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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Letter of Findings.

Indiana Truck Dealer was required to collect sales tax from its customers on the price Truck Dealer charged its customers for subcontractor costs because the charges represented unitary transactions. Truck Dealer failed to establish that the audit's sampling methodology was flawed and that the resulting assessment overstated its sales tax liability. The Department was correct in assessing sales tax on the price Truck Dealer paid for computer software and software maintenance agreements.

I. Gross Retail Tax - Subcontractor Charges.

Authority: IC § 6-2.5-1-1(a); IC § 6-2.5-2-1; IC § 6-8.1-5-1(c); Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 2.2-1-1; 45 IAC 2.2-2-2.

Taxpayer argues that charges on its customer invoices designated as "sublet" costs represent separate charges for labor and materials and that the Department's decision assessing tax on the total sublet charges was erroneous.

II. Gross Retail Tax - Audit Sample.

Authority: IC § 6-8.1-3-12(b); IC § 6-8.1-5-1(c).

Taxpayer maintains that the audit sampling methodology is flawed because it includes in its sample tire sales transactions which occurred at only one of its business locations.

III. Gross Retail Tax - Miscellaneous Charges.

Authority: IC § 6-8.1-5-1(c); American Heritage Dictionary of the English Language (1^st ed. 1969).

Taxpayer claims that it was not required to collect from its customers sales tax on separately stated "miscellaneous charges" because the charges represent exempt labor costs.

IV. Gross Retail Tax - Computer Software and Software Maintenance Agreements.

Authority: IC § 6-2.5-4-17; IC § 6-2.5-1-27; IC § 6-2.5-1-24; IC § 6-2.5-2-1(a); IC § 6-2.5-2-1(b); IC § 6-2.5-3-1(a); IC § 6-2.5-3-2(a); Rhoade v. Ind. Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); Sales Tax Information Bulletin 2 (March 2013); Sales Tax Information Bulletin 2 (December 2006).

Taxpayer disagrees with the assessment of sales/use tax on the cost it paid for computer software and computer maintenance agreements.

Taxpayer is an Indiana company in the business of selling large and medium sized trucks and truck parts. Taxpayer also operates parts and service departments at its multiple Indiana business locations.

The Indiana Department of Revenue ("Department") conducted a sales and use tax audit of Taxpayer's business records and tax returns. The audit resulted in the assessment of additional tax. Taxpayer disagreed with a portion of the assessment and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer's representative explained the basis for its protest. This Letter of Findings results.

I. Gross Retail Tax - Subcontractor Charges.

Taxpayer sells trucks. Taxpayer also repairs and services customer vehicles. The audit reviewed Taxpayer's "deal jackets" which contain information documenting the sale of Taxpayer's trucks. The audit reviewed documentation detailing the sales of its truck parts and vehicle service transactions. According to the audit report, "Due to the volume of information to examine, it was agreed to sample the parts and service invoices." The audit report indicates that Taxpayer agreed "it would be representative to review the parts and service activities of all locations through a single stat sample."

Insofar as Taxpayer's service and parts division, the audit concluded as follows:

In support of its decision assessing additional tax, the audit cited as authority 45 IAC 2.2-2-2 which provides as follows:

As used by Taxpayer, the term "Sublet Charges" requires an explanation. Taxpayer presents its customers with an invoice which details charges for labor, parts, miscellaneous charges, and a "sublet amount." The sublet amount is the cost of the work one of Taxpayer's subcontractors performed on a particular vehicle. In other words, there may be repair work performed on a customer vehicle which Taxpayer chose not to perform itself but allowed a third-party subcontractor to perform.

For example, Taxpayer may not have been qualified to perform certain sheet metal, body work on one of its customer's vehicles. Taxpayer would select a vendor qualified to do that work, the vendor would perform the work, invoice Taxpayer for that work, and Taxpayer would pass along that cost on its final customer invoice as a charge labeled "sublet amount." The customer would receive a single invoice on which it would see a separate charge labeled "sublet amount." That sublet amount represented the subcontractor's cost to perform the sheet metal, body work.

When Taxpayer charged its customers sales tax on the final invoices, it charged its customers seven percent sales tax on "parts" but did not charge its customers sales tax on the "sublet" charges.

The Department's audit found that "sales tax was not correctly charged and remitted on some invoices. The [T]axpayer failed to collect tax on sublet parts in the body shop including glass, parts, tires and paint . . . ." The audit assessed sales tax on the customer invoice sublet charges.

Taxpayer disagrees and explains that it can now differentiate between exempt labor costs and taxable part costs for each sublet charge. In other words, if Taxpayer charged its customer an original $100 sublet charge, it has now conducted a review of it and its subcontractor's original charges and now is able to explain that the original $100 sublet charge actually consists of $30 in parts costs and $70 in labor charges. Taxpayer asks that Department adjust the audit assessment to reflect that distinction.

As a threshold issue, it is the Taxpayer's responsibility to establish that the existing tax assessment is incorrect. As stated in IC § 6-8.1-5-1(c), "The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. Further, [W]hen [courts] examine a statute that an agency is 'charged with enforcing . . . [courts] deter to an agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.'" Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, interpretations of Indiana tax law contained within this decision, as well as the preceding audit, are entitled to deference.

