NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 require the publication of this document in the Indiana Register. This document provides the general public with information about the Department's official position concerning a specific set of facts and issues. This document is effective as of its date of publication and remains in effect until the date it is superseded by the publication of another document in the Indiana Register.

I. Sales/Use Tax – Imposition.

Authority: IC § 6-2.5-1-1; IC § 6-2.5-1-2; IC § 6-2.5-1-11.5; IC § 6-2.5-2-1; IC § 6-2.5-3-1; IC § 6-2.5-3-2; IC § 6-2.5-3-4; IC § 6-2.5-4-1; IC § 6-2.5-5-1 et. seq.; IC § 6-2.5-5-19; IC § 6-8.1-5-1; Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Indiana Dep't. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); USAir, Inc. v. Indiana Dep't of State Revenue, 623 N.E.2d 466 (Ind. Tax Ct. 1993); Indiana Dep't. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Indiana Dep't of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Frame Station, Inc. v. Indiana Dep't of Revenue, 771 N.E.2d 129 (Ind. Tax Ct. 2002); Cowden & Sons Trucking, Inc. v. Indiana Dep't of State Revenue, 575 N.E.2d 718 (Ind. Tax Ct. 1991); Indiana Dep't of State Revenue v. Martin Marietta Corp., 398 N.E.2d 1309 (Ind. Ct. App. 1979); Galligan v. Indiana Dep't. of State Revenue, 825 N.E.2d 467 (Ind. Tax Ct. 2005); 45 IAC 2.2-3-4; 45 IAC 2.2-4-1; 45 IAC 2.2-4-2; 45 IAC 2.2-5-36; Sales Tax Information Bulletin 14 (December 2002); Sales Tax Information Bulletin 54 (December 2002); Sales Tax Information Bulletin 54 (August 1990); Sales Tax Information Bulletin 48A (February 2010); Revenue Ruling ST 98-07 (July 24, 1998).

Taxpayer protests the Department's assessments on additional taxable purchases, claiming that its purchases of tangible personal property were exempt from sales/use tax.

Taxpayer, an Indiana company, offers 24-hour emergency care and also specialized diagnostics and surgical procedures for animals. Taxpayer, however, does not offer routine veterinary care.

In April 2013, the Indiana Department of Revenue ("Department") audited Taxpayer's business records for the tax years 2010 and 2011. Pursuant to the audit, the Department determined that Taxpayer purchased certain tangible personal property to be used in the course of its business without paying sales tax or self-assessing use tax. As a result, the Department assessed additional use tax and interest. Nonetheless, the Department's audit waived the negligence penalty.

Taxpayer protested the assessments. An administrative hearing was held. This Letter of Findings ensues. Additional facts will be provided as necessary.

I. Sales/Use Tax – Imposition.

The Department's audit assessed use tax on tangible personal property, including "magnet postcards," "business cards," "brochures," "frisbees," "invitations and envelopes," "folders," "[T-]shirts", and "x-mas tree connect," "syringe set," "test kits," "sealing caps," "shoe covers," "gloves," "tongue[s]," "needles," and "bandages," which Taxpayer purchased and used for its veterinary care business. Taxpayer, to the contrary, claimed that it was not responsible for the sales/use tax.

As a threshold issue, all tax assessments are prima facie evidence that the Department's claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Indiana Dep't. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012).

Indiana imposes an excise tax called "the state gross retail tax" (or "sales tax") on retail transactions made in Indiana. IC § 6-2.5-2-1(a). A person who acquires property in a retail transaction (a "retail purchaser") is liable for the sales tax on the transaction. IC § 6-2.5-2-1(b). Indiana also imposes a complementary excise tax called "the use tax" on "the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction, regardless of the location of that transaction or of the retail merchant making that transaction." IC § 6-2.5-3-2(a). "Use" means the "exercise of any right or power of ownership over tangible personal property." IC § 6-2.5-3-1(a). The use tax is functionally equivalent to the sales tax. See Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002).

By complementing the sales tax, the use tax ensures that non-exempt retail transactions (particularly out-of-state retail transactions) that escape sales tax liability are nevertheless taxed. Rhoade, 774 N.E.2d at 1048; USAir, Inc. v. Indiana Dep't of State Revenue, 623 N.E.2d 466, 468 – 69 (Ind. Tax Ct. 1993). The use tax ensures that, after such goods arrive in Indiana, the retail purchasers of the goods bear their fair share of the tax burden. Rhoade, 774 N.E.2d at 1050. To trigger imposition of Indiana's use tax, tangible personal property must (as a threshold matter) be acquired in a retail transaction. IC § 6-2.5-3-2(a); USAir, Inc., 623 N.E.2d at 468 – 69. A taxable retail transaction occurs when (1) a party acquires tangible personal property as part of its ordinary business for the purpose of reselling the property; (2) that property is then exchanged between parties for consideration; and (3) the property is used in Indiana. See IC § 6-2.5-1-2; IC § 6-2.5-4-1(b) and (c); IC § 6-2.5-3-2(a).

