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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Business was able to produce documentation and explanation showing that some sales under protest were not subject to sales tax. Therefore, those sales will be removed from the Department's calculations of sales tax due. Business was also able to produce documentation and explanation showing that some purchases under protest were not subject to use taxes. Therefore, those purchases will be removed from the Department's calculations of use tax due. Waiver of penalty was warranted.

I. Sales Tax–Collection as a Retail Merchant.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-4-1; IC § 6-2.5-3-7; IC § 6-2.5-8-8; IC § 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 2.2-4-2; Sales Tax Information Bulletin 2 (May 2002); Sales Tax Information Bulletin 2 (December 2010); Sales Tax Information Bulletin 2 (November 2011); ; Sales Tax Information Bulletin 2 (March 2013).

Taxpayer protests the imposition of sales tax on certain transactions.

II. Use Tax–Imposition.

Authority: IC § 6-2.5-1-27; ; IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-4-9; IC § 6-8.1-5-1; IC § 6-2.5-1-11.5; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Lowe's Home Centers, LLC, v. Indiana Dept. of State Revenue, 23 N.E.3d 52 (Ind. Tax 2014); 45 IAC 2.2-3-4; 45 IAC 2.2-3-7; 45 IAC 2.2-4-22; Sales Tax Information Bulletin 60 (April 2011); 2016 Ind. Acts 1939, P.L. 181-2016, § 18 (codified at I.C. § 6 -2.5-3-2(c)).

Taxpayer protests the imposition of use tax on certain transactions.

III. Tax Administration–Negligence Penalty.

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

Taxpayer protests the imposition of penalty.

Taxpayer is a retail business with operations in Indiana and other states. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had not collected and remitted sales tax on all transactions it had as a retail merchant and all purchases it made as a consumer during the tax years 2010, 2011, and 2012. The Department therefore issued proposed assessments for sales tax, use tax, penalty, and interest for those years. Due to the large number of transactions under review, the Department used a sample and projection method to determine Taxpayer's compliance rate regarding its retail merchant sales tax collection and remittance duties. That rate was applied to Taxpayer's sales and purchases respectively to determine sales tax that should have been remitted during the tax years. That amount was compared to the amount of sales tax and use tax actually remitted during the tax years. Sales tax was imposed on the difference between the amount of sales tax actually remitted and what the Department determined should have been remitted based on the compliance rate. Similarly, due to the large number of Taxpayer's purchases as a consumer, the Department used a sample and projection method to determine Taxpayer's compliance rate regarding its use tax remittance duties. The Department applied the use tax compliance rate against the amount of use tax remitted and imposed use tax on the difference. Purchases of fixed assets which Taxpayer made were reviewed for use tax compliance on a transactional basis. Taxpayer protested the imposition of sales tax on some transactions and the imposition of use tax on some transactions. Taxpayer also protested the imposition of penalty. An administrative hearing was conducted and this Letter of Findings results. Further facts will be supplied as required.

I. Sales Tax–Collection as a Retail Merchant.

Taxpayer protests the imposition of sales tax which the Department determined should have been collected and remitted on certain transactions during the tax years 2010, 2011, and 2012. The Department based its proposed assessments on the fact that Taxpayer did not collect and remit sales tax on some transactions which the Department determined were taxable sales. Taxpayer protests that several transactions which the Department believed were taxable sales were actually not subject to sales tax and that the compliance rate is understated resulting in the overstatement of the proposed assessments.

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 Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. 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 the 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, all interpretations of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

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

Therefore, when a retail merchant sells tangible personal property to its customer, the retail merchant is responsible for collecting and remitting the sales tax on that transaction.

Also of relevance is IC § 6-2.5-4-1, which states in relevant parts:

Taxpayer protests that some of its customers were exempt from sales tax. Specifically, Taxpayer states that two of the transactions of tangible personal property ("TPP") considered to be taxable sales by Taxpayer were in fact drop shipments to exempt customers with third party delivery addresses. In support of this position, Taxpayer was able to provide exemption certificates for the two customers which it states were the actual purchasers of the TPP. Of relevance is IC § 6-2.5-3-7, which provides:

Also, IC § 6-2.5-8-8 states:

Therefore, if a retail merchant receives a properly completed exemption certificate, it is not responsible for the collection and remittance of sales tax on transactions with that customer. Since Taxpayer has provided exemption certificates and invoices establishing that the transactions in question were with exempt customers, those transactions were not subject to sales tax. Taxpayer has met the burden of proving this portion of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

