ATTORNEYS FOR PETITIONER:
JEFFREY S. DIBLE
MICHAEL T. BINDNER
LOCKE REYNOLDS LLP
ATTORNEYS FOR RESPONDENT:
ATTORNEY GENERAL OF INDIANA
LINDA I. VILLEGAS
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
TRUMP INDIANA, INC., )
COMPANY, Successor in Merger with
v. ) Cause No. 49T10-0201-TA-5
INDIANA DEPARTMENT OF )
STATE REVENUE, )
ON APPEAL FROM A FINAL DETERMINATION
OF THE INDIANA DEPARTMENT OF STATE REVENUE
June 16, 2003
Trump Indiana, Inc. (Trump) appeals from the Indiana Department of State Revenues (Department)
proposed assessment for use tax (including penalties and interest) in the amount of
approximately $1.8 million for 1996 and 1997 (the years at issue). The
case is before the Court on the parties cross-motions for summary judgment, which
raise the following issues:
I. Whether Trump is entitled to the public transportation exemption for its purchase of
personal property for its riverboat;
II. Whether Trump is entitled to the equipment exemption for its purchase of a
hotdog bun warmer and a microwave oven;
III. Whether Trump is entitled to a refund of use tax it paid on
the 1996 purchase of its riverboat; and
FACTS AND PROCEDURAL HISTORY
IV. Whether Trump is subject the 10% negligence penalty imposed on its use tax
For the reasons stated below, the Court DENIES summary judgment to Trump on
Issues I and II and GRANTS summary judgment to Trump on Issue III.
Finally, as to Issue IV, the Court GRANTS in part and DENIES
in part summary judgment to Trump.
Trump is a Delaware corporation with its principle place of business in Gary,
Indiana. In 1996, Trump contracted with a Florida business to construct a
riverboat for $26.2 million. Trump paid neither Indiana nor Florida sales tax
on the riverboat. In June 1996, the riverboat was delivered to Buffington
Harbor (on Lake Michigan), Indiana. At that time, Trump became licensed to
operate the riverboat pursuant to Indiana Code Section 4-33
In 1999, the Department audited Trump for the years at issue, which resulted
in a proposed sales and use tax assessment, including penalties and interest, of
$2,337,822.59. Trump protested the proposed assessment, which the Department sustained in part
and denied in part. Ultimately, the Department assessed Trump approximately $1.8 million
in use tax, including penalties and interest.
Trump initiated an original tax appeal on January 8, 2002 and paid the
proposed assessment under protest. On November 7, 2002, Trump filed a motion
for summary judgment. On February 5, 2003, the Department filed a cross-motion
for summary judgment. The Court held a hearing on both motions on
March 31, 2003. Additional facts will be supplied as needed.
ANALYSIS AND OPINION
Standard of Review
This Court hears appeals from denials of protests by the Department de novo
and therefore is not bound by the evidence or the issues raised at
the administrative level. Ind. Code § 6-8.1-5-1 (Supp. 2002); Snyder v. Indiana
Dept of State Revenue, 723 N.E.2d 487, 488 (Ind. Tax Ct. 2000), rev.
denied, 735 N.E.2d 233 (Ind. 2000). Summary judgment is appropriate only when
there are no genuine issues of material fact and the moving party is
entitled to judgment as a matter of law. Ind. Trial Rule 56(C).
Cross-motions for summary judgment do not alter this standard. Snyder, 723
N.E.2d at 488.
I. Transportation exemption
The first issue is whether Trump is exempt from use tax
See footnote paid on
its purchase of personal property for its riverboat for the years at issue.
Trump argues that because it transported people by water in exchange for
consideration, it qualifies for the public transportation exemption,See footnote which provides, Transactions involving tangible
personal property and services are exempt from [sales] tax, if the person acquiring
the property or service directly uses or consumes it in providing public transportation
for persons or property.
Ind. Code § 6-2.5-5-27 (1998).
