SUBJECT: Public Transportation

REFERENCES: IC 6-2.5-3-7; IC 6-2.5-5-8; IC 6-2.5-5-27; 45 IAC 2.2-5-61; 45 IAC 2.2-5-62; 45 IAC 2.2-5-63; Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012)

DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein.

SUMMARY OF CHANGES

Apart from nonsubstantive, technical changes, this version of the bulletin has been changed to incorporate decisions of the Indiana Tax Court concerning the exemption for specific items related to public transportation. The bulletin also incorporates statutory changes contained in HEA 1448-2014 and HEA 1001-2015 that exempt from sales tax natural gas products used in public transportation if purchased by a public transportation corporation organized in accordance with IC 36-9-4 providing transportation of persons. HEA 1448-2014 provides that natural gas products purchased after Dec. 31, 2013, and before Jan. 1, 2017, used in providing public transportation of persons or property are subject to sales tax. This provision takes effect on Jan. 1, 2014, and expires on Dec. 31, 2016.

PUBLIC TRANSPORTATION DEFINITION

"Public transportation" means the movement, transportation, or carrying of persons and/or property for consideration by a common carrier, a contract carrier, a household goods carrier, carriers of exempt commodities, and other specialized carriers performing public transportation service for compensation by highway, rail, air, or water, which carriers operate under authority issued by, or are specifically exempt by statute or regulation from economic regulation of, the appropriate federal or state regulatory authority. Even if a person or company operates under the appropriate authority, they also must transport people or property for consideration. That is to say, a public transportation provider must be compensated for transporting people or goods. The goods transported must be goods owned by someone other than the public transportation provider. To qualify for the exemption, the tangible personal property purchased must be predominately used in providing public transportation. The tangible personal property is predominately used in public transportation if more than 50% of its use is attributable to transporting people or property for hire.

PUBLIC TRANSPORTATION REQUIREMENTS

The following requirements are factors the department weighs in determining whether a transportation company is engaged in public transportation. An asterisk (*) indicates a requirement that is considered by the department to be a critical factor in determining whether a transportation company qualifies for the public transportation exemption. A transportation company fails to qualify for the exemption if it does not, at a minimum, adhere to all the critical requirements. However, failure to adhere to one or more of the "noncritical" requirements can also result in a transportation company's failure to qualify for the exemption. The requirements are

• The transportation company must transport the persons or property of another.*

• The transportation company must receive compensation for the services it provides.*

• The transportation company must hold and pay for appropriate public transportation insurance.*

• The transportation company must be fully and independently authorized by federal and/or state authorities to provide public transportation services.*

• If an employee of the parent company performs duties for the parent company and also performs "leased" duties for the transportation company, the parent company must maintain detailed records of when and which duties that employee is performing for the parent company and when and which duties that employee is performing under the lease.*

• If the parent company makes a capital contribution of the vehicles to the transportation company, titles to the vehicles must be transferred to the transportation company.*

• The transportation company and the parent company must maintain separate books and records, including separate charts of accounts for each company:

• If the parent company owns and holds titles to the vehicles, the parent company may lease those vehicles to the transportation company. However:

• If the transportation company owns the vehicles, titles to the vehicles must be held by the transportation company.

• The parent company and transportation company must have separate employees, or, if the transportation company leases its employees from the parent company, there must be a meaningful, arms-length charge for the leased employees.

ACQUISITION BY A PUBLIC TRANSPORTATION PROVIDER

Tangible personal property bought by a public transportation provider may be purchased exempt from sales or use tax if the property is to be predominately and directly used in providing public transportation. Property is directly used in providing public transportation if the property is reasonably necessary to provide public transportation.

Determining whether property is reasonably necessary to provide public transportation can be difficult. The following items are reasonably necessary to provide public transportation. These items do not comprise a comprehensive list. Rather, the following are provided to offer some basic examples of items that generally are reasonably necessary to provide public transportation:

• Roadway machinery and equipment;

• Caboose and locomotive supplies such as fuses, lanterns, batteries, and flags;

• Tariff publications;

• Vehicles used for public transportation;

• Vehicles used to escort vehicles used in public transportation;

• Communication equipment;

• Equipment and items purchased to meet federal requirements;

• All replacement parts, repair parts, and materials consumed by exempt equipment;

• Tools and equipment used to repair and maintain rolling stock and track;

• Vehicles used primarily for transportation of track maintenance crews;

• Items used for repairs and maintenance of such vehicles;

• Items used for the production of financial matters, insurance, schedules, routes, and rates;

• Items used to provide customer stations, handle baggage, or sell tickets;

• Items used to keep vehicles clean and safe for passengers;

• Items used to disassemble, load, and secure the customer's machinery for movement in public transportation;

• Machine shop and truck tools;

• Equipment related to the construction and operation of terminals;

• Directories;

• Gas storage facilities;

• Caboose and locomotive compliments such as towels, masking tape, powders, cleaners, ice, water coolers, and bottled water;

• Cleaning supplies;

• Employee uniforms;

• Garage supplies; and

• Planning transportation routes and obtaining travel permits.

