NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 requires 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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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.

Farmer provided sufficient documentation that the repair parts for a feed grinder and parts for an animal waste sprayer were exempt from sales tax. The remaining items are not exempt from sales tax.

I. Gross Retail Tax - Agricultural Exemption.

Authority: IC § 6-2.5-5-2; IC § 6-8.1-5-1; IC § 6-2.5-3-2; Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); 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); Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, (Ind. 2014); Mynsberge v. Dep't of State Revenue, 716 N.E.2d 629 (Ind. Tax Ct. 1999); Tri-States Double Cola Bottling Co. v. Dep't of State Revenue, 706 N.E.2d 282 (Ind. Tax Ct. 1999); Dep't of Revenue, State of Ind. v. Kimball Intern., Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax. Ct. 2010); 45 IAC 2.2-3-4; 45 IAC 2.2-5-6; 45 IAC 2.2-5-4; Sales Tax Information Bulletin 9 (July 2012); Sales Tax Information Bulletin 9 (August 2008).

Taxpayer protests the assessment of use tax.

II. Gross Retail Tax - Construction Contract.

Authority: IC § 6-8.1-5-1; 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).

Taxpayer protests the assessment of tax on a construction contract.

Taxpayer is an Indiana resident engaged in producing various agricultural products. The Indiana Department of Revenue ("Department") assessed Taxpayer use tax on certain transactions. Taxpayer disagreed with the assessment and submitted a protest to that effect. An administrative hearing was scheduled to provide Taxpayer an opportunity to explain the basis for the protest. Taxpayer's representative provided Taxpayer's basis for his protest during the hearing. This Letter of Findings results.

I. Gross Retail Tax - Agricultural Exemption.

Taxpayer owns and operates an Indiana farming operation. The Department assessed use tax on several transactions. Taxpayer protests the imposition of tax on its purchase of a hog welder and related parts and fuel, repair parts for a feed grinder, two way radio replacements for tractors, parts for a sprayer used to clear animal waste, and a construction contract. Taxpayer argues that the items at issue are used for agricultural purposes and therefore exempt from sales or use tax. In addition, Taxpayer argues that the construction contract was for labor as part of a building construction project that was contracted through a subcontractor.

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.

Taxpayer argues that use tax was improperly imposed on the purchase of hog welder and related parts and fuel, repair parts for a feed grinder, two way radio replacements in tractors, parts for a sprayer used to clear animal waste due to the items being used in an exempt agricultural manner. Use tax is imposed under IC § 6-2.5-3-2(a), which states:

Indiana's agriculture exemption is listed under IC § 6-2.5-5-2 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 state's use tax is triggered when a person exercises ownership over TPP.

In applying any tax exemption, the general rule is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Dep't of Revenue, State of Ind. v. Kimball Intern., Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988).

IC § 6-2.5-5-2, like all tax exemption provisions, is strictly construed against exemption from the tax. Mynsberge v. Dep't of State Revenue, 716 N.E.2d 629, 636 (Ind. Tax Ct. 1999); Tri-States Double Cola Bottling Co. v. Dep't of State Revenue, 706 N.E.2d 282, 283 (Ind. Tax Ct. 1999).

"In general, all purchases of tangible personal property by persons engaged in the direct production, extraction, harvesting, or processing of agricultural commodities are taxable." 45 IAC 2.2-5-6(a). However, there is an exemption for "agricultural machinery, tools, and equipment to be directly used by the purchaser in the direct production, extraction, harvesting, or processing or [sic.] agricultural commodities." 45 IAC 2.2-5-6(b); IC § 6-2.5-5-2(a).

A taxpayer must establish that the property was acquired for "direct use in the direct production, extraction, harvesting, or processing of agricultural commodities." IC § 6-2.5-5-2(a). Property which is directly used in the direct production of agricultural commodities "is an essential and integral part of an integrated process." 45 IAC 2.2-5-6(g). Therefore, a taxpayer must establish that the property for which this exemption is claimed is "integral and essential to its production process." Graham Creek Farms, 819 N.E.2d at 156. Whether property is essential and integral to an integrated process is determined by "identifying the points where production begins and where it ends." Id. 45 IAC 2.2-5-6(d) identifies additional purchases which are exempt:

The Department has issued Sales Tax Information Bulletin 9 (July 2012), 20120725 Ind. Reg. 045120427NRA, addressing the exemption on which Taxpayer depends. The Bulletin provides in part as follows:

The Bulletin also addresses agricultural functions which do meet the requirements set out in IC § 6-2.5-5-2.