The next area of protest concerns transactions for installation only. Taxpayer states that several transactions identified by the Department as taxable transactions of TPP were actually installation transactions with no TPP sold by Taxpayer. In the course of the protest process, Taxpayer was able to provide documentation which establishes that the transactions at issue were in fact charges for delivery and installation services only. As provided by IC § 6-2.5-4-1(e), services are only taxable if they are rendered as part of the same transaction and are performed prior to the transfer of the TPP. In this case, the entries listed as delivery and installation were separate transactions. No TPP was involved in these instances and so no sales tax was due on them. Taxpayer has met the burden of proving this portion of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

The next area of protest concerns optional warranty sales. The Department determined that Taxpayer had not collected sales tax at the time it sold optional warranties to its customers. The Department based its determination on the grounds that Sales Tax Information Bulletin 2 20100804 Ind. Reg. 045100497NRA (December 2010) and Sales Tax Information Bulletin 2 20111228 Ind. Reg. 045110764NRA (November 2011), which were the versions of that information bulletin in effect during the tax years, required retail merchants to collect sales tax on the sale of optional warranties. In the earlier versions of Sales Tax Information Bulletin 2, the underlying regulation was 45 IAC 2.2-4-2.

Taxpayer protests that Sales Tax Information Bulletin 2 25 Ind. Reg. 3595 (May 2002) was the only version of the information bulletin to be published in the Indiana Register until August 4, 2010, and that version of the information bulletin instructed that optional warranties were not subject to sales tax. Taxpayer also protests that the Department later changed its position in Sales Tax Information Bulletin 2 20130327 Ind. Reg. 045130126NRA (March 2013) back to the stance that it considered optional warranties to not be subject to sales tax imposed on the purchasers of the warranties. Taxpayer argues that it was always following the position the Department later agreed to, even if that agreement occurred after the tax years at issue. The Department does not agree with Taxpayer's position. Retail merchants are required to follow the Department's instructions, including instructions found in information bulletins, when performing their sales tax collection and remittance duties.

The Department's instructions after August 4, 2010 were to collect sales tax on the sales of optional warranties. Taxpayer did not do so. Therefore, while Taxpayer was applying the instructions of the version of the information bulletin as it was published until August 4, 2010, Taxpayer did not follow the instructions of the information bulletin from August 4, 2010 through the end of 2012. Therefore, while those sales of optional warranties which occurred from January 1, 2010 through August 3, 2010 did not need to have sales tax collected, those sales which occurred on August 4, 2010 through December 31, 2012 did need to have sales tax collected at the time of the transaction. Taxpayer has partially met the burden of proving this portion of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

In conclusion, Taxpayer has met the burden of proving the proposed sales tax assessments wrong with regard to some of the items under protest. Specifically, the transactions which were drop shipments to exempt customers, the separate transactions which were delivery and installation only, and the sales of optional warranties from January 1, 2010 through August 3, 2010 are not subject to sales tax and therefore those transactions will be reclassified as non-taxable. The non-protested transactions and sales of optional warranties sold from August 4, 2010 through December 31, 2012, will remain subject to sales tax. Using these revised classifications, the Department will recalculate Taxpayer's sales tax compliance rate. The new compliance rate will be applied to Taxpayer's overall sales and credit will be allowed for sales tax collected and remitted during the tax years. The reduced difference between sales tax actually remitted and that which should have been remitted using the revised compliance rate will be subject to sales tax.

Taxpayer's protest is sustained in part and denied in part, as explained above.

II. Use Tax–Imposition.

Taxpayer protests the imposition of use tax on certain purchases it made during the tax years. The Department reviewed capital purchases for sales and use tax compliance and imposed use tax on those transactions upon which it believed tax was due but had not been paid. The Department also reviewed Taxpayer's expense purchases and classified those upon which no sales tax or use tax was remitted during the tax years as subject to use tax. The Department then compared Taxpayer's overall sales/use tax payment rate on consumer expenses against the amount of use tax remitted. Proposed use tax assessments were issued on the difference.

As provided in Issue I above, 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 Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. 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 the 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, all interpretations of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

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

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

Therefore, when tangible personal property is used, stored, or consumed in Indiana, use tax is due unless sales tax was paid at the time of the transaction.

