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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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 certain purchases were eligible for the agricultural exemption. Therefore, those purchases are not subject to use tax. One category of purchases was partially exempt.

I. Use Tax–Imposition.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-5-2; 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); Graham Creek Farms v. Ind. Dept. of State Revenue, 819 N.E.2d 151 (Ind. Tax 2004); Guardian Automotive Trim, Inc. v. Ind. Dept. of Revenue, 811 N.E.2d 979 (Ind. Tax 2005); 45 IAC 2.2-3-4; 45 IAC 2.2-5-3; 21 U.S.C. § 1032; 9 C.F.R. § 590.422; 9 C.F.R. § 590.500; 9 C.F.R. § 590.502.

Taxpayer protests the imposition of use tax on certain transactions.

Taxpayer is an Indiana business in the poultry/egg industry. As the result of an audit conducted in 2012, the Indiana Department of Revenue ("Department") determined that during the tax years 2009, 2010, and 2011, Taxpayer purchased some tangible personal property ("TPP") without paying sales tax at the time of purchase and without remitting use tax during the relevant year. The Department therefore issued proposed assessments for use tax, penalty, and interest for those years. Taxpayer timely protested a portion of the purchases determined to be subject to use tax and also paid the proposed assessments in order to toll the accrual of interest during the protest process. Due to a misunderstanding by the Department, the payment was determined to be a non-protest of the proposed assessments and the matter was not forwarded to the Department's Legal Division until mid-2016. Upon notification of the oversight, the Department's Legal Division scheduled an administrative hearing. This Letter of Findings results. Further facts will be supplied as required.

I. Use Tax–Imposition.

Taxpayer protests the imposition of use tax on certain purchases of TPP it made during the tax years 2009, 2010, and 2011. The Department determined that the purchases were not eligible for the agricultural exemption and therefore issued proposed assessments for use tax on those purchases. Due to the volume of purchases during the tax years, the Department and Taxpayer agreed to use a sample and projection method to determine a use tax compliance rate for the tax years. The Department then applied that compliance rate to the rate of sales and use taxes actually paid by Taxpayer for the tax years. Use tax was imposed on the difference between the amount of the compliance rate and the actual amount paid. Taxpayer states that TPP purchased and classified in four categories were exempt and so were not subject to use tax. Taxpayer therefore argues that the TPP in the four categories should be reclassified as exempt and that the use tax compliance rate should be recalculated and reapplied to all three tax years.

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:

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.

Also of relevance is IC § 6-2.5-5-2, which states:

Therefore, if the TPP is used in the direct production, extraction, harvesting, or processing of agricultural commodities, it is exempt from sales tax under IC § 6-2.5-5-2.

In this case, Taxpayer protested the imposition of use tax on TPP used in four categories: 1) a manure building; 2) epoxy flooring in the egg laying facility; 3) a carton washer; and 4) pressure washers used to clean the egg laying facility. Regarding the first category, a manure building, Taxpayer explained that the manure building is used to store and dry poultry droppings in order to provide a more productive environment for the chickens as well as to make the droppings more marketable for subsequent sale.

The Department determined that the manure building was used to store the poultry manure without any processing or treatment of the manure prior to sale. 45 IAC 2.2-5-3 provides:

In the course of the protest process, Taxpayer explained that removal of the manure from the building in which the chickens were located resulted in improved health of the chickens and so resulted in improved egg quality and quantity. Taxpayer also refers to a 2013 advisory letter from the Department to the Indiana State Poultry Association which states that a new manure barn used exclusively for the purpose of processing and handling manure would be exempt from Indiana sales tax. Therefore, Taxpayer argues, the manure building is part of an overall agricultural production process and is therefore exempt.

After review of the provisions of IC § 6-2.5-5-2(b)(3) and of 45 IAC 2.2-5-3(c)(6), the Department does not agree that the manure barn qualified for the exemption since it did not directly gather, spread, or move the manure or directly affect the health of the poultry. . The equipment that moved the manure from the egg-laying facility to the manure barn directly moved the manure, but the barn did not. Therefore, the barn does not qualify for the agricultural exemption on that basis. However, in the protest process Taxpayer also explained that the manure building was used to dry the manure prior to sale for fertilizer purposes. As provided by 45 IAC 2.2-5-3(a) fertilizer is an agricultural commodity and the drying process constituted the production of an agricultural commodity.

Of relevance is the Indiana Tax Court's opinion in Graham Creek Farms v. Ind. Dept. of State Revenue, 819 N.E.2d 151 (Ind. Tax 2004). In that case, the taxpayer made upgrades to a tobacco drying barn and the Department determined that there was no active role played by the barn or any equipment in the barn and so the barn and the equipment did not affect the production of the agricultural product. The court explained:

As provided by 45 IAC 2.2-5-3(b), TPP used to produce agricultural commodities is exempt from sales and use taxes. Since Taxpayer used the manure barn to both store and dry the manure, and since the storing of the manure is non-exempt activity and the drying of the manure constitutes an exempt agricultural production process as explained by the court in Graham Creek Farms, the materials used to construct the manure barn were fifty percent exempt and fifty percent taxable.