• General farm maintenance;

• Farm management and administration;

• Selling and marketing;

• Exhibition of farm products;

• Safety and fire prevention;

• Illumination;

• Heating and cooling equipment for general temperature control;

• Transportation of animals, poultry, feed, fertilizer, etc. to the farm for use in farming; and

• Transportation of animals, poultry, and other farm produce from the farm to market.

Taxpayer argues that use tax was improperly imposed on the purchase of the hog welder and related parts and fuel, repair parts for a feed grinder, two way radio replacements in tractors, parts for a sprayer used to clear animal waste due to the items being used in an exempt agricultural manner. Taxpayer explains the hog welder, related parts and fuel were used to repair the metal pins the hogs stay in while they are growing. However, pursuant to 45 IAC 2.2-5-4 fencing and gating were a taxable event for farmer in Indiana. Thus, the Department cannot agree that the welder, fuel and parts is exempt under IC § 6-2.5-5-2.

Next, Taxpayer protests that repair parts for a feed grinder are exempt under IC § 6-2.5-5-2 because it is essential to its agricultural production. According to 45 IAC 2.2-5-6(d), "Sales of agricultural machinery, tools, and equipment used by the purchaser directly in feeding exempt animals, poultry, etc., are exempt from tax. This exemption does not extend to machinery, equipment, and tools used for the handling, movement, transportation, or storage of feed prior to the actual feeding process." The feed grinder is used in grinding feed to add to the hogs' food. Thus, the feed grinder and parts are exempt as long as tangible personal property is not part of storage, handling, or transporting the feed to the hogs.

Taxpayer also protested use tax assessed on the purchase of a two way radio used in its tractors. While communication is important it is not directly used in the direct production, extraction, harvesting, or processing of agricultural commodities as required by IC § 6-2.5-5-2. Thus, the Taxpayer's protest regarding the radio is denied because it is not directly used in direct agriculture production.

Finally, Taxpayer protests the imposition of tax on the purchase of repair parts for its sprayer used to remove animal waste. IC § 6-2.5-5-2(b)(3) specifically exempts machines and equipment used to remove animal waste as exempt for purposes of sales tax. Thus, repair parts used for the sprayer to remove animal waste are exempt from use tax. Taxpayer's protest regarding the repair parts or the sprayer is sustained.

The Department is unable to agree that Taxpayer has met the burden under IC § 6-8.1-5-1(c) of establishing that the assessment is wrong for the hog welder, parts, and fuel and the two way radio for the tractors. Taxpayer did meet its burden under IC § 6-8.1-5-1(c) for the feed grinder and replacement/repair parts for its sprayer.

Taxpayer's protest is denied in part and sustained in part.

II. Gross Retail Tax - Construction Contract.

As stated above, "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). Taxpayer also protests use tax assessed on a contraction contract. Taxpayer explained that it engaged contractor to build a building for Taxpayer. The contractor subcontracted out labor to a subcontractor. Taxpayer therefore argues that the contract was for labor and therefore not subject to use tax. Taxpayer was only able to provide the invoice of the contractor for an amount of labor different than the amount Taxpayer is protesting. Taxpayer also provided a statement from subcontractor signed in 2016 stating that the transaction at issue was for labor. Unfortunately, this documentation is not enough to meet Taxpayer's burden under IC § 6-8.1-5-1(c).

As explained during the hearing and the Department's letter setting the hearing, the protest process is a taxpayer's opportunity to clearly explain their protest and to provide relevant and cogent supporting documentation. Taxpayer has not presented a sufficiently developed argument for the Department to address. See Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 485 n.9, (Ind. Tax Ct. 2012) (stating in a footnote parenthetical "that poorly developed and non-cogent arguments are subject to waiver" by the Indiana Tax Court) (citing Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax. Ct. 2010)). Taxpayer has not met the burden to proving the proposed assessment wrong as required by IC § 6-8.1-5-1(c).

Taxpayer's protest is denied.

As stated in Issue I Taxpayer's protest is denied in part and sustained in part. As stated in Issue II Taxpayer's protest is denied.