04-20100093.LOF

Taxpayer protests the assessment of sales tax on an all-terrain vehicle.

Taxpayer protests the imposition of the negligence penalty.

Taxpayer owns and operates a farm in Kentucky. In 2006, Taxpayer purchased an all-terrain vehicle (ATV) in Indiana. Taxpayer submitted an exemption certificate to the seller at the time of purchase and consequently did not pay the sales tax. The Indiana Department of Revenue (Department) later investigated the purchase. In response, Taxpayer submitted a Form AGQ-100, the Agricultural Equipment Exemption Usage Questionnaire, reporting the uses of the ATV on his farm. Based on this information, the Department determined that Taxpayer's ATV qualified for 26 percent exempt use and assessed tax accordingly. Taxpayer protested the assessment of the tax, but later declined a hearing stating that the Department could make its final determination based on information he had already submitted. This Letter of Findings ensues. Additional facts will be provided as necessary.

The Department notes that all tax assessments are presumed to be accurate and the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(b), (c); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007).

In accordance with IC § 6-2.5-2-1(a), a sales tax, known as state gross retail tax, is imposed on Indiana retail transactions. IC § 6-2.5-4-1 provides that a retail transaction involves the transfer of tangible personal property for consideration in Indiana. IC § 6-2.5-2-1(b) provides that the person who acquires the property in a retail transaction is liable for the tax on the transaction and must pay the tax to the retail merchant as a separate added amount to the consideration in the transaction. Indiana imposes a complementary excise tax, the use tax, on tangible personal property purchased in a retail transaction and stored, used, or consumed in Indiana. IC § 6-2.5-3-2(a).

There are a number of statutory exemptions from the sales and use tax. IC § 6-2.5-5 et. seq. All exemptions must be strictly construed against the party claiming the exemption. Gross Income Tax Div. v. National Bank and Trust Co., 79 N.E.2d 651, 654 (Ind. 1948).

Pursuant to IC § 6-2.5-8-8(a), a person who makes a purchase in a transaction which is exempt from the sales and use tax may issue an exemption certificate to the seller instead of paying the tax and the seller would have no duty to collect the tax on the purchase. In this instance, Taxpayer issued the seller an exemption certificate on the basis that Taxpayer considered the transaction exempt from sales tax because he would exclusively use the ATV on his farm.

Taxpayer bases his claim for exemption from the tax on the following provisions of IC § 6-2.5-5-2(a) which states as follows:

Transactions involving agricultural machinery, tools, and equipment are exempt from the state gross retail tax if the person acquiring that property acquires it for his direct use in the direct production, extraction, harvesting, or processing of agricultural commodities.

This exemption statute is further explained in the regulations at 45 IAC 2.2-5-4(e) as follows:

The fact that an item is purchased for use on the farm does not necessarily make it exempt from sale [sic.] tax. It must be directly used by the farmer in the direct production of agricultural products. The property in question must have an immediate effect on the article being produced. Property has an immediate effect on the article being produced if it is an essential and integral part of an integrated process which produces agricultural products. The fact that a piece of equipment is convenient, necessary, or essential to farming is insufficient in itself to determine if it is used directly in direct production as required to be exempt.

In his protest letter, Taxpayer stated that he used the ATV exclusively for farming purposes and therefore the vehicle should be exempt from Indiana sales and use tax. The standard that Taxpayer describes is the standard for the agricultural exemption in Kentucky. As stated above, in Indiana, an agricultural exemption from the sales and use tax does not exist solely because an ATV is used exclusively on a farm. Under Indiana law, the ATV must be directly used in the direct production of agricultural products (this is referred to as the "double direct" test). IC § 6-2.5-5-2(a); 45 IAC 2.2-5-4(e). The use of the ATV on the farm must directly impact the direct agricultural production process. Examples of exempt uses include using the equipment to plant seeds, treat the plants with fertilizer, and harvest crops, hauling feed to livestock to be sold.

When Taxpayer filled out Form AGQ-100 describing use of the ATV on his farm and an approximate number of days for each described use. The uses included seeding and fertilization of crops, hauling feed to livestock, hauling tools and equipment, checking on livestock, and checking fence lines. Therefore, Taxpayer's only exempt use related to seeding and fertilizing of crops and hauling feed to livestock. The Department, using a formula that incorporates how often Taxpayer engaged in exempt and non-exempt activities, calculated that Taxpayer's ATV would be 26 percent exempt.

According to Taxpayer's description of the use of the ATV, it is mostly used to perform necessary but ancillary agricultural functions. Taxpayer should, therefore, be assessed tax based on 73 percent non-exempt use. See 45 IAC 2.2-5-1(c)(3).

Taxpayer's protest is respectfully denied.

The Taxpayer also protested the imposition of the ten percent negligence penalty pursuant to IC § 6-8.1-10-2.1. Indiana Regulation 45 IAC 15-11-2(b) clarifies the standard for the imposition of the negligence penalty as follows:

Negligence, on behalf of a taxpayer is defined as the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer. Negligence would result from a taxpayer's carelessness, thoughtlessness, disregard or inattention to duties placed upon the taxpayer by the Indiana Code or department regulations. Ignorance of the listed tax laws, rules and/or regulations is treated as negligence. Further, failure to read and follow instructions provided by the department is treated as negligence. Negligence shall be determined on a case by case basis according to the facts and circumstances of each taxpayer.

The standard for waiving the negligence penalty is given at 45 IAC 15-11-2(c) as follows:

The department shall waive the negligence penalty imposed under IC 6-8.1-10-1 if the taxpayer affirmatively establishes 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. 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 under this section. 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.

Taxpayer has affirmatively established, as required by 45 IAC 15-11-2(c), that his actions were due to reasonable cause and not due to negligence.

Taxpayer's protest of the negligence penalty is sustained.

Taxpayer's protest of sales tax is denied. Taxpayer's protest of the negligence penalty is sustained.

DIN: 20100623-IR-045100385NRA

Composed: May 02,2024 5:17:32PM EDT

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