As this Court has previously stated, it is well-settled that tax exemptions are
to be strictly construed against the taxpayer, and the taxpayer bears the burden
of proving entitlement to the exemption. Tri-States Double Cola Bottling Co. v.
Indiana Dept of State Revenue, 706 N.E.2d 282, 283 (Ind. Tax Ct. 1999)
(citation omitted). However, the Court must avoid reading an exemption provision so
narrowly so as to exclude cases rightly falling within the ambit of that
exemption provision. Id. at 284. For purposes of the exemption, the
Department has defined public transportation as the movement, transportation, or carrying of persons
and/or property for consideration by a common carrier, contract carrier, household goods carrier,
carriers of exempt commodities, and other specialized carriers performing public transportation service for
compensation by . . . water[.] Ind. Admin. Code tit. 45, r.
2.2-5-61(b) (2001) (emphasis added). See also Meyer Waste Sys., Inc. v. Indiana
Dept of State Revenue, 741 N.E.2d 1, 9 (Ind. Tax Ct. 2000) (holding
that to qualify for the exemption, the movement, transportation, or carrying must be
for consideration), review denied.
Trumps riverboat typically left its dock for roundtrip journeys on Lake Michigan that
lasted up to four hours. However, assuming that Trump charged admission to
See footnote the law
required Trump to leave dock before gaming could begin.
See Ind. Code § 4-33-9-2 (1998) (providing that gambling may not be
conducted while a riverboat is docked) (amended by Pub. L. 192-2002 § 16
(ss)). A promise by a party to perform an act that the
law already requires the party to perform is not consideration. Grand Victoria
Casino and Resort, LP v. Indiana Dept of State Revenue, no. 49T10-0012-TA-125, slip
op. at 6 (Ind. Tax Ct. June 16, 2003) (quoting Ritenour v. Mathews,
42 Ind. 7, 14 (1873)). Hence, because the law required Trump to
leave dock before gambling could ensue, its movement of passengers was not bargained-for
consideration. See Grand Victoria, slip op. at 67. Consequently, Trump is
not entitled to the exemption. The Court therefore DENIES summary judgment to
Trump on this issue and GRANTS it in favor of the Department.
II. Equipment exemption
The second issue is whether Trump is entitled to the equipment exemption under
Indiana Code Section 6-2.5-5-3(b), which provides that [t]ransactions involving manufacturing machinery, tools, and
equipment are exempt from [sales] tax if the person acquiring that property acquires
it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining,
processing, refining, or finishing of other tangible personal property.
Ind. Code §
6-2.5-5-3(b) (1998). Trump contends that a hotdog bun warmer and a microwave
oven that it purchased for the riverboats kitchen qualify for the exemption.
Trump is incorrect.
To qualify for the equipment exemption, a taxpayer must show that it
is engaged in the direct production or manufacture of other tangible personal property.
See Gen. Motors Corp. v. Indiana Dept of State Revenue, 578 N.E.2d
399, 401 (Ind. Tax Ct. 1991), affd, 599 N.E.2d 588 (1992). If
the taxpayer satisfies this element, it must then show that the equipment for
which it seeks an exemption is directly used in the production of the
tangible personal property. See id. There are innumerable ways to produce
other tangible personal property, and the exemption provision cannot be expected to give
a precise answer to each factual situation that arises. Rotation Prod. Corp.
v. Indiana Dept of State Revenue, 690 N.E.2d 795, 798 (Ind. Tax. Ct.
1998). Nevertheless, the Departments rules make clear that production must entail a
substantial change or transformation that places tangible personal property in a form, composition,
or character different from that in which it was acquired. Ind. Admin.
Code tit. 45, r. 2.2-5-8(k) (2001). Moreover, production must increase the number
of scarce economic goods, i.e., it must create a new, marketable product.
Harlan Sprague Dawley, Inc. v. Indiana Dept of State Revenue, 605 N.E.2d 1222,
1225 (Ind. Tax Ct. 1992).