Taxpayer's first point of protest concerns transactions which Taxpayer state were services only, with no transfer of TPP. In support of its position, Taxpayer provided invoices and other documentation showing that these transactions were in fact for services only, without the transfer of TPP. Taxpayer has met the burden of proving this portion of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

The next point of protest concerns those sales where Taxpayer states that sales tax was in fact collected and no imposition of sales tax is needed. In support of its protest, Taxpayer provided invoices showing sales tax charged to Taxpayer by the vendors. Therefore, these three transactions for which Taxpayer has supplied invoices showing that it paid sales tax at the time of the transactions will be removed from the Department's calculations of sales tax due. Taxpayer has met the burden of proving this portion of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

The next point of protest concerns instances in which Taxpayer paid sales tax or had use tax imposed upon TPP which was used to make improvements to real property with a roofing contractor via maintenance contracts with two separate HVAC service providers. Taxpayer states that the Indiana Tax Court's decision in Lowe's Home Centers, LLC, v. Indiana Dept. of State Revenue, 23 N.E.3d 52 (Ind. Tax 2014) results in overpayment of sales tax and therefore it is due a refund on those amounts and also does not owe use tax on the amount assessed. Specifically, the court in Lowe's stated:

Id. at 59.

The Department notes that IC § 6-2.5-3-2 as amended by the Indiana General Assembly in 2016, applies here because subsection (c) was made retroactive to January 1, 2010. P.L. 181-2016, § 18. As amended in 2016, IC § 6-2.5-3-2(c) states in relevant part:

(Emphasis added).

Further, IC § 6-2.5-4-9 provides:

(Emphasis added).

Also, 45 IAC 2.2-4-22 provides:

(Emphasis added).

As highlighted above, IC § 2.5-3-2(c) now does specifically and retroactively impose use tax liability contingent upon the type of contract used between a contractor and its customer. Therefore, the legislative amendment to IC § 6-2.5-3-2(c) nullifies the court's decision in Lowe's. Since Lowe's has been legislatively nullified, Taxpayer's position is not convincing. Taxpayer has not met the burden imposed under IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong regarding the roofing contractor. Neither is there an overpayment of sales/use tax to refund under the Lowe's decision.

However, regarding the two HVAC maintenance contracts with two separate vendors, Taxpayer offers an alternate position that use tax should not have been imposed on those amounts. Taxpayer bases its position on the basis that the maintenance contracts were lump sum contracts for maintenance on HVAC equipment and that the HVAC maintenance is actually considered an improvement to realty and is therefore not taxable to it as a consumer.

The first relevant statute is IC § 6-2.5-1-11.5, which states:

(Emphasis added).

Also of relevance is 45 IAC 2.2-3-7(b), which provides:

Taxpayer believes that IC § 6-2.5-1-11.5(b) exempted the maintenance contracts at issue from sales and use taxes because the HVAC equipment which was being serviced was incorporated into the realty of the buildings. Also, Taxpayer refers to Sales Tax Information Bulletin 60 20110427 Ind. Reg. 045110247NRA (April 2011)(Suspended October 2016), which provided that construction materials included central air conditioning units, and also stated that "Improvements" to real property included repairs to existing improvements to real property.

After review of the maintenance agreement for one vendor and of the invoices for both vendors, the Department agrees with Taxpayer's position. Since the HVAC systems were construction materials to be incorporated into a facility as defined by 45 IAC 2.2-3-7(b) and since IC § 6-2.5-1-11.5(b) excludes real property and services to real property from the definition of bundled transactions, the maintenance of those systems was not taxable to Taxpayer. Rather, the sales/use tax burden regarding TPP in these cases is the responsibility of the vendors, as provided by 45 IAC 2.2-4-22(b). Taxpayer has met the burden of proving this portion of the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

The next point of protest concerns purchases which Taxpayer states are from outside the tax years at issue. In support of its position, Taxpayer provided invoices showing that the purchases in question occurred prior to the tax years. Since the tax years at issue are 2010-12, any purchases which occurred before January 1, 2010 and after December 31, 2012 will not be included in the Department's calculations of use tax due for this audit period.

The next point of protest concerns postage charged by an Indiana printer hired by Taxpayer to print and directly mail insurance forms to Taxpayer's employees. Taxpayer believes that, since only twelve percent of its employees are located in Indiana, only twelve percent of the postage charges should be subject to use tax. The relevant statute is IC § 6-2.5-1-5(a), which during the years at issue provided:

(Emphasis added).