Certain functional categories of items are not reasonably necessary to provide public transportation. For example, all items related to the marketing and selling of public transportation are taxable, including preparation of estimates. Telephone utilities used for sales activities; office supplies and furniture for sales personnel; and promotional expenses, such as matches, caps, or jackets given away to the public also would be subject to tax. If a taxpayer acquires tangible personal property for predominant use in providing public transportation, the property is entitled to the exemption. Thus, a phone used 10% of the time for sales calls and 90% of the time to dispatch vehicles would meet the predominant use (greater than 50%) test, so the entire purchase price of the item would be exempt. Items used for reassembly of equipment or machinery moved by a provider of public transportation are taxable. Labels used during disassembly of equipment to facilitate reassembly are taxable.

A person who acquires an aircraft to rent or lease to another person for predominant use in public transportation by the other person is exempt from the sales or use tax (see Sales Tax Information Bulletin #76).

For periods prior to Jan. 1, 2014, IC 6-2.5-5-27 provides a sales tax exemption for purchases of tangible personal property, including natural gas products, used in providing public transportation of persons or property. Effective Jan. 1, 2014, HEA 1448-2014 amends IC 6-2.5-5-27 for periods prior to Jan. 1, 2017, and provides that purchases of natural gas products by a provider of public transportation are subject to tax when the fuel is used to provide public transportation for either persons or property. However, during the same time period, purchases of natural gas products by a public transportation corporation for use in a motor vehicle used to provide public transportation of persons is exempt from tax. After Jan. 1, 2017, the exemption for natural gas products purchased by providers of public transportation and used to provide public transportation of persons or property will be reinstated.

Additionally, effective July 1, 2015, HEA 1001-2015 amended IC 6-3.1-24.6 to provide that a person who placed a qualified vehicle into service in 2013 may claim a credit against the person's sales tax liability on transactions involving a natural gas product occurring after June 30, 2015, and before Jan. 1, 2017, if it was subject to taxation under IC 6-2.5-5-27(b). To claim a credit, a person will first need to file the Commercial Natural Gas Vehicle Credit Form (Form NGV-C), found online at www.in.gov/dor/5051.htm, and supporting documentation with the department. Once approved by the department, the person may file a Claim for Refund (Form GA-110L), found online at https://forms.in.gov/Download.aspx?id=7168, for any sales tax liability on transactions involving a natural gas product during the timeframe mentioned above. A person is still only eligible for a credit of up to $15,000 per qualified vehicle, but they will not be subject to the $150,000 limitation for a taxable year. However, any sales tax liabilities occurring prior to July 1, 2015, or after Dec. 31, 2016, will not be eligible for a refund based on the qualified vehicle credit, even if a person may have additional credits remaining.

"Natural gas products" means a liquid or compressed natural gas product, or a combination of liquefied petroleum and a compressed natural gas product.

EXEMPTION CERTIFICATES

Any person or company engaged in providing public transportation may buy certain items exempt from sales or use tax (see Section II), but if the public transportation provider has a facility in Indiana, it must register with the Indiana Department of Revenue to obtain a Registered Retail Merchant Certificate (RRMC) to buy exempt. The RRMC will have a number that must be used on all exemption certificates given to vendors by the public transportation provider. Exemption certificates can be used as a blanket exemption, kept on file by the vendor, or used for each individual transaction. A blanket exemption certificate tells the vendor that all purchases made by the public transportation provider are reasonably necessary to provide public transportation. If a public transportation provider uses property purchased with a blanket exemption in a taxable manner, the provider must pay use tax for the purchase. The tax must be remitted on the provider's sales and use tax return, the annual income tax return, or a consumer use tax return (Form ST-115).

Individuals engaged in public transportation but operating under another person's United States Department of Transportation (USDOT) or Indiana ID number or similar permit must use Form ST-105 when making an exempt purchase.

Another option is for the purchaser to provide the seller with the person's name, address, and motor carrier number or USDOT number and provide a signature to affirm, under penalties of perjury, that the information is correct and that the tangible personal property is being purchased for an exempt purpose.

UTILITIES

Before a person or company engaged in providing public transportation can purchase utilities, natural gas, electricity, local exchange telephone service, intrastate toll message telephone service, steam, or water exempt from tax, an exemption certificate issued by the department on behalf of the transportation provider must be on file with the utility. A public transportation provider will qualify for the special exemption certificate, Form ST-109, only after having an ST-200 utility exemption application approved by the department. The department will issue an ST-109 to a utility on behalf of the provider only if the utility being bought is separately metered or the utility is predominately used in providing public transportation. If the utility is being used less than 50% in providing public transportation, the public transportation provider must pay the tax and file a claim for refund for the exempt percentage.

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Michael J. Alley

Commissioner