With respect to food items, this Court has held that a taxpayer is
entitled to the equipment exemption when its equipment is directly used to induce
a substantial chemical change in the food, thereby transforming the food into a
new, marketable product. See Indianapolis Fruit Co. v. Indiana Dept of State
Revenue, 691 N.E.2d 1379, 138384 (Ind. Tax Ct. 1998). Here, the Department
granted the exemption to Trump for items directly used by Trump to alter
the chemical composition of food items, either by cooking food or by freezing
water. (See Petr Mem. of L. in Supp. of Mot. for Summ.
J. at 25 (citing Dept Letter of Finding).) However, the Department foundand
Trump does not denythat Trump used the bun warmer and microwave simply to
keep food warm; the Department concluded that to merely warm food is not
to directly produce food. (See Petr Mem. of L. in Supp. of
Mot. for Summ. J. at 25 (citing Dept Letter of Finding).) Trump,
on the other hand, has made no argument nor cited any authority showing
that to merely warm food induces a substantial chemical transformation in the food
that results in a new, marketable product. See 45 IAC 2.2-5-8(k) (requiring
a substantial change in the product); Indianapolis Fruit, 691 N.E.2d at 138384; Harlan
Sprague Dawley, 605 N.E.2d at 1225. Accordingly, Trump is not entitled to
judgment as a matter of law on this issue. The Court therefore
DENIES summary judgment to Trump and instead GRANTS summary judgment to the Department.
III. Purchase of the riverboat
The third issue is whether Trump is entitled to a refund of use
tax it paid on the 1996 purchase of its riverboat. Trump argues
that the riverboat was not subject to use tax because it is classified
by statute as real property and, therefore, was not subject to use tax
during the years at issue. Trump is correct.
Article 2.5 of the tax code (the sales and use tax statutes) deals
primarily with transactions involving personal property. However, the Legislature has classified riverboats
as real property when they are licensed pursuant to Indiana Code Section 6-1.1-1-15(5).
Grand Victoria, slip op. at 12 (citing Ind. Code § 6-1.1-1-15(5) (1998)).
By doing so, the Legislature necessarily excluded such riverboats from the provisions
of Article 2.5. Grand Victoria, slip op. at 12. The undisputed
facts show that Trumps riverboat was licensed pursuant to Indiana Code Section 4-33
et seq. during the years at issue. Consequently, use tax did not
apply to it. Accordingly, Trump is entitled to a refund of the
use tax assessed for the purchase of its riverboat. The Court GRANTS
summary judgment to Trump on this issue.
IV. Ten percent penalty
The final issue is whether Trump should be subject to the 10% negligence
penalty imposed on its use tax deficiency assessment. Trump argues that it
should not be subject to the penalty because it acted reasonably in withholding
the tax payments at issue. The Department, on the other hand, argues
that the penalty is warranted because Trump failed to pay sales or use
tax on items clearly subject to those taxes.
Indiana Code Section 6-8.1-10-2.1 subjects a person to a penalty if the person
incurs, upon examination by the department, a deficiency that is due to negligence[.]
Ind. Code § 6-8.1-10-2.1(a)(3) (1998). The penalty is 10% of the
amount of deficiency as finally determined by the department. Ind. Code §
6-8.1-10-2.1(b)(4). If a person subject to the penalty . . . can
show that the failure to file a return, pay the full amount of
tax shown on the person's return, timely remit tax held in trust, or
pay the deficiency determined by the department was due to reasonable cause and
not due to willful neglect, the department shall waive the penalty. Ind.
Code § 6-8.1-10-2.1(d). Thus, a taxpayer may escape the penalty by affirmatively
establishing that the failure to file a return, pay the full amount of
tax due, timely remit tax held in trust, or pay a deficiency was
due to reasonable cause and not due to negligence. Ind. Admin. Code
tit. 45, r. 15-11-2(c) (2001). In order to establish reasonable cause, the
taxpayer must demonstrate that it exercised ordinary business care and prudence in carrying
out or failing to carry out a duty giving rise to the penalty
imposed[.] See footnote Id.
