Taxpayer is in the business of selling retail and wholesale groceries in Indiana and outside Indiana. In 2013, the Indiana Department of Revenue ("Department") conducted a sales/use tax audit of Taxpayer's business records. Pursuant to the audit, the Department determined that Taxpayer failed to properly collect sales tax on several items sold in its stores. The audit also determined that Taxpayer purchased some tangible personal property to be used during the course of its business without paying sales tax or self-assessing and remitting the use tax.
The Department's audit determined that Taxpayer's purchases of labels were subject to use tax because Taxpayer did not pay sales tax at the time of its purchases. The audit, in relevant part, explains:
[Taxpayer] purchased [blank] labels for their meat, deli, and bakery departments. These labels are printed from the scales in the departments and attached to the packaging outside the product with the barcode, price, weight, and date included on [each of the labels]. These labels are for [Taxpayer's] use to be able to scan the product at check out and therefore they are subject to use tax. These labels do not qualify as wrapping materials, do not become an integral part of the product sold, and do not meet the necessary criteria to be exempt purchases for resale in the same form as they were purchased.
Taxpayer, to the contrary, claimed that its purchases were exempt under IC § 6-2.5-5-6 or IC § 6-2.5-5-9(d).
Claiming that its purchase and use of the blank labels were exempt from sales/use tax, Taxpayer, in this instance, referenced two (2) statutory exemptions, IC § 6-2.5-5-6 and IC § 6-2.5-5-9(d), to support its protest. This Letter of Findings addresses each of them, as follows:
In this instance, Taxpayer claimed that its purchase and use of the blank labels were exempt from sales/use tax under IC § 6-2.5-5-6. Taxpayer stated, in relevant part, that:
Example of how this applies to [Taxpayer] is as follows:
A Whole Pork Loin is purchased, a Butcher will remove this item from its original packaging and they will process it by Trimming, Cutting, Tenderizing, and/or Seasoning it. They proceed to package the processed items into non-returnable containers, wrap, weigh and Label the items for re-sale.
Taxpayer thus maintained, "The labels qualify for the exemption because they become a part of the Final Product that has been processed in our store." To support its protest, Taxpayer further provided sample labels illustrating its use of the labels.
Upon reviewing Taxpayer's supporting documentation, however, the Department is not able to agree that Taxpayer's purchase and use of labels are exempt pursuant to the above mentioned statutes and regulations. First, Taxpayer claimed that it is in the business of processing tangible personal property because its employees, namely butchers, trim, cut, tenderize, and/or season the meat. However, to be in the business of processing, Taxpayer must demonstrate that its operation "places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantial change." 45 IAC 2.2-5-10 (k). "Trimming, [c]utting, [t]enderizing, and/or [s]easoning" do not result in a substantial change of the tangible personal property sold at Taxpayer's grocery stores.
Additionally, even if, for the sake of argument, that Taxpayer is in the business of processing, Taxpayer's purchase and use of the labels at issue did not qualify for the exemption under IC § 6-2.5-5-6 and 45 IAC 2.2-5-14 . Each of Taxpayer's sample labels contained (1) Seller's Name, (2) a bar code, (3) name of the tangible personal property, i.e., name of the "Finished Product," (4) a "sell by" date, (5) net weight, (6) unit price, (7) total sale price, (8) a set of "Safe Handling Instructions," and (9) "Product of USA." In Example provided by Taxpayer, "They proceed to package the processed items into non-returnable containers, wrap, weigh and Label the Items for re-sale." Thus, Taxpayer's Example demonstrates that its process ended at the time the trimmed, cut, tenderized and/or seasoned tangible personal property was produced. Thus, Taxpayer used the labels after the processed tangible personal property, i.e., Pork Loin, was already placed into containers, wrapped with wrapping materials, and weighed. That is, the labels at issue were not physically incorporated as material parts or integral parts of the processed tangible personal property and did not become a component part of the finished product, namely Taxpayer's Pork Loin, for which Taxpayer sold at its grocery stores. Taxpayer's customers who purchase the processed Pork Loin at the Taxpayer's store intend to buy and cook the Pork Loin, not the labels, and the labels do not become material parts or integral parts of the processed Pork Loin. Rather, the labels at issue were adhered to the wrapping materials, which were used to package the processed tangible personal property at Taxpayer's store. Thus, the Department is not able to agree that the labels would become part of the product.
Alternatively, Taxpayer claimed that its purchase and use of the labels were exempt under IC § 6-2.5-5-9(d).
In this instance, Taxpayer claimed that its purchase and use of the labels were exempt under IC § 6-2.5-5-9(d). Taxpayer stated, in relevant part, that:
The Labels in question are purchased solely for the purpose of becoming a part of the Non-returnable packaging of Food items that are prepared and resold in the Meat, Deli and Bakery Departments.
Upon reviewing Taxpayer's documentation, however, the Department is not able to agree that Taxpayer's purchase and use of the blank labels were exempt pursuant to IC § 6-2.5-5-9(d). First, Taxpayer claimed that it is in the business of processing tangible personal property because its employees, namely butchers, trim, cut, tenderize, and/or season the meat. However, to be in the business of processing, Taxpayer must demonstrate that its operation "places tangible personal property in a form, composition, or character different from that in which it was acquired. The change in form, composition, or character must be a substantial change." 45 IAC 2.2-5-10 (k). "Trimming, [c]utting, [t]enderizing, and/or [s]easoning" do not result in a substantial change of the tangible personal property sold at Taxpayer's grocery stores.
Additionally, even if, for the sake of argument, that Taxpayer is in the business of processing, Taxpayer's purchase and use of the labels at issue did not qualify for the exemption under IC § 6-2.5-5-9 and 45 IAC 2.2-5-16 . Taxpayer claimed that the labels at issue were "solely for the purpose of becoming a part of the Non-returnable packaging of Food items that are prepared and resold in the Meat, Deli and Bakery Departments." However, as discussed earlier, Taxpayer's employees, after trimming, cutting, tenderizing, and seasoning the tangible personal property, proceeded to package "the processed items into non-returnable containers, wrap, weigh and Label the items for re-sale." Although Taxpayer intended to use the labels solely on packaged items for resale, the labels at issue were not used to contain or wrap the items for resale. Rather, the labels were affixed to the wrapping materials to identify the items being sold at Taxpayer's grocery store. Or, as the audit noted, "The labels are primarily used by [Taxpayer] to scan the product at checkout." Thus, Taxpayer's purchase and use of the labels were not used as wrapping materials or non-returnable containers. Therefore, Taxpayer's purchase and use of the labels were not exempt under IC § 6-2.5-5-9(d) and 45 IAC 2.2-5-16 .
Thus, 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 to demonstrate that its purchase and use of the labels at issue were exempt pursuant to the above mentioned statutes and regulations. Since Taxpayer did not pay sales tax at the time of its purchases, use tax is properly imposed.
