Taxpayer is a manufacturer with two plants in Indiana. Taxpayer submitted to the Department of Revenue ("Department") a request for refund for sales and use taxes it paid for the tax periods from March 31, 2008, through December 31, 2010. Taxpayer's refund claim was granted in part and denied in part. For the 2008 tax periods of the refund claim, the Department conducted an investigation and issued an investigation report granting a partial refund. For the 2009 and 2010 tax periods of Taxpayer's refund claim, the Department addressed the refund issues as part of an audit examination. The Department conducted an audit review of Taxpayer's business records employing a statistical sampling methodology covering the 2009, 2010, and 2011 tax years. As a result of the audit, the Department issued an audit report that determined that Taxpayer owed additional use tax for the 2009, 2010, and 2011 tax years. Taxpayer protested certain of the purchases for which the refunds were denied and certain of the purchases on which use tax was assessed.
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Taxpayer asserts that its purchases of "counting scales" and repair parts for a lathe are not subject to use tax because the purchases qualify for exemption under the "manufacturing exemptions."
A. "Counting Scales."
The Department determined that the "counting scales" did not qualify for the manufacturing exemption and assessed use tax on the purchase. The Department found, as follows:
The scales are used to verify quantities in the non-returnable containers and pallets. Inside the non-returnable containers are multiple packages of Taxpayer's finished goods . . . Packaging of product to facilitate shipment to the customer is a post production function subject [to] tax pursuant to
45 IAC 2.2-5-8(d).
Taxpayer maintains that its "counting scales" qualify for exemption under the "manufacturing equipment exemption" as found in IC § 6-2.5-5-3. Taxpayer states that "the scale is used to 'count' pieces by weight prior to completion of the product, which includes packaging."
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During the hearing, Taxpayer presented a picture to demonstrate how the "counting scales" are used. In the picture, an open box sits on top of the scale. Inside the box are little sealed packages of the product identified with a "UPS code," product description, and product quantity number. Based on the documentation presented, this scale is used in Taxpayer's fulfillment/shipping area to fulfill specific customers' orders of Taxpayer's packaged product–i.e., the little sealed packages. Thus, the weighing of the items on the scale is a post production activity.
Therefore, Taxpayer's protest to the imposition of use tax on the "counting scales" is respectfully denied.
B. Repair Parts: Lathe.
Taxpayer maintains that the repair parts for the lathe qualify for exemption as repair parts purchased for equipment that is exempt under IC § 6-2.5-5-4. Taxpayer states that the lathe "can only be used to make equipment and parts by changing the shape of steel through turning and cutting to make parts for a machine or to grind and drill steel to make a mold used in manufacturing." In effect, Taxpayer protests that the parts in question were used on exempt equipment and therefore the replacement parts themselves are exempt from sales and use tax.
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Taxpayer has not provided any information/documentation beyond its general assertion that the "parts for the lathe" are used in the manufacturing process. Taxpayer has not provided any information about the specific items of equipment made by the lathe and how those specific items are used in its manufacturing process. Without specific information about the equipment being made and how that equipment is used during the production process, a determination about the exempt status of the lathe cannot be made. Therefore, it is not possible to conclude that the repair parts for the lathe are directly used in Taxpayer's production of its goods or that it has "an immediate effect on the article being produced."
Accordingly, Taxpayer's protest to the imposition of use tax on the repair parts for the lathe is respectfully denied.
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Taxpayer purchased computer software license agreements. The Department's audit noted that the invoices for the transactions in question demonstrated that Taxpayer correctly paid sales tax to the vendor at the time of purchase.
Taxpayer maintains that the software license agreements were partially utilized outside Indiana. Taxpayer argues that since a portion of the software licenses were used on computers located outside Indiana, it would be more reasonable to allocate a portion of the purchase fees to locations outside Indiana based upon the ratio of Indiana users compared to users in all jurisdictions. Taxpayer states that if you compare the number of Indiana "SAP users" to "SAP users" outside of Indiana, then approximately 55 percent of the licenses were used outside Indiana. Taxpayer asserts that it should get a "refund" in the form of a "credit" in the audit for the portion of the sales tax it paid that relates to this "out-of-state usage." Taxpayer, therefore, maintains that it is entitled to a refund/credit of 55 percent of the sales tax that was paid to the vendors on these transactions.
