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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Transportation Provider failed to meet its burden of demonstrating that it was a segregated, distinct, and independent legal entity from that of the company on whose behalf it delivered the company's products, that it transported the company's property pursuant to an arm's-length business agreement, that it was compensated for providing the company transportation services, and that it was entitled to claim the public transportation sales tax exemption.

I. Gross Retail and Use Tax - Public Transportation Exemption.

Authority: IC § 6-2.5-1-2; IC § 6-2.5-2-1(a); IC § 6-2.5-2-1(b); IC § 6-2.5-3-1(a); IC § 6-2.5-3-2(a); IC § 6-2.5-3-4; IC § 6-2.5-4-1(b), (c); IC §§ 6-2.5-5 et seq.; IC § 6-2.5-5-27; IC § 6-8.1-5-1(c); Dept. 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); Dep't of Treasury of Ind. v. Dietzen's Estate, 21 N.E.2d 137 (Ind. 1939); Conklin v. Town of Cambridge City, 58 Ind. 130 (1877); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); Universal Group Limited v. Indiana Department of Revenue, 642 N.E.2d 553 (Ind. Tax Ct. 1994); USAir, Inc. v. Indiana Dep't of State Revenue, 623 N.E.2d 466 (Ind. Tax Ct. 1993); Indiana Dep't. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); 45 IAC 2.2-5-61; 45 IAC 2.2-5-61(j); Sales Tax Information Bulletin 12 (July 2015); Sales Tax Information Bulletin 12 (September 2014); Sales Tax Information Bulletin 12 (July 2010).

Taxpayer argues that it is entitled to claim the public transportation exemption and that the Department's audit decision to the contrary is erroneous.

Taxpayer is an Indiana company which provides transportation services. Taxpayer distributes Bottling Operation's products. Taxpayer delivers Bottling Operation's products to retailers, distribution centers, and warehouses. Taxpayer owns its own vehicles but has no employees. The employees - drivers and management personnel - work for Bottling Operation. Taxpayer "leases" the employees from Bottling Operation.

The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's business records and tax returns. The audit resulted in an assessment of additional sales/use tax because the Department concluded that Taxpayer's property and vehicles were not "predominately . . . used in providing public transportation." Taxpayer disagreed with the audit results and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer's representatives explained the basis for the protest. This Letter of Findings results.

I. Gross Retail Tax - Public Transportation Exemption.

The issue is whether Taxpayer has provided sufficient information to establish that it was a separate legal entity distinct from that of Bottling Operation, that it was in the business of providing "public transportation," that it was engaged in transporting products it did not own, that it was compensated by Bottling Operation for providing those services, and that the Department's assessment of additional sales/use tax was incorrect.

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 an 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, the interpretation and application of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

A. Audit Results.

In determining whether Taxpayer was entitled to the public transportation exemption, the Department's audit cited to 45 IAC 2.2-5-61 and Sales Tax Information Bulletin 12 (July 2015), 20080528 Ind. Reg. 045080397NRA. See also Sales Tax Information Bulletin 12 (September 2014), 20150128 Ind. Reg. 045150028NRA; Sales Tax Information Bulletin 12 (July 2010), 20100623 Ind. Reg. 045100390NRA. Under those authorities, the audit noted that in order to qualify for the sought-after exemption, a taxpayer must meet certain criteria:

• Public transportation is defined as the movement of goods, persons, or property for consideration by a common or contract carrier;

• The carrier must operate under authority issued by a federal or state agency;

• The carrier must receive consideration (payment) for transporting people or property;

• The property being transported must be owned by someone other than the carrier;

• The equipment or property purchased by carrier must be predominately used in providing public transportation;

• "Predominately used" means that the equipment or property is used more than 50 percent in providing public transportation.

The Department's audit report cited to the "critical" and "non-critical" factors set out in Sales Tax Information Bulletin 12. This Bulletin "includes a listing of factors the Department weighs in determining whether a transportation company is engaged in public transportation." As explained in the audit report:

The audit determined that Taxpayer failed to meet two of the "critical" requirements. The audit found that Taxpayer failed to establish that all transactions between itself and Bottling Operation be "evidenced by actual invoicing and payments." As explained in the audit report:

The audit report notes Taxpayer makes "journal entries" in its books to account for "labor expense and corresponding credits to [its] income . . . in an effort to show the full cost and income [for] providing transportation services to [Bottling Operation] . . . ." However the audit report points out that "no money is being exchanged regarding [Taxpayer's] use of lease employees."

