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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Business was able to produce documentation and explanation showing a higher exemption rate for utility usage than originally determined. Not all areas of protest were sustained. Therefore, the exemption rate will be recalculated. Waiver of penalties was not warranted.

I. Use Tax–Imposition.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-5-5.5; IC § 6-2.5-4-5; 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 2.2-3-4; 45 IAC 2.2-4-13.

Taxpayer protests the imposition of use tax on utilities.

II. Tax Administration–Penalties.

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

Taxpayer protests the imposition of penalties.

Taxpayer owns and operates a group of seven restaurants in Indiana. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer did not pay sales tax on all of its taxable utility usage for the tax years 2011, 2012, and 2013. The Department therefore issued proposed assessments for use tax, penalty, and interest for those years. Taxpayer protested the imposition of use tax and penalty. An administrative hearing was scheduled but neither Taxpayer nor its representatives attended the hearing. Per Department policy, the protest was deemed withdrawn. Subsequently, Taxpayer's representative contacted the Department to request a rehearing. The Department granted the request. A supplemental hearing was held and this Supplemental Letter of Findings results. Further facts will be supplied as required.

I. Use Tax–Imposition.

Taxpayer protests the imposition of use tax on its purchase of utilities at seven restaurants it owned and operated during the tax years 2011, 2012 and 2013. Taxpayer had claimed and received refunds for sales tax paid on electricity purchases at three locations in 2013. Three other locations had predominant use exemptions in place for all three tax years at issue. The seventh restaurant did not have the electrical meter in the name of Taxpayer, therefore that restaurant was not eligible to claim the predominant use exemption for utilities. The review of the remaining six restaurants' utility usage resulted in the Department making several adjustments to Taxpayer's calculations of taxable electrical use and exempt electrical use. After these revisions, the Department concluded that four of the six restaurants in question did not qualify for the predominant use exemption allowed under IC § 6-2.5-4-5(c)(3) for electricity. Taxpayer protests that not all of the Department's adjustments were correct and that all six restaurants did qualify for the predominant use exemption.

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:

The next relevant statute is IC § 6-2.5-5-5.1, 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 unless an applicable exemption is available.

In the case of electrical usage, 45 IAC 2.2-4-13 explains:

Finally, the Department refers to IC § 6-2.5-4-5(c), which states in relevant part:

Therefore, if fifty percent or more of electricity sold from a single meter is used in an exempt manner, the taxpayer is considered to have predominantly used the electricity for exempt purposes and the electricity sold through that meter is wholly exempt from sales tax and use tax. The Department's audit determined that two of Taxpayer's restaurants did qualify for the predominant use exemption provided under IC § 6-2.5-4-5(c)(3) and so there were no proposed assessments of use tax on the purchase of electricity for those two locations. The Department determined that the remaining four restaurants did not qualify for the predominant use exemption and so recalculated the percentage of exempt use of the utilities. Of those four locations, the Department's recalculations for exempt usage rates were forty-eight percent, forty-three percent, forty-six percent, and thirty-six percent. The Department determined that the thirty-six percent exemption rate for one location was not reasonable and therefore applied an exemption rate of forty-five percent, which is an average of the other three exemption rates, to that location.

The Department based its determination that the four restaurants were not predominantly exempt on its calculations starting with the utility studies supplied by Taxpayer in its exemption application process. The Department then visited each location to verify the utility studies. During these visits, the Department noted several inconsistencies between the type, number, and nature of the equipment listed on Taxpayer's utility studies and the equipment observed on-site. Specifically, the Department noted that for each location several pieces of equipment were left off of the utility study including: televisions, menu boards, outside lighting and computer monitors, and heated sandwich holding equipment. These items are all non-production equipment and were added to the numerator of the calculation used to determine exempt and taxable utility usage. Also, items such as coolers, freezers, coffee makers, fryers, and ice machines were adjusted to reflect the accurate amount in each store. Those adjustments either increased or decreased the percentage of exempt electricity usage. Also, the Department noted that one piece of equipment was listed twice under two different names. The Department removed one of the listings.

In another adjustment, the Department noted that several items were listed as wholly used in production and were treated in Taxpayer's utility study as wholly using electricity in an exempt manner. The Department considered these items to be partially used in production and partially used in post-production warming or cooling. The Department recalculated exempt and taxable use of these items and then re-entered those amounts into the calculations of exempt and taxable utility usage. Also, the Department noted that several pieces of equipment were listed on Taxpayer's utility study as having a three-phase power supply while in fact they used a single-phase power supply. Since single-phase power equipment uses a significantly lower amount of electricity, the Department adjusted the usage numbers for these items and re-entered those amounts into the calculations of exempt and taxable utility usage. Finally, the Department determined that it was appropriate to use Department-calculated standard electrical usage figures for some pieces of equipment as determined by its experience in dealing with these types of equipment.

Taxpayer disagrees with the Department's conclusion that the four restaurants were under fifty percent exempt usage on their electricity purchases. Taxpayer made several points of protest in support of its position. The first point of protest is that Taxpayer believes that the Department under-calculated the power consumption of several pieces of equipment used in the food production process. Specifically, Taxpayer provided photographs of the serial number plates attached to these pieces of equipment. Those plates also list power requirements including volts, wattage, hertz, and/or phase type. Not all plates had all of these categories listed. Since these are manufacturer-supplied power consumption numbers, the Department will recalculate the utility studies it performed in the course of the audit and will use these numbers where applicable in the exempt usage calculations. Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong.