Presumably, Taxpayer is referring to the "temporary storage" exception for use tax. Pursuant to IC § 6-2.5-3-2, "[A]n excise tax, known as the use tax, is imposed on the storage, use or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction . . . ." (Emphasis added). Indiana law provides a "temporary storage" exception under IC § 6-2.5-3-1(b) which defines "'[s]torage' [as] the keeping or retention of tangible personal property in Indiana for any purpose except the subsequent use of that property solely outside Indiana." (Emphasis added).
However, the invoices provided by Taxpayer demonstrate that Taxpayer paid sales tax on the items in questions. There is not a temporary storage exception for sales tax. Sales tax is a transaction tax that is imposed on the occurrence of a retail sales transaction. IC § 6-2.5-2-1(a). The purchaser in the retail transaction is liable for the sales tax and must pay the sales tax to the retail merchant. IC § 6-2.5-2-1(b). A retail transaction is defined as "a transaction of a retail merchant that constitutes selling at retail as described in IC § 6-2.5-4-1 . . . or that is described in any other section of IC § 6-2.5-4." IC § 6-2.5-1-2. "A person is a retail merchant making a retail transaction when he engages in selling at retail." IC § 6-2.5-4-1(a). Further, IC § 6-2.5-4-1(b) explains that a person sells at retail when he "(1) acquires tangible personal property for the purpose of resale; and (2) transfers that property to another person for consideration." On the other hand, the use tax is imposed on a person's use of property in Indiana by IC § 6-2.5-3-2(a). Thus, the sales tax is a tax imposed on the purchaser for the occurrence of a retail transaction, and the use tax is a tax imposed on a purchaser for the purchaser's use of the property in Indiana.
In conclusion, the use tax "temporary storage exception" does not apply to the transactions in question. The vendor properly collected sales tax from Taxpayer.
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Taxpayer purchased "hardware maintenance agreements" and paid tax on the transactions at the time of purchase. Taxpayer also purchased "software maintenance agreements" and paid tax on the transactions at the time of purchase. The Department also found that Taxpayer purchased "software maintenance agreements" without paying sales tax at the time of purchase, and assessed used tax on the purchases.
Taxpayer protests the denial of refund and imposition of sales and use tax on the "maintenance contracts." Taxpayer asserts that its purchases of "hardware maintenance agreements" and "software maintenance agreements" were neither purchases of tangible personal property nor "enumerated services," and therefore, are not subject to sales and use tax. Taxpayer maintains that it is entitled to a refund of the sales tax paid and that the use tax assessed by the Department should be abated. The issue is whether the various protested "maintenance contracts" were properly subject to Indiana sales and use tax.
A. Equipment Maintenance Contracts.
The first type of "maintenance contract" is for items other than computer software.
The Department's audit denied refund and/or imposed sales and use tax on Taxpayer's purchase of optional/extended warranty contracts. Taxpayer, to the contrary, asserted that it was not responsible for sales tax on its sales of the optional/extended warranties.
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Department's guidance and interpretation on this issue relevant to the years for which Taxpayer was audited is found in Sales Tax Information Bulletin 2 (May 2002) which states that "Optional warranties and maintenance agreements that contain the right to have property supplied in the event it is needed are not subject to sales tax." Id. Therefore, Taxpayer was not required to remit sales or use tax on the warranties/maintenance agreements it purchased until August 4, 2010. After August 4, 2010, Taxpayer was required to remit sales or use tax on the warranties/maintenance agreements. Therefore, Taxpayer's protest is denied to the extent the transactions took place after August 4, 2010.
However, Taxpayer's protest is sustained to the extent that a supplemental audit determines that the transactions took place before August 4, 2010, and that Sales Tax Information Bulletin 2 (May 2002) applies to the situation. The audit division is requested to review the original assessment of tax on the sale of warranties/maintenance agreements to its customers based on Sales Tax Information Bulletin 2 (May 2002) in effect during the first part of the audited years and to make whatever adjustment is appropriate.
B. Software Maintenance Contracts.
The second type of "maintenance contract" is for items of computer software. Pursuant to IC § 6-8.1-5-1(c), all tax assessments are presumed accurate, and the taxpayer bears the burden of proving that an assessment is incorrect.