Regarding the epoxy flooring in the egg-laying facility and the pressure washers and carton washer, Taxpayer refers to several federal regulations regarding egg production requirements. In 1970 the United States Congress established the Egg Products Inspection Act ("the Act"), as provided by 21 U.S.C. § 1032. Taxpayer argues that the Act requires certain actions by egg producers and that these requirements are found under the provisions of 9 C.F.R. 590 et seq. Further, Taxpayer argues that these requirements result in the TPP listed under the remaining three categories qualifying for exempt status under Indiana statutes and regulations.

Specifically, Taxpayer argues that the epoxy flooring and washers are federally required egg production equipment as provided by 9 C.F.R. § 590.500(i), which states:

Also of relevance is 9 C.F.R. § 590.422, which provides:

The Department considered the epoxy flooring to be safety equipment for workers and therefore subject to sales tax as provided by 45 IAC 2.2-5-3(d)(8). The Department considered the washers to constitute normal farm maintenance equipment and therefore subject to tax as provided by 45 IAC 2.2-5-3(d)(4).

Taxpayer refers to 9 C.F.R. § 590.502, which provides:

Of relevance is the Indiana Tax Court's decision in Guardian Automotive Trim, Inc. v. Ind. Dept. of Revenue, 811 N.E.2d 979 (Ind. Tax 2005), in which the court provided:

Also of relevance, the Indiana Tax Court in Graham Creek Farms stated:

Graham Creek Farms, at 164-65, (emphasis in original)(emphasis added)

Therefore, the court in Graham Creek Farms explained that cleaning supplies used outside the production process were not eligible for the exemption while the window cleaner was eligible since it was used in the course of an integrated agricultural production process.

While the taxpayer in Guardian Automotive was seeking to qualify for the manufacturing exemption found under IC § 6-2.5-5-3(b) rather than the agricultural production exemption found under IC § 6-2.5-5-2(a), the wording of and exemption concepts of the two statutes are substantially similar. Also, the court in Graham Creek Farms explained that cleaning supplies used as part of an integrated agricultural production process are exempt when, without clean equipment, the agricultural production cannot occur as provided by 45 IAC 2.2-5-13(a). In a manner analogous to the electroplating production process described in Guardian Automotive and in the same manner as the window cleaning supplies used in Graham Creek Farms, Taxpayer in the instant case was compelled to clean its facilities and equipment on an ongoing basis in order to produce a marketable product. When read together with 9 C.F.R. § 590.500(i), 9 C.F.R. § 590.502(a) requires egg processing equipment and facilities to undergo regular and thorough cleaning. As provided by 9 C.F.R. § 590.422 eggs and egg products found to be adulterated at official plants shall be condemned and, if no appeal be taken from such determination of condemnation, such articles shall be destroyed for human food purposes under the supervision of an inspector. Therefore Taxpayer's compliance of the facilities' flooring, cleaning of the facilities, and sterilization in the case of the cartons, with the regulations associated with the Egg Products Inspection Act are required to produce a marketable product and are not routine maintenance. Rather, these activities and the TPP used to perform them are essential and integral parts of an integrated process as provided by the court in Guardian Automotive and in Graham Creek Farms. Like the cleaning procedures in Guardian Automotive and in Graham Creek Farms, the cleaning procedures in the instant case do not halt the egg production process. It is this agricultural production process which produces food or an agricultural commodity. Taxpayer in the instant case could not use the production equipment to produce marketable agricultural products (eggs) continuously without cleaning. The epoxy flooring, pressure washers, and carton washer are therefore not subject to sales and use taxes as provided by 45 IAC 2.2-5-3(c)(2). The Department takes this opportunity to note that merely complying with a government regulation is not the determining factor in reaching this conclusion. Rather, the determining factor is that, because non-compliance results in the destruction of Taxpayer's product, production of Taxpayer's product is not possible without incorporating these items into its integrated production process.

In conclusion, Taxpayer has met its burden of proving the proposed assessments wrong with regards to the epoxy flooring, pressure washers, and carton washer, as required by IC § 6-8.1-5-1(c). Taxpayer has been sustained in part regarding the manure barn. Fifty percent of the use of the manure barn is for taxable storage purposes and fifty percent is used for exempt drying purposes. The Department will recategorize the purchases of pressure washer, carton washer, and epoxy flooring as exempt and the purchases relating to the manure barn as fifty percent taxable and will recalculate Taxpayer's compliance rate. The Department will then recalculate the amount of use tax, penalty, and interest which was originally determined to be due and will refund the excess amount of tax already paid by Taxpayer.

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