort, mix and distribute all materials and as such alter the natural state of the materials. This procedure is one of the steps in the manufacture of asphaltic concrete. As a step in the production cycle the purchase of parts and fuel for these pieces of equipment should be exempt. They are not used for any other purposes. . . .
3. The Cat. CB-24 roller and DD-90 roller should be exempt because these rollers are the final step in the production process. For this reason these pieces of equipment, along with their fuel and repair parts, should be exempt. . . .
4. All shelters should be exempt. The processing of RAP (crushing and screening) is the start of the production process for asphalt using RAP in its mix design. These shelters are used to protect the RAP from moisture after it has been processed for use. . . .
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Taxpayer, in this instance, stated that it "is in the business of manufacturing hot mix asphalt materials for public and private uses in roads, parking lots, etc. The raw material used are stone aggregates, asphalt oils, recycled asphalt pavements (RAP), and recycled asphalt shingles." Taxpayer further claimed that its "manufacturing process begins when [raw] materials are trucked in and dumped on our site in stockpile areas. The needed materials are various sizes [and] are combined according to design formulas for various asphalt mixtures." Taxpayer thus argued that its purchases of the Items at Issue were exempt from sales/use tax. To support its protest, Taxpayer submitted additional documentation, including photos and video clips, to demonstrate its use of its stockpiles, loaders, and shelters.
Upon reviewing Taxpayer's documentation, however, the Department is not able to agree. First, the Department's Information Bulletin 60 explains that the asphalt manufacturers are not entitled to the manufacturing exemption concerning the rollers. Also, Taxpayer did not provide any supporting documentation regarding its use of the Cat. CB 24 and DD-90 rollers. Thus, Taxpayer's protest of the rollers at issue is denied.
Additionally, the Department is not able to agree that Taxpayer's "manufacturing process begins when [raw] materials are trucked in and dumped on our site in stockpile areas." As mentioned above, in order to be exempt from sales/use tax, items are required to be directly used in direct production, "i.e., they have an immediate effect on the article being produced." 45 IAC 2.2-5-8 (d) further explains, "'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." Thus, Taxpayer's asphalt production begins, after the raw materials are "ready to be proportioned for entry to the mixing plant," and ends when the asphalt mixture is formed.
In this instance, Taxpayer's documentation demonstrated that it used the loaders to move the raw materials (stockpiles) at its asphalt plant, including stone aggregates, recycled asphalt pavements, and recycled asphalt shingles, which were raw materials delivered, "loaded, trucked, and dumped" at its asphalt plant. Thus, pursuant to45 IAC 2.2-5-8 (c), Example (4)(G), and the Information Bulletin 60, Taxpayer's use of the loaders – to move its raw materials – is pre-production and is not exempt.
Similarly, Taxpayer's documentation demonstrated that it purchased precast concrete blocks to build shelters, which were used to store the raw materials. Thus, pursuant to45 IAC 2.2-5-8 (c), Example (4)(G), and the Information Bulletin 60, its use of the precast concrete blocks and shelters is pre-production and is not exempt.
In short, given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer met its burden of proof demonstrating that it was entitled to the manufacturing exemption for the purchases in question. Since Taxpayer did not pay sales tax at the time of its purchases, use tax is properly imposed.