After review of IC § 6-2.5-1-5(a), the Department does not agree with Taxpayer's position. First, the statute does not say anything about the destination of items dropped in the mail as being determinative on the taxable status of the postage charged. Second, Taxpayer took delivery of the mailings when the vendor mailed them on Taxpayer's behalf. Since the vendor is located in Indiana, it stands to reason that the items were mailed from an Indiana location and so the delivery charges including postage were incurred in Indiana. Taxpayer has not met the burden of proving the proposed assessments wrong, as required by IC § 6-8.1-5-1(c).

The next point of protest concerns purchases from a specific vendor. Taxpayer states that it should not be required to pay use tax on purchases it made from that vendor but upon which the vendor did not collect sales tax. Taxpayer states that it knows that the vendor, as a retail merchant, paid the uncollected sales tax to the Department in an unrelated interaction with the Department. Taxpayer did not provide documentation supporting this position. Without documentation verifying that the uncollected sales tax on the transactions at issue in the instant protest, the Department is unable to agree with Taxpayer's position. Therefore, Taxpayer has not met the burden imposed under IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong.

The next point of protest concerns shipments of TPP to out-of-state locations. Taxpayer states that some of the transactions identified by the Department as subject to Indiana use tax were actually shipped from out-of-state vendors to Taxpayer's out-of-state locations and that the TPP never entered Indiana. As provided by IC § 6-2.5-3-2(a), TPP must be used, stored, or consumed in Indiana in order to be subject to Indiana use tax. Taxpayer provided invoices in support of its position. After review, Taxpayer has established that the transactions in question took place wholly outside Indiana and that the TPP was not used, stored, or consumed in Indiana. Therefore, Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) of proving the proposed assessments wrong with regard to these transactions.

The next point of protest concerns one instance where Taxpayer states that the Department made a calculation error. Specifically, Taxpayer states that the Department assessed use tax on the TPP sold in the transaction, but removed only $497.15 in labor charges when the labor charges actually were $595. Taxpayer has provided sufficient documentation to establish that the amount of labor charges which should have been removed from the Department's use tax calculations was $595.

The last point of protest is in regards to a computer software program. Taxpayer states that the program was custom-made and not a prewritten or "canned" software program. IC § 6-2.5-1-27 incorporates "prewritten computer software" such as that purchased by Taxpayer in the definition of tangible personal property as follows:

In the course of the protest process, Taxpayer was able to provide sufficient documentation including invoices and product descriptions from the programming company and analysis to establish that the program in question was a custom-made product and was not a prewritten program. Therefore, the program is not TPP as defined by IC § 6-2.5-1-27 and is not subject to sales tax or use tax. Taxpayer has met the burden imposed under IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong.

In conclusion, Taxpayer has met the burden of proving the proposed assessments wrong regarding those transactions which were: for services only, had sales tax paid at the time of the transaction, were wholly conducted out-of-state, were conducted outside the audit period, were for custom computer software, should have had $595 in labor charges removed from taxable calculations, or were for HVAC maintenance contracts. Taxpayer has not met the burden of proving the proposed assessments wrong regarding charges for postage and regarding charges which Taxpayer alleged were paid by the vendor. The capital transactions upon which Taxpayer has been sustained will be removed from the Department's calculations of use tax due. The expense transactions upon which Taxpayer has been sustained will be reclassified as non-taxable and the Department will recalculate Taxpayer's use tax compliance rate. That rate will then be compared to Taxpayer's use tax remitted during the tax years and use tax will be due on the newly recalculated difference.

Taxpayer's protest is sustained in part and denied in part as explained above.

III. Tax Administration–Penalty.

Taxpayer protests the imposition of penalties pursuant to IC § 6-8.1-10-2.1 Penalty waiver is permitted if the taxpayers show that the failure to pay the full amount of the tax was due to reasonable cause and not due to willful neglect. 45 IAC 15-11-2(b) clarifies the standard for the imposition of the negligence penalty as follows:

The standard for waiving the negligence penalty is given at 45 IAC 15-11-2(c) as follows:

Taxpayer protests the Department's assessment of penalty. After review of the documentation and analysis provided in the protest process, the Department may waive penalty as provided by IC § 6-8.1-10-2.1(e). Taxpayer has affirmatively established that it exercised ordinary business care in this case. Therefore, waiver of penalties is warranted under 45 IAC 15-11-2(c).

Taxpayer's protest to the imposition of penalties is sustained.

Taxpayer's Issue I protest regarding the imposition of sales tax is sustained in part and denied in part as provided above. Taxpayer's Issue II protest regarding the imposition of use tax is sustained in part and denied in part as provided above. Taxpayer's Issue III protest regarding the imposition of penalty is sustained.