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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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 LLC provided documentation to affirmatively establish that some of the protested purchases were not subject to use tax. The remaining amounts of use tax were properly assessed.

I. Sales/Use Tax-Imposition.

Authority: IC § 6-2.5-3-2; IC § 6-8.1-5-1; IC § 6-2.5-5-1; IC § 6-2.5-1-1; IC § 6-2.5-5-8; IC § 6-2.5-1-27; IC § 6-2.5-2-1; IC § 6-2.5-3-1; IC § 6-2.5-1-24; IC § 6-2.5-3-4; IC § 6-2.5-4-1; 45 IAC 2.2-4-1; 45 IAC 2.2-3-4; 45 IAC 2.2-4-2; 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); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Rhoade v. Ind. Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); Sales Tax Information Bulletin 8; Sales Tax Information Bulletin 2.

Taxpayer protests the assessment of sales and use tax.

Taxpayer is an Indiana Limited Liability Company ("LLC"). The Indiana Department of Revenue ("Department") conducted a sales and use tax audit for the years 2012, 2013, and 2014. The Department determined that Taxpayer had not paid sales or use tax on some transactions during the audit period. The Department therefore issued proposed assessments of sales and use tax. Taxpayer protested the imposition of use tax on certain transactions. An administrative hearing was conducted and this Letter of Findings results. Further facts will be presented as required.

I. Sales/Use Tax-Imposition.

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] defer to the 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). Thus, all interpretations of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

The Department assessed tax on an elevator maintenance contract, software purchases, and tangible personal property provided through construction contracts but not used in construction. Taxpayer protests that some of the items listed as taxable in the Department's calculations were actually exempt from tax because they related to service contracts. Taxpayer argues that the Department erred in assessing tax on transactions it entered into with certain vendors on the grounds that the transactions involved supplies and building services. Taxpayer provided invoices and some contracts in support of its protest.

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

Therefore, when tangible personal property ("TPP") is used, stored, or consumed in Indiana, use tax is due unless sales tax was paid at the time of the transaction, or if there is another applicable exemption to sales and use taxes. A transaction subject to the state's sales tax necessarily involves the transfer of TPP.

The Department assessed use tax on Taxpayer's elevator maintenance contract because the Department determined that the contract was a "bundled transaction" containing the possible transfer of tangible personal property. Taxpayer protests the assessment of use tax on invoices for elevator services. 45 IAC 2.2-4-2(a) states that:

However, the Department assessed tax because the transaction was considered a "bundled transaction." IC § 6-2.5-1-11.5 states in relevant part:

The Department has provided guidance on this issue through Information Bulletin 2. There are three different information bulletins that apply to the tax years at issue: Information Bulletin 2 (November 2011); Information Bulletin 2 (January 2013); and Information Bulletin 2 (March 2013). Each information bulletin has remained consistent with its interpretation of maintenance contracts, only the interpretation of warranty contracts has differed. Information Bulletin 2 (March 2013), 20130327 Ind. Reg. 045130126NRA provides in relevant part.

Taxpayer provided invoices and a letter from the vendor explaining that the transactions listed in the audit report are for services rendered. Taxpayer also provided the agreement between Taxpayer and vendor. The agreement is for a preventative maintenance program, which includes, "cleaning, lubricating, packing, adjusting, calibrating, repairing, and replacing parts and equipment for maintenance purposes, and furnishing of all cleaning material, and testing equipment necessary for the performance." Thus, Taxpayer's agreement meets the "bundled transaction" as described in IC § 6-2.5-1-11.5 and Information Bulletin 2, thus Taxpayer owes tax on the amount of the contract. However, Taxpayer did not provide sufficient documentation to show that the tangible personal property transferred fell under the de minimums standard. IC § 6-2.5-1-11.5(d)(2)(B). Therefore, the Department was correct in assessing sales tax on the elevator maintenance contract.

The Department assessed tax on software purchased by Taxpayer. 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:

The Department has explained that computer software - acquired and stored on servers located outside Indiana but accessed by persons within the state - is subject to Indiana's sales and use tax.

Taxpayer protests sales tax assessed on four software transactions. Taxpayer argues that each software had servers out of state and each main office was located out of state as well. Software 1 was used as an accounting system. Software 2 was used as a Point of Sale system. Software 3 was a corporate POS type system. Software 4 was used by a reputation company that provides reports of reviews of Taxpayer. Taxpayer provided invoices to support its argument that the payments are for services and that each software company is located outside Indiana. Taxpayer could not show that Software 1, 2, and 3 were actual services provided by the software company. Taxpayer could however show that Software 4 was a third party service provider and provides a service of tracking Taxpayer's reputation on social media. Indiana has determined that prewritten software is subject to Indiana sales tax. Id. Thus, Taxpayer is responsible for the sales tax on the software programs with the exception of Software 4.