The second point of protest is the number of exempt items in each store. Taxpayer states that the Department under-estimated the number of exempt items used for food production in each store. In support of its position, Taxpayer provided photographs, power ratings, and activity logs for each piece of equipment which it believes should be included as exempt in the Department's calculations of exempt power usage.

Of the four pieces listed, the Department did not question three as qualifying for the production exemption, but did not physically count it. However, the fourth piece, a bun steamer, was specifically listed by the Department as non-exempt equipment used to keep previously cooked food warm. Taxpayer protests that the bun steamer was, in fact, used to heat food and provided supporting documentation including training instructions for using this piece of equipment. After review of this additional documentation, the Department agrees that all four pieces of equipment should be included as exempt in its calculations of exempt power usage. Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong.

The third point of protest is the daily power consumption for certain pieces of exempt equipment. Taxpayer protests that the Department under-estimated the time the exempt equipment was in use during any given day and therefore under-estimated the amount of electricity used in an exempt manner. In support of its position, Taxpayer provided monitoring reports which showed how often the equipment in question was used during a twenty-four hour period. When coupled with the power consumption data provided on the serial number plate attached to the equipment, the total amount of power consumed by the exempt equipment can be calculated. In light of this new information, the Department agrees that the amount of power used by these pieces of equipment will be increased as determined by Taxpayer's calculations in the protest materials. Taxpayer has met the burden imposed by IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong.

The fourth point of protest concerns the Department's calculations of electricity used by each location's roof top units. Taxpayer protests that the Department over-stated the time per day that the roof top units were cooling and also that the Department over-stated the days per year that the air conditioning units were cooling. In support of its position, Taxpayer provided explanation that the units cycled only fifty percent of the time rather than sixty percent as determined by the Department. Also, Taxpayer explained that Indiana's climate does not require year-round cooling. By Taxpayer's estimates, no more than four months of the year require air conditioning. Taxpayer therefore believes that the total amount of electricity used by the non-production roof top units is significantly less than determined by the Department. That reduced amount of non-production electrical usage, Taxpayer argues, in turn increases the percentage of exempt electrical usage and contributes to Taxpayer's belief that it is entitled to the predominant use exemption explained by 45 IAC 2.2-4-13(e).

After review of the Department's audit calculations and of Taxpayer's argument, the Department does not agree with Taxpayer's protest on this point. The audit report explained that the roof top units were used to "Circulate Heat and AC." This means that even if the Department used Taxpayer's reasoning that air conditioning is not needed year-round, heating and general ventilation would be needed for the other portions of the year and so the roof top units would be in use year-round for combined heating/ventilation/ cooling ("HVAC") purposes. Regarding Taxpayer's argument that the roof top units only cycled fifty percent of the time rather than sixty percent of the time as determined by the Department in its audit, Taxpayer has not provided documentation establishing the cycling time for the roof top units. Therefore, Taxpayer has not met the burden imposed by IC § 6-8.1-5-1(c) of proving this portion of the proposed assessments wrong.

In conclusion, Taxpayer is sustained on three points of its protest. Taxpayer is sustained on the issue of power ratings as confirmed by the manufacturer's plates on those pieces of equipment for which Taxpayer has provided photographs. Taxpayer is sustained on the issue of the number of exempt pieces of equipment as confirmed by photographs of the equipment in the restaurant. Taxpayer is sustained on the issue of the amount of power used by certain pieces of exempt production equipment as confirmed by the power usage study provided by Taxpayer during the protest process. Taxpayer is denied on the fourth point of protest regarding the amount of power used by roof top units in providing HVAC operations. Therefore, the Department will recalculate the amount of exempt and taxable electric usage at each of the four restaurants in question using Taxpayer's data regarding power ratings, the number of pieces of equipment, and the amount of power used by those pieces of equipment for which Taxpayer has supplied usage monitoring reports. The Department's initial determinations regarding the roof top units will remain unchanged. Each restaurant will have a new, recalculated exemption percentage. Any restaurant with a new exemption percentage of fifty percent or greater will receive the one hundred percent predominant use exemption listed under 45 IAC 2.2-4-13(e). Taxpayer also requested that the restaurants have their ST-109 exemption certificates reinstated as predominantly exempt. While a Letter of Findings is not the appropriate venue for restoring exemption certificates used in refund claims, Taxpayer may use the results of this Letter of Findings and the subsequent audit recalculations of the exemption percentages in its application for ST-109s for these restaurants.

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

II. Tax Administration–Penalties.

Taxpayer protests the imposition of penalties pursuant to IC § 6-8.1-10-2.1. Penalty waiver is permitted if the taxpayer shows 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 penalties. While Taxpayer has been partially sustained on the imposition of use tax as described in Issue I above, it is also true that there were other instances reported in the audit report where use tax was properly due. Therefore, waiver of penalties is not warranted under 45 IAC 15-11-2(c). However, penalties will be recalculated to reflect the reduced amount of use tax due after the Department performs a supplemental audit to implement the determinations in this Letter of Findings.

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

Taxpayer's protest under Issue I regarding the imposition of use tax on utilities is sustained to the extent and subject to the Department's recalculations of exempt and taxable usage. Taxpayer's protest of the imposition of penalties under Issue II is denied.