NOTICE: IC § 4-22-7-7 permits the publication of this document in the Indiana Register. The publication of this document provides the general public with information about the Indiana Department of Revenue's official position concerning a specific set of facts and issues. 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 Memorandum of Decision or Final Order Denying Refund.

Business was able to produce sufficient documentation and analysis to establish that repair parts for equipment used in its restaurant qualified for the manufacturing exemption. Therefore, refund of sales tax previously paid was warranted.

I. Sales Tax–Manufacturing Exemption.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-5-3; IC § 6-8.1-9-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014); Aztec Partners LLC v. Ind. Dept. of State Revenue, 35 N.E.3d 230 (Ind. Tax 2016).

Taxpayer protests the denial of a claimed refund of sales tax.

Taxpayer is an Indiana business operating several restaurants. Taxpayer filed a claim for refund of sales tax it paid during the tax years 2011, 2012, and 2013 ("Tax Years") on repair parts for soft drink machines used in its restaurants. The Indiana Department of Revenue ("Department") determined that Taxpayer had not provided sufficient documentation to verify its refund claim and therefore denied the claim. Taxpayer filed a protest of that denial. An administrative hearing was scheduled, but neither Taxpayer nor its representative appeared or contacted the Hearing Officer at that time. According to Department policy, the protest was deemed withdrawn. Taxpayer filed a written request for rehearing, which was granted. In the course of the rehearing, Taxpayer explained the basis for its claim for refund. This Supplemental Memorandum of Decision results. Further facts will be presented as required.

I. Sales Tax–Manufacturing Exemption.

Taxpayer protests the denial of a claim for refund of sales tax it paid on restaurant equipment repair parts in 2011-13. Taxpayer states that its vendor charged sales tax on repairs to soft drink machines used in its restaurants, but that this equipment was exempt from sales tax. Specifically, Taxpayer states that the equipment combined raw materials in the form of syrup and carbonated water to produce a new product in the form of a soft drink. Taxpayer therefore filed a claim for refund of the sales tax. The Department denied the claim on the basis that Taxpayer had not provided sufficient documentation to verify the claim. Subsequently, Taxpayer filed the instant protest along with additional documentation supporting its claim.

The Department notes that, "[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.

IC § 6-8.1-9-1(a) states:

In this case, Taxpayer determined that it had paid more sales tax than was due for the Tax Years and so it filed the claim for refund. The Department did not approve that refund claim because Taxpayer did not substantiate the claim.

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

Next, the Department refers to IC § 6-2.5-5-3(b), which states in part:

Finally, in Aztec Partners LLC v. Ind. Dept. of State Revenue, 35 N.E.3d 230 (Ind. Tax 2016), the Indiana Tax Court issued an opinion on manufacturing as it applies to restaurants. In that opinion, the court provides:

Therefore, if a piece of equipment is essential and integral to the restaurant's integrated production process, it will qualify for the exemption found under IC § 6-2.5-5-3(b).

In the instant case, Taxpayer has provided sufficient documentation to establish that it paid sales tax on repair parts for soft drink machines which were used in an essential and integral manner to produce a new item of tangible personal property as part of Taxpayer's integrated production process. Thus, the equipment qualifies for the exemption provided by IC § 6-2.5-5-3(b). Since this was the Department's only stated reason for denying the claim for refund, Taxpayer has established that it is entitled to the claimed refund.

Taxpayer's protest is sustained.