In the instant case, Trumps claim to the transportation exemption ignores a fundamental
tenant of contract law. See opinion, supra, at § I. As
to the equipment exemption, there is sufficient regulatory and case law to indicate
that equipment used merely to warm food is not exempt from sales or
use tax. See id, supra at § II. Thus, Trump
did not have reasonable cause to withhold tax on these items. Accordingly, the
Court DENIES Trumps motion for summary judgment as to the use tax it
withheld under the equipment and transportation exemptions.
As to Trumps riverboat, however, since it fell within the statutory definition
of real property, it was not subject to use tax and so no
penalty can be due. See opinion, supra at § III. The
Court therefore GRANTS summary judgment to Trump on the use tax withheld on
the purchase of its riverboat.
For the aforementioned reasons, the Court DENIES Trumps motion for summary judgment as
to Issues I and II. The Court GRANTS Trumps motion for summary
judgment as to Issue III. As to Issue IV, the Court GRANTS
in part and DENIES in part Trumps motion for summary judgment. The
Court REMANDS this case to the Department to determine, consistent with this opinion,
the amount of refund owed to Trump.
The Departments motion for summary judgment in this case substantially mirrors its
motion for summary judgment in
Grand Victoria Casino and Resort, LP v. Indiana
Dept of State Revenue, no. 49T10-0012-TA-125, slip op. (Ind. Tax Ct. June 16,
2003), which was handed down concurrently with this decision. Because of the
Courts holding in Grand Victoria, it need not address the arguments that the
Department raises in support of its motion for summary judgment here. See
id., slip op. at 914.
Of this proposed assessment, approximately $1.3 million in use tax was imposed
on the purchase of the riverboat.
Footnote: Indiana imposes sales tax on retail transactions made in Indiana.
Code § 6-2.5-2-1(a) (1998); see also Ind. Code §§ 6-2.5-1-2 (1998) (defining retail
transaction as a transaction of a retail merchant); 6-2.5-4-1(b) (1998) (providing that a
retail merchant sells at retail when he acquires and resells tangible personal property).
Under Article 2.5 of the tax code, Indiana also imposes a use
taxwhich is the functional equivalent of sales taxon the acquisition of certain tangible
personal property that escapes sales tax, usually because the property was acquired in
a transaction that occurred outside of Indiana. See Rhoade v. Indiana Dept
of State Revenue, 774 N.E.2d 1044, 104748 (Ind. Tax Ct. 2002).
Trump also claims the use tax it was assessed on the purchase
of its riverboat falls under the public transportation exemption. However, given the
Courts holding in Section III,
infra, it need not reach this issue.
Although it charged no admission
per se to board its riverboat, Trump
argues that the gaming tokens its customers purchased satisfied the requirement that transportation
be for consideration. (Petr Mem. of L. in Supp. of Mot. for
Summ. J. at 17.)
The equipment exemption is an exemption from sales tax; exemptions from sales
tax are made applicable to the use tax by Indiana Code Section 6-2.5-3-4(a)(2).
Ind. Code § 6-2.5-3-4(a)(2).
The Department argues, in the alternative, that Trump owes use tax on
its riverboat because under Article 2.5, the riverboat is a watercraft required to
be registered for use in Indiana. In light of the Courts holding,
it need not address the Departments argument.
See also Grand Victoria, slip
op. at 1316.
Factors which may be considered in determining reasonable cause include, but are
not limited to:
(1) the nature of the tax involved;
(2) judicial precedents set by Indiana courts;
(3) judicial precedents established in jurisdictions outside Indiana;
(4) published department instructions, information bulletins, letters of findings, rulings, letters of advice, etc.;
(5) previous audits or letters of findings concerning the issue and taxpayer involved in
the penalty assessment.
Reasonable cause is a fact sensitive question and thus will be dealt with
according to the particular facts and circumstances of each case.
Ind. Admin. Code tit. 45, r. 15-11-2(c) (2001).