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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.

I. Use Tax–Imposition.

Authority: Morton Buildings, Inc. v. Indiana Dep't of State Revenue, 819 N.E.2d 913 (Ind. Tax Ct. 2004); General Motors Corp. v. Ind. Dep't of State Revenue, 578 N.E.2d 399 (Ind. Tax 1991); IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-4-1; IC § 6-2.5-5-3; IC § 6-8.1-5-1; 45 IAC 2.2-3-4; 45 IAC 2.2-4-26.

Taxpayer protests the assessment of use tax on certain items.

II. Tax Administration–Negligence Penalties.

Authority: IC § 6-8.1-10-2.1; IC § 6-8.1-5-1; 45 IAC 15-11-2.

Taxpayer protests the imposition of negligence penalties.

Taxpayer is an Indiana contractor which produces the tangible personal property it installs into its customers' realty. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had under-collected sales tax as a retail merchant and had under-paid sales tax as a consumer for the tax years 2010, 2011, and 2012. The Department therefore issued proposed assessments for sales tax, use tax, ten percent negligence penalties, and interest for those years. Taxpayer disagreed with some of the use tax assessments and filed a protest. An administrative hearing was held and this Letter of Findings results. Further facts will be supplied as required.

I. Use Tax–Imposition.

Taxpayer protests the imposition of use tax on certain items it purchased during the tax years 2010-12. Specifically, Taxpayer protests that some items listed as "Capital Assets" in the Department's audit report were considered partially taxable and partially exempt. The Department based its determination that use tax was owed on a percentage of the purchases in question due to the determination that Taxpayer was acting as a contractor and was installing tangible personal property ("TPP") into realty via both lump-sum contracts and in time and materials contracts. The Department determined that the percentage of lump-sum installations resulted in an equivalent taxable use of machinery used by Taxpayer to create the TPP which it then installed in realty at its customers' locations. The Department did not impose use tax on the corresponding percentage of use of the same machinery which created the TPP which Taxpayer installed in realty at its customers' locations via time and materials contracts. Taxpayer argues that the machinery is used in manufacturing regardless of the status of the installation contract and that the machinery is therefore wholly exempt. The Department notes that the burden of proving a proposed assessment wrong rests with the person against whom the proposed assessment is made as provided by IC § 6-8.1-5-1(c).

Sales tax is imposed by IC § 6-2.5-2-1, which states:

Use tax is imposed under IC § 6-2.5-3-2(a), which states:

Therefore, when TPP is used in Indiana but sales tax is not paid at the time of purchase, use tax will be imposed.

Also of relevance is 45 IAC 2.2-4-26, which provides:

The Department, as provided by 45 IAC 2.2-4-26(a) and (e), therefore considered Taxpayer's purchases of machinery and equipment to be subject to use tax to the extent that those items were used in the process of installing TPP into realty via lump-sum contracts. The Department did not impose use tax to the extent that those items were used in the process of installing TPP into realty via time and materials contracts, pursuant to 45 IAC 2.2-4-26(b).

Taxpayer protests that the machinery and equipment in question is used for manufacturing regardless of the billing method used for a particular project. Taxpayer refers to Morton Buildings, Inc. v. Indiana Dep't of State Revenue, 819 N.E.2d 913 (Ind. Tax Ct. 2004) in support of its position. In that case, the Indiana Tax Court determined that tangible personal property did have a different character when it underwent a construction process. Taxpayer states that it purchased TPP and, as in Morton Buildings, converted it into real property which gave the TPP a different character.

Such a change in character of the TPP it purchases, Taxpayer argues, constitutes manufacturing and thus the machinery and equipment it uses in such a manner qualify for the exemption found under IC § 6-2.5-5-3(b), which provides:

The Department does not agree that Morton Buildings supports Taxpayer's position. Morton Buildings addresses the taxable status of raw materials purchased by a builder for incorporation into realty. The issue in the instant case is the taxable status of the tools and equipment used to change the form of raw materials prior to any installation into realty.

Taxpayer also refers to General Motors Corp. v. Ind. Dep't of State Revenue, 578 N.E.2d 399 (Ind. Tax 1991), in support of its position that it is a manufacturer and that the equipment and machinery is therefore exempt. In that case, the Indiana Tax Court provided that the taxpayer had an integrated production process and that packing materials required to protect the work-in-process was exempt as part of that integrated production process. Taxpayer states that it too has an integrated production process and that its equipment and machinery is also exempt under the manufacturing exemption provided by IC § 6-2.5-5-3(b).

As explained above, Taxpayer is not merely producing tangible personal property. Taxpayer is a contractor installing the tangible personal property into realty. Since that is the case and since 45 IAC 2.2-4-26 provides that a contractor's billing methods do affect the taxable status of tools and machinery it purchases to facilitate the improvements to real estate, the Department finds that the original estimation of taxable and non-taxable percentages of Taxpayer's production machinery was correct. Taxpayer has not met the burden imposed by IC § 6-8.1-5-1(c) of proving the proposed assessment wrong.

Taxpayer's protest is denied.

II. Tax Administration–Negligence Penalties.

Taxpayer protests the imposition of penalties assessed against it for the tax years at issue. Taxpayer states that it acted reasonably in performing its use tax duties. As provided in Issue I above, the Department notes that the burden of proving a proposed assessment wrong, including the assessment of penalty, rests with the person against whom the proposed assessment is made, as provided by IC § 6-8.1-5-1(c).

The Department refers to IC § 6-8.1-10-2.1(d), which states:

Next, the Department refers to 45 IAC 15-11-2(b), which states:

Finally, 45 IAC 15-11-2(c) provides in pertinent part:

Taxpayer's protest is in regards to the Department's assessment of penalties. IC § 6-8.1-10-2.1 and 45 IAC 15-11-2(c) require a taxpayer to show that failure to remit taxes in a timely manner is due to reasonable cause. As provided by the discussion in Issue I above, the taxable status of the machinery which Taxpayer used to create tangible personal property which it installed in its contracting capacity is taxable in the case of lump-sum contracts and is not taxable in the case of time and materials contracts.

This is a very specific distinction and if it were the only category of items upon which tax was assessed, then waiver of penalty might be warranted. However, there were other items such as parts, light bulbs, shop tools, copy charges, and lawn products which were clearly subject to sales or use tax but upon which no tax was remitted. Also, the Department assessed sales tax which it determined that Taxpayer should have collected and remitted as a retail merchant. Taken together, Taxpayer did not exercise ordinary business care and prudence in performing its sales and use tax duties. Taxpayer has not met the burden imposed under IC § 6-8.1-5-1(c) of proving the proposed assessment wrong.

Taxpayer's protest is denied.

Taxpayer's protest is denied on Issue I regarding the imposition of use tax on machinery and equipment in the percentage relating to the use of those items in performing contracting installation of tangible personal property into realty via lump sum contracts. Taxpayer's protest is denied on Issue II regarding the imposition of negligence penalties for the years at issue.