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 This document is effective as of its date of publication and remains in effect until the date it is superseded by the publication of another document in the Indiana Register.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

Company was not responsible for use tax on its purchase of an aircraft from 2013 because it qualified for an exemption.

I. Sales/Use Tax–Aircraft.

Authority: IC § 6-8.1-5-1; IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-6-6.5-8; IC § 6-2.5-5-8; IC § 6-6-6.5-2; IC § 6-6-6.5-3; IC § 6-2.5-3-1; IC § 6-2.5-3-4; IC § 6-2.5-5; 45 IAC 2.2-3-4; Dep't 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); 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); Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002).

Taxpayer protests the imposition of use tax on an aircraft.

II. Tax Administration--Penalty.

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

Taxpayer protests the Department's imposition of a penalty.

Taxpayer is a partnership. In 2013, Taxpayer bought a plane from a California company and attempted to bring the plane to Indiana. In route the plane experienced technical difficulties and landed in St. Louis, MO. The plane stayed in St. Louis for about four months for repairs. The plane was then flown to Indiana where Taxpayer leased the plane. In 2015, the Indiana Department of Revenue ("Department") sent a letter to Taxpayer, which stated that as the owner of an aircraft Taxpayer was required to register the aircraft with the State of Indiana. The Department issued a proposed assessment of use tax, penalty, interest, and fees regarding the aircraft. Taxpayer protested, and an administrative telephone hearing was conducted. This Letter of Findings results. Further facts will be supplied as required below.

I. Sales/Use Tax–Aircraft.

As a threshold issue, it is 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] defer to an agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.'" Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014).

The Department determined that Taxpayer failed to register the aircraft within 31 days of purchase, thus the Department assessed use tax for what Taxpayer would have paid at the time of registration. Taxpayer argues that it is engaged in the business of leasing the aircraft and is exempt because from the time of purchase it always intended to lease the plane and simply failed to register because the plane was in St. Louis for a considerable amount of time. Thus, the aircraft would have been exempt under IC § 6-2.5-5-8(e). Taxpayer also argued that it had remitted sales tax to Indiana based on the rental stream of income.

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). In addition, the use tax is also imposed on the purchase of an aircraft, if the aircraft "is acquired in a transaction that is an isolated or occasional sale" and "is required to be titled, licensed, or registered by this state for use in Indiana." IC § 6-2.5-3-2(b). "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 generally 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). Additionally, when a transaction involves an aircraft, a person who acquires the aircraft is also required to register the aircraft and pay the excise tax pursuant to IC § 6-6-6.5-2 and IC § 6-6-6.5-3.

An exemption from the use tax is granted for transactions where the sales tax was paid at the time of purchase pursuant to IC § 6-2.5-3-4 and 45 IAC 2.2-3-4. There are various tax exemptions available outlined in IC § 6-2.5-5. "[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." Indiana Dep't of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 101 (Ind. Ct. App. 1974) (internal citations omitted). 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).

Also of importance is IC § 6-6-6.5-8, which states:

IC § 6-2.5-5-8(e) illustrates the "threshold requirements" for aircraft rentals, as follows:

During the protest process, Taxpayer provided documents that show it is in the business of leasing aircraft. Taxpayer also provided proof that the plane was in St. Louis for four months and flight logs to demonstrate when the plane arrived in Indiana. Taxpayer also provided proof of sales tax remitted to Indiana. Taxpayer was able to substantiate that although it did not register the plane within the amount of time stated in the statute, it did remit sales tax to Indiana based on a rental agreement that did exceed 7.5 percent of the aircraft's value. Therefore, Taxpayer met the requirements of IC§ 6-6-6.5-8(d) and IC § 6-2.5-5-8(e) and did qualify for the exemption. Taxpayer has met the burden of proving the proposed assessment incorrect, as required by IC § 6-8.1-5-1(c).

Taxpayer's protest is sustained.

II. Tax Administration–Penalty.

Taxpayer requests that the Department abate the ten-percent negligence penalty. IC § 6-8.1-10-2.1 requires that a ten-percent penalty be imposed if the tax deficiency results from the taxpayer's negligence. Departmental regulation 45 IAC 15-11-2(b) defines negligence as "the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer." Negligence is to be determined on a case by case basis according to the facts and circumstances of each taxpayer. Id.

IC § 6-8.1-10-2.1(d) allows the Department to waive the penalty upon a showing that the failure to pay the deficiency was based on "reasonable cause and not due to willful neglect." Departmental regulation 45 IAC 15-11-2(c) requires that 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. . . . "

Taxpayer has demonstrated that it will not owe any of the proposed tax assessments, as discussed in Issue I. Therefore, the issue of penalty assessed pursuant to IC § 6-8.1-10-2.1 is moot.

Taxpayer's protest is sustained.

Taxpayer's protest to the imposition of use tax and negligence penalty is sustained.