Taxpayer purchased various "software maintenance agreements." During the audit, the Department found instances where Taxpayer had purchased software "maintenance agreements" without paying sales tax at the time of purchase, and assessed use tax on the purchases.
Taxpayer maintains that since the "software maintenance agreements" do not contain a provision which guaranteed that Taxpayer would automatically receive software updates and upgrades, the "software maintenance agreements" are not subject to Indiana sales/use tax.
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In the case of the software maintenance agreements, the interpretations set out in the Sales Tax Information Bulletins are irrelevant. Instead, the interpretation set out in the August 2006 Letter of Findings governs the issue. Notwithstanding that a "new" interpretation of law based upon a change in facts–like the one in the August 2006 Letter of Findings which discusses the effects of the "new facts" reflecting the change in the industry–would not require publication to be implemented. If publication was needed to implement a new interpretation, the publication of that Letter of Findings met the publication requirements set out in IC § 6-8.1-3-3. See Carroll County Rural Elec. Membership Coop. v. Dep't of State Revenue, 733 N.E.2d 44, 49 n.5 (Ind. Tax Ct. 2000) ("The publication of the Letter of Findings is a prerequisite for the Department before it can change its position as to the interpretation of a tax, where the change would increase the taxpayer's liability.").
Accordingly, the Department has consistently found that "software maintenance agreements" were subject to sales and use tax with a rebuttable presumption since August 2006. However, as of July 1, 2010, the legislature effectively removed the rebuttable presumption with the enactment of IC § 6-2.5-4-17 (effective July 1, 2010) which provides that "software maintenance agreements" are always subject to tax. Therefore, Taxpayer was required to remit sales or use tax on the "software maintenance agreements" since August 2006, which is a date prior to the transactions in question.
Alternatively, Taxpayer asserts that if its "software maintenance agreements" were subject to sales and use tax, sales and use tax should not be due on the entire amount of the transactions. Taxpayer maintains that it did not receive updates and/or received limited updates on multi-year agreements. Taxpayer, therefore, argues that the "value of any tangible personal property" received should not be based on the full amount of the purchase and requires a pro-rating of the amount subject to tax.
During the course of the protest, Taxpayer submitted a list of "maintenance agreement" purchases, numerous invoices, numerous agreements, and a Taxpayer prepared spreadsheet. However, other than its bare assertions in the form of notations of "update/no update/update in 1 yr" on this spreadsheet, Taxpayer did not provide documentation that demonstrated whether or not the updates were actually received pursuant to the software maintenance agreement. Absent a written statement from the vendor or other documentation from the vendor, the Department lacks sufficient legal and factual grounds to conclude that the full amount of the transactions should not have been subject to Indiana sales or use tax. Thus, Taxpayer has failed to meet its burden of proof under IC § 6-8.1-5-1(c).
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The Department found that Taxpayer purchased tangible personal property without paying sales tax at the time of purchase, and assessed use tax on the purchases. Pursuant to IC § 6-8.1-5-1(c), all tax assessments are presumed accurate, and the taxpayer bears the burden of proving that an assessment is incorrect.
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Taxpayer maintains that the Department incorrectly assessed use tax on its purchases of services from two vendors: "Vendor G" and "Vendor L."
A. "Vendor G."
The Department found that use tax was due on Taxpayer's purchases from "Vendor G" on its "office supplies purchase card" where the auditor described the purchase as "['Vendor G'] for IT Leaders Advisor/Reference." At the time of the audit, the Department was unable to verify the nature of the transaction. Therefore, as Taxpayer had not paid sales tax at the time of the transaction, the Department assessed use tax on the purchase. As stated previously, Indiana imposes "an excise tax, known as the use tax," on tangible personal property that is acquired in retail transactions and is stored, used, or consumed in Indiana. IC § 6-2.5-3-2(a).
Taxpayer asserts that the Department's assessment of use tax on the "Vendor G" purchases is incorrect because these are service transactions that are exempt from use tax. Taxpayer maintains that the invoiced amount represents a charge "for telephone support, certain research done by ['Vendor G'] for [Taxpayer], and also enable [Taxpayer] to attend an annual seminar at a reduced price. Taxpayer presented invoices for the transactions with "Vendor G." However, the invoices contained one unitary price with the description on the invoice using the words "Advisor" and "Reference," which could reasonably be descriptions for items of tangible personal property.