Use of tangible personal property in Indiana could be exempt from Indiana use tax if the sales tax is paid or collected at the time of the purchase pursuant to IC § 6-2.5-3-4 and 45 IAC 2.2-3-4. There are also various tax exemptions available outlined in IC § 6-2.5-5. A statute which provides a tax exemption, however, is strictly construed against the taxpayer. Indiana Dep't. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." Id. at 101 (internal citations omitted). Thus, in applying any tax exemption, the general rule is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Indiana Dep't of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988).

During the administrative hearing, Taxpayer raised several issues related to its purchases from various vendors. This Letter of Findings addresses each issue, as follows:

Taxpayer claimed that it was not responsible for the sales/use tax on items that it purchased from Vendor A, including magnet postcards, business cards, brochures, Frisbees, invitations and envelopes, folders, and T shirts.

IC § 6-2.5-1-2 states:

IC § 6-2.5-1-1(a) explains that "'unitary transaction' includes all items of personal property and services which are furnished under a single order or agreement and for which a total combined charge or price is calculated."

IC § 6-2.5-4-1, in relevant part, provides:

(Emphasis added).

(Emphasis added).

The Indiana Tax Court has addressed the issue of "mixed transactions" that involve the simultaneous transfer of tangible personal property and the performance of services. In Frame Station, Inc. v. Indiana Dep't of Revenue, 771 N.E.2d 129 (Ind. Tax Ct. 2002), the taxpayer, Framemakers, provided custom framing services. Specifically, Framemakers framed its customers' art in frames that it built or special ordered. Id. at 130. Framemakers, when it billed its customers, "record[ed] separate subtotals on the invoices: one for the service of framing the art and the other for the frame itself." Id. Framemakers collected sales tax only on the price of the frame itself, not on the price for framing the art. Id. The court stated that the issue was "whether Framemakers' sale of custom-framed art constitutes a 'retail unitary transaction' and is thereby subject to Indiana's gross retail and use tax." Id. at 129-30. Specifically, the court focused on "whether Framemakers' services were preformed before or after it transferred property to its customers." Id. at 131. (Emphasis in original). The court explained that services that "are performed with respect to property prior to the transfer of the property" are taxable. Id. Referencing Cowden & Sons Trucking, Inc. v. Indiana Dep't of State Revenue, 575 N.E.2d 718 (Ind. Tax Ct. 1991) and Indiana Dep't of State Revenue v. Martin Marietta Corp., 398 N.E.2d 1309 (Ind. Ct. App. 1979), the court stated "a retail unitary transaction exists when the transfer of the property and rendition of services are 'inextricable and indivisible'" from the property being transferred. Id. at 131. The court concluded that Framemakers' services were performed prior to the transfer of the property and constituted taxable retail unitary transactions pursuant to IC § 6-2.5-4-1(e). Id. Therefore, the court determined that Framemakers' charges (for service) were subject to sales tax. Id.

In Galligan v. Indiana Dep't. of State Revenue, 825 N.E.2d 467 (Ind. Tax Ct. 2005), the taxpayer, a responsible officer of the company, challenged, among other things, the Department's sales/use tax assessments on various purchase invoices, which the taxpayer claimed to be payments for services and "services are not taxable." Id. at 480.

The court stated, in relevant part, that:

Id. at 480-81. (Internal citations omitted) (Emphasis in original).

Finally, the Department's Sales Tax Information Bulletin 14 (December 2002), 26 Ind. Reg. 914 ("Information Bulletin 14"), in pertinent part, provides that:

Referring to the Information Bulletin 14, Taxpayer claimed that it primarily engaged Vendor A for the branding and marketing services; that in rendering the services, Vendor A acted as Taxpayer's agent, employing printers or manufacturers to produce tangible personal property with Taxpayer's information and logo; that Vendor A paid sales tax on those items and subsequently was reimbursed by Taxpayer. Alternatively, referencing the Department's Sales Tax Information Bulletin 54 (August, 1990) ("Information Bulletin 54"), Taxpayer asserted that if "the Department fails to recognize the agency relationship" between Taxpayer and Vendor A, Vendor A was the customer who "engaged the mass mailing companies and printers" and thus "the printers are required to collect the sales tax from the customer." Thus, Taxpayer asserted that it was not responsible for the sales/use tax. To support its protest, Taxpayer submitted sample invoices both from Vendor A and from a third party printer.

Upon review, however, Taxpayer's reliance on Information Bulletin 14 and Information Bulletin 54 is misplaced. First, when an agent purchases tangible personal property in behalf of its client, the principal, the agent should pay the sales tax and only recoup the same amount from its client. Taxpayer's documentation demonstrated otherwise. Taxpayer's documentation showed that it paid Vendor A for various items, which the tangible personal property was ultimately transferred to Taxpayer or Taxpayer's designated recipients. When Vendor A engaged in the third party printers to produce the tangible personal property that contained Taxpayer's information or logo, the third party printers billed Vendor A. However, Taxpayer's documentation further showed that Vendor A charged Taxpayer additional mark-ups in addition to its incurred costs as opposed to mere reimbursement when it billed Taxpayer. Therefore, in this instance, Vendor A was a retail merchant who transferred tangible personal property to Taxpayer for a consideration. Thus, pursuant to the above mentioned statutes and regulations, Taxpayer's purchases were subject to sales/use tax. Since Taxpayer did not pay sales tax, use tax is properly imposed.