IC § 6-2.5-2-1 provides:

The sublet charges represent "unitary transactions" which are explained at IC § 6-2.5-1-1(a), which states:

The Department's regulation, 45 IAC 2.2-1-1, further explains the "unitary transaction" concept.

In this case, Taxpayer charged its customers a single, unitary price for the "sublet" charges but now asks that the Department review the original documentation between itself and its subcontractors to differentiate between exempt service charges and taxable transfers of tangible personal property.

The Department does not agree that Taxpayer can now belatedly parse the sublet charges differentiating the labor and tangible personal property. The transactions at issue are those between Taxpayer and its individual customers for which Taxpayer was required to collect sales tax. For purposes of determining the sales tax liability between Taxpayer and those customers, the predecessor transactions between Taxpayer and its vendors are irrelevant. Taxpayer presented its customers with a single unitary sublet charge for which Taxpayer was required to collect sales tax.

Taxpayer's protest is respectfully denied.

II. Gross Retail Tax - Audit Sample.

Taxpayer disagrees with the sales and use tax assessment on the ground that the audit sample was distorted by including in the sample transactions which occurred at one of its multiple business locations which sold tires.

Rather than reviewing each and every transaction entered into by a particular taxpayer, the Department has the authority to use a "sampling" method to determine whether the taxpayer is subject to additional tax. IC § 6-8.1-3-12(b) provides:

On June 11, 2014, Taxpayer signed an "Agreement for Projecting Audit Results" agreeing to the audit sampling methodology because of "the volume of information to examine and obvious time constraints . . . ."

Taxpayer argues that the sampling results were skewed because the sample included transactions at one of its locations which sold tires. Taxpayer does not explain precisely how its assessment would have changed if the tire sales were not included but only that the error rate - and consequent assessment - would have been lower.

As noted in Part I above, IC § 6-8.1-5-1(c) provides that "[t]he notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made."

The transactions in the audit stat sample which occurred at the Taxpayer business location may indeed be unique and may have resulted in an assessment larger than expected. However, Taxpayer has provided nothing of substance which would justify a specific adjustment to that assessment. Taxpayer's protest in this respect is denied because Taxpayer has failed to prove that the assessment was "wrong" only that the assessment should be lower.

Taxpayer's protest is respectfully denied.

III. Gross Retail Tax - Miscellaneous Charges.

On its invoices, Taxpayer includes a cost for "miscellaneous charges." Taxpayer did not charge its customers sales tax on this line-item expense. The audit disagreed and apparently assessed additional tax on these costs. Taxpayer disagrees and explains that "miscellaneous charges" are a "labor charge" above and beyond what the "labor amount" included on that same invoice. In effect, the "miscellaneous charged" represent a "bonus" labor charge separate and distinct from the base labor charge.

Taxpayer maintains that it should not have been assessed tax on "miscellaneous charges" because these charges are simply an additional "mark-up" on its standard exempt labor charges.

Taxpayer has provided nothing of substance which would support Taxpayer's assertion that its "miscellaneous charges" are not subject to sales tax. This particular charge is, of course, designed to be ambiguous ("Made up of a variety of parts or ingredients." American Heritage Dictionary of the English Language 838 (1^st ed. 1969)) and remains so in this context. As noted previously, the law requires that the Taxpayer establish that the assessment is wrong not that it is subject to ambiguity. IC § 6-8.1-5-1(c).

Taxpayer's protest is respectfully denied.

IV. Gross Retail Tax - Computer Software and Software Maintenance Agreements.

Taxpayer argues that it was not subject to sales or use tax on the purchase of computer software or computer maintenance agreements.

The audit found as follows:

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. Ind. Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002) (Emphasis added).

IC § 6-2.5-1-27 specifies that:

"Prewritten computer software" is defined in IC § 6-2.5-1-24 which provides in part as follows:

Taxpayer also purchased software maintenance agreements that - according to the audit report - "provide assurances that any required service and parts will be provided in the event of a break down or malfunction of the covered property."

The audit report also points out that some of the maintenance agreements "also contain provisions for periodic inspection or preventative maintenance where tangible personal property will be supplied as a part of the unitary price."

The Department has unequivocally explained that under Indiana law software maintenance agreements that contain the right to obtain software updates are subject to sales tax.

Therefore, the Department has consistently found that "software maintenance agreements" were subject to sales and use tax with a rebuttable presumption since August 2006. Thus, the Department is not required to determine whether the maintenance agreements vendors did or did not provide Taxpayer with computer software updates or whether the underlying agreement guaranteed that updates would be provided. For the tax year in question, the Department presumes that updates were provided pursuant to the agreement and a taxpayer may rebut this presumption. The Department notes that, as of July 1, 2010, the legislature effectively removed this rebuttable presumption with the enactment of IC § 6-2.5-4-17 (effective July 1, 2010) which provides that "software maintenance agreements" are always subject to tax.

The audit was correct in determining that, under Indiana law, prewritten computer software and software maintenance agreements are ordinarily subject to Indiana's sales and use tax.

Taxpayer's protest is respectfully denied.

The Department is unable to agree with Taxpayer's various arguments that the proposed assessment was "wrong" and Taxpayer's protest is denied in all respects.