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 general, all purchases of tangible personal property are subject to sales and/or use tax. An exemption from use tax is granted for transactions where sales tax was paid at the time of the purchase pursuant to IC § 6-2.5-3-4. In certain circumstances, additional enumerated exemptions from sales and/or use tax are available. IC § 6-2.5-5-1 et seq.

The Department reviewed Taxpayer's depreciation schedule and made adjustments to tangible personal property purchased by Taxpayer. The Department determined that:

The Department requested the invoices for the non-construction tangible personal property to determine whether sales tax was paid on those transactions. When the invoices did not show sales tax paid, the Department assessed use tax on the non-construction tangible personal property and also included the related delivery and installation fees.

Taxpayer protested this assessment stating that the transactions were part of a "lump sum contractor contract for realty," and therefore the contractor was responsible for sales tax. Taxpayer in the alternative argued that the tangible personal property was an "improvement to realty" and therefore exempt from sales tax.

The Department points out that Taxpayer is assuming that all the tangible personal property transferred under the construction contract is taxed or not taxed the same. In this instance, there are two categories of tangible personal property transferred under the contract: the construction materials and non-construction tangible personal property. Unitary transactions, transactions that include tangible personal property and services "which are furnished under a single order or agreement and for which a total combined charge or price is calculated" are "retail unitary transactions." IC § 6-2.5-1-1(a). Pursuant to IC § 6-2.5-4-1(e), the amount of the retail transaction that is subject to sales tax includes "the price of the property transferred" and "any bona fide charges which are made for preparation, fabrication, alteration, modification, finishing, completion, delivery, or other service performed in respect to the property transferred before its transfer and which are separately stated on the transferor's records." Further, 45 IAC 2.2-4-1(b)(3) states that the amount of the retail transaction that is subject to tax includes the amounts collected for "services performed or work done on behalf of the seller prior to transfer of such property at retail." Therefore, the sales tax due on a retail unitary transaction is based on the total price of the transaction, including delivery and installation fees.

Regarding improvement to realty, IC § 6-2.5-3-2, states in relevant part:

Thus, a contractor is liable for sales or use tax due on construction materials under a lump sum contract, but a consumer is liable for sales or use tax of non-construction tangible personal property.

Taxpayer argues that use tax assessed was on tangible personal property which was included in a lump sum contractor contract, and that the tax assessed already included delivery and installation cost. In the alternative Taxpayer argues that the tangible personal property was incorporated into real property and therefore exempt from use tax. During the hearing Taxpayer provided an explanation of Contractor's billing, invoices, estimate quotes, cost summaries, breakdown of deposit billing, changes in the orders, and cost coverages and changes. The contract included both improvements to real property and non-construction tangible personal property. The audit only assessed tax on the non-construction tangible personal property, not the tangible personal property used as construction material, and included the "delivery and installation fees" based on IC § 6-2.5-1-1 and IC § 6-2.5-4-1. IC § 6-2.5-3-2 does not apply in this instance, since the items on which tax was assessed were not construction material but rather tangible personal property such as, furniture, hair dryers, beds, etc. The delivery fees are included in the price of the retail transaction and are always taxable in a non-exempt transaction. The installation fees were also taxable in this instance because they were transferred under a "unitary transaction." Taxpayer's documentation did not separately state installation charges and therefore, pursuant to IC § 6-2.5-1-1 and IC § 6-2.5-4-1, use tax was properly assessed the "delivery and installation" fees, as well.

Taxpayer also protested the sales tax assessed on an invoice. Taxpayer argued in its protest letter that sales tax was paid at the time of purchase. Taxpayer provide the disputed invoice, number 3304156. The invoice does not show sales tax was paid. At the hearing, Taxpayer reviewed the invoice again and withdrew its protest on tax assessed on this invoice.

In conclusion, Taxpayer has met the burden imposed under IC § 6-8.1-5-1(c) for the elevator maintenance protest. Taxpayer, however, has not met its burden under IC § 6-8.1-5-1(c) for the software and construction protests. Taxpayer conceded the final issue.

Taxpayer's protest is sustained for use tax assessed on Software 4. Taxpayer's protest is denied for the elevator maintenance contract, for the capital improvement contracts, and use tax assessed on Software 1, 2, and 3.