Nonetheless, even taking Taxpayer's assertions at face value, the mere fact that a transaction might have a service component is not determinative. Pursuant to IC § 6-2.5-4-1(e), the amount of the retail transaction that is subject to sales tax includes "the price of the property transferred" and "any bona fide charges which are made for preparation, fabrication, alteration, modification, finishing, completion, delivery, or other service performed in respect to the property transferred before its transfer and which are separately stated on the transferor's records." Further,
45 IAC 2.2-4-1(b)(3) provides that the amount of the retail transaction that is subject to tax includes the amounts collected for "services performed or work done on behalf of the seller prior to transfer of such property at retail." Thus, when services are performed or work is done to tangible personal property before the tangible personal property is transferred to the purchaser, the amount of the charges for the services or work done is also subject to sales tax.
Moreover, services that are performed as part of a retail "unitary transaction" are subject to sales and use tax. IC § 6-2.5-1-2(b). A retail "unitary transaction" is one in which items of personal property and services are furnished under a single order or agreement and for which a total combined charge or price is calculated. IC § 6-2.5-1-1(a). A unitary transaction includes all items of property and services for which a total combined selling price is computed irrespective of the fact that the cost of services, which would not otherwise be taxable, is included in the selling price.
45 IAC 2.2-1-1(a). Therefore, Taxpayer has failed to meet its burden under IC § 6-8.1-5-1(c).
Accordingly, Taxpayer's protest to the imposition of use tax on its purchases from "Vendor G" is respectfully denied.
B. "Vendor L."
Taxpayer asserts that the Department's assessment of use tax on its "lawn care application" purchases from "Vendor L" is incorrect because these are service transactions that are exempt from use tax.
The Department's audit determined that Taxpayer did not pay sales/use tax on its "lawn care applications" transactions, which included the application of lawn fertilizer and pesticides to the lawn. When Taxpayer was billed for this transaction for the "lawn care applications," Taxpayer was charged one unitary price that included both the materials and service components of the transaction.
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When "Vendor L" sold the "lawn care applications" to Taxpayer, it applied tangible personal property, such as fertilizer or pesticides, to Taxpayer's lawn/trees to complete the transactions. The fertilizer and pesticide were transferred for consideration and, therefore, were subject to sales tax.
Taxpayer maintains that these "lawn care applications" would fall under the service provider exception found at
45 IAC 2.2-4-2.
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Taxpayer presented two signed statements from the "Vendor L." The first statement, dated May 24, 2012, asserted that "[o]ur [agreement] with [Taxpayer] is for a contracted flat monthly fee. This fee includes all labor and materials for activities listed in the contract[, and] ["Vendor L"] is responsible for and pays all sales tax for any materials . . . ." The second statement, dated April 4, 2013, asserted that "[t]he materials cost for any Spray applications for trees is less than 10[percent] of the total cost." While statements from a vendor can be a helpful tool to explain other documentation, the statement alone is self-serving and is insufficient to rebut the presumption of the Department's assessment. Without other documentation from "Vendor L" establishing the amount of materials and labor in question and the payment of the use tax, the Department cannot apply the service provider exception to the "Vendor L" transactions. Therefore, Taxpayer has failed to meet its burden under IC § 6-8.1-5-1(c).
Accordingly, Taxpayer's protest to the imposition of use tax on its "lawn care application" purchases from "Vendor L" is respectfully denied.
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Taxpayer maintains that the Department incorrectly assessed use tax on its purchases from three vendors: "Vendor I," "Vendor CM," and "Vendor FE."
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Taxpayer asserts that the Department's assessment of use tax on its purchase of $2,500 from "Vendor I" is incorrect because these are service transactions that are exempt from use tax. Taxpayer also asserts that the Department's assessment of use tax on its two purchases from "Vendor CM" in the amounts of $597.80 and $47.04 is incorrect because these purchases qualify for exemption. Taxpayer further asserts that the Department's assessment of use on its purchase of $1,142 from "Vendor FE" is incorrect because these purchases qualify for exemption.
However, after a thorough review of the audit report, these four purchases could not be located in the audit report. Therefore, Taxpayer has failed to meet its burden under IC § 6-8.1-5-1(c).