Taxpayer also erred in arguing that Vendor A was responsible for the tax because Vendor A was the customer who engaged the mass mailing companies and printers. In this instance, Vendor A was not audited and its business records were not being examined. Thus, whether Vendor A was responsible for the sales/use tax on items it purchased is irrelevant and beyond the scope of Taxpayer's protest.

In short, Vendor A was a retail merchant when it charged Taxpayer mark-ups on the tangible personal property it transferred to Taxpayer for consideration. Taxpayer's purchases were subject to sales/use tax. Since Taxpayer did not pay sales tax, use tax is properly imposed.

Taxpayer claimed that it was not responsible for the sales/use tax on various supplies, including "[c]atheters, syringes, IV lines, infusion tubes, blood bags, cross match kits," and "food" that it purchased from several vendors at issue because its purchases were exempt.

IC § 6-2.5-5-19 (effective January 1, 2004) provides:

(Emphasis added).

The Department's Sales Tax Information Bulletin 48A (February 2010), 20100224 Ind. Reg. 045100099NRA, in relevant part, provides:

(Emphasis added).

Taxpayer, in this instance, asserted that it "is an emergency referral veterinary hospital; [and does] not normally examine healthy animals for routine services." Thus, Taxpayer claimed that "all medications are a medical necessity, including but not limited to food, blood and medications." Referencing the Department's Revenue Ruling ST 98-07 (July 24, 1998), Taxpayer further argued that it was not responsible for the sales/use tax on its purchases of "[c]atheters, syringes, IV lines, infusion tubes, blood bags, cross match kits, etc. [because] all [of them were used to] either administer or contain prescription, medication, blood, plasma, etc."

Upon review, however, the Department is not able to agree. Taxpayer referenced Revenue Ruling ST 98-07, which was published in 1998–more than a decade ago, and is not applicable in this case. First, in 2003, the Indiana General Assembly amended IC § 6-2.5-5-19, which only exempts "drugs, insulin, oxygen, blood, and blood plasma" when the licensed practitioner "buys the items for: (A) direct consumption in his practice; or (B) resale to a patient that the practitioner is treating, in the case of sales of legend or nonlegend drugs." IC 6-2.5-5-19(f). The legislators chose not to exempt tangible personal property, such as "catheters, syringes, IV lines, infusion tubes, blood bags, cross match kits" used by licensed practitioners. Second, the Department updated the same Information Bulletin 48A in February 2010, replacing the September 1989 version. Thus, Taxpayer's reliance on the 1998 ruling is misplaced.

There is no dispute as to whether Taxpayer is a licensed practitioner that provides medical treatments to patients. However, "all purchases of tangible personal property by a licensed practitioner are subject to sales tax," unless the items meet the definitions of the "certain drugs, vaccines, insulin, oxygen, blood, or blood plasma." Information Bulletin 48A. As mentioned earlier, a statute which provides a tax exemption is strictly construed against the taxpayer. RCA Corp., 310 N.E.2d at 97. "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." Id. at 101 (internal citations omitted). Thus, Taxpayer's purchases of medical supplies, including catheters, syringes, IV lines, infusion tubes, blood bags, cross match kits, were not exempt. Since sales tax was not paid at the time of the purchases, use tax is properly imposed.

Taxpayer claimed that it purchased "food" from two (2) veterinary suppliers, Vendor C and Vendor W, and should be removed from the audit assessment because the Department's field auditor agreed that those purchases qualified for "[p]rescription diets, including those diets necessary to correct or alleviate a particular medical condition, are not taxable," under Information Bulletin 48A. Nonetheless, in the process of finalizing the audit report, Taxpayer asserted that some purchases were overlooked and remained in the audit, resulting in additional tax on the items at issue.

After a review of the Department's audit report, it is clear that the Department did not assess tax on Taxpayer's purchases from Vendor C. Thus, the issue is moot. As to Taxpayer's purchases from Vendor W, the Department's Audit Division is instructed to remove from the assessment any purchases that qualify for prescription diet, if any.

In short, Taxpayer's purchases from Vendor A and its purchases of medical supplies from various vendors were not exempt. Since Taxpayer did not pay sales tax at the time of its purchases, use tax is properly imposed. As to Taxpayer's purchases from Vender W, the Department's Audit Division is instructed to remove from the assessment any purchases that qualify for prescription diet, if any.

Taxpayer's protest is sustained in part and denied in part. Taxpayer's protest of Subpart A, purchases from Vendor A, and Subpart B(1), purchases of medial supplies, is respectfully denied.

As to Taxpayer's protest of Subpart B(2), purchases of food supplies, the Department's Audit Division is instructed to remove from the assessment any purchases that qualify for prescription diet, if any.