Because Taxpayer and Bottling Operation's relationship was not "evidenced by actual invoicing and payments," the audit found that Bottling Operation was "not entitled to any exemption regarding equipment used to deliver their products, as no bottling company would have any exemption available for equipment used to deliver their own product."

In addition, the audit found that Taxpayer's relationship with Bottling Operation lacked "detailed records regarding the [Bottling Operation's] administrative and management personnel that are performing duties for both entities."

There is no dispute that Taxpayer has no employees of its own. Instead, Taxpayer "leases" Bottling Operation's employees to operate Taxpayer vehicles. In addition, Bottling Operation employees perform Taxpayer's routine administrative and management duties.

The audit report noted that Taxpayer has "no personnel to handle business functions and has no independent management [personnel] . . . ." The report states that "[j]ob functions that must be performed by this personnel would include funding the bank account, paying bills, decisions on equipment purchases, dispatching, handling customer complaints, collections, billing, filing required returns, and responsibility for the transportation operations meeting required federal and state regulations."

Because Taxpayer failed to meet two of the Information Bulletin's "critical" requirements, the audit concluded that Taxpayer was not entitled to claim the public transportation sales tax exemption.

The Department's audit concluded that "[t]he [T]axpayer is not engaged in business as an independent entity providing public transportation services when providing the vehicles to haul goods that are owed by [Bottling Operation]." As a result of that conclusion, the Department assessed sales tax on "all untaxed purchases for the audit years 2013, 2014, and 2015 . . ." including the purchases of "semi-trailers, semi-trucks, and a pickup truck . . . ."

B. Taxpayer's Response.

Taxpayer states that the Department's audit "erred in disallowing the sales tax exemption . . . ." Taxpayer argues that it "met all the requirements, including those considered to be 'critical requirements', listed in [Sales Tax Information Bulletin 12] for purposes of determining whether a transportation company qualifies for the public transportation exemption."

Taxpayer addressed the audit's contention that "there is certainly no consideration being exchanged between the two entities for [the] actual payroll cost for the drivers."

Taxpayer explains that its invoices to Bottling Operation includes the routine expenses Taxpayer incurred such as fuel and repair costs along with the contractual 10 percent markup. Taxpayer provided a sample calculation of charges made to Bottling Operation. The calculation purportedly includes "wages (including fringe benefits), repairs, diesel, tires, depreciation, licenses, insurance . . . [and] the cost of diesel [fuel] . . . ." In addition, the calculation accounts for "revenue for backhauling services that was initially received by [Bottling Operation] but are truly earnings of [Taxpayer] which performed the public transportation services."

Taxpayer also addressed the audit's contention that the transactions between itself and Bottling Operation failed to account for the management and administrative functions performed by Bottling Operation's personnel on behalf of Taxpayer. Taxpayer contends that Bottling Operation is not providing management or administrative services on behalf of Taxpayer. To that end, Taxpayer points to its "Operating Agreement" which provides:

In addition, Taxpayer explains that any "benefit it receives for any administrative support services provided by [Bottling Operation] is accounted for in the [ten-percent] markup percentage applied when computing the charge due to [Bottling Operation] for the public transportation services [Taxpayer] provides."

Taxpayer concludes as follows:

C. Hearing Analysis.

As noted above, the assessment constitutes evidence that the Department's claim for the unpaid sales/use tax is valid, and that Taxpayer here bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c)

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. Indiana Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002).

By complementing the sales tax, the use tax ensures that non-exempt retail transactions (particularly out-of-state retail transactions) that escape sales tax liability are nevertheless taxed. Id.; USAir, Inc. v. Indiana Dep't of State Revenue, 623 N.E.2d 466, 468-69 (Ind. Tax Ct. 1993). The use tax ensures that, after such goods arrive in Indiana, the retail purchasers of the goods bear their fair share of the tax burden. To trigger imposition of Indiana's use tax, tangible personal property must (as a threshold matter) be acquired in a retail transaction. Id. A taxable retail transaction occurs when (1) a party acquires tangible personal property as part of its ordinary business for the purpose of reselling the property; (2) that property is then exchanged between parties for consideration; and (3) the property is used in Indiana. See IC § 6-2.5-1-2; IC § 6-2.5-4-1(b), (c); IC § 6-2.5-3-2(a).

In general, all purchases of tangible personal property are taxable unless specifically exempt by statute. 45 IAC 2.2-5-61(j). An exemption from use tax is granted for transactions where the sales tax was paid at the time of purchase pursuant to IC § 6-2.5-3-4. There are also additional exemptions from sales tax and use tax under IC §§ 6-2.5-5 et seq. A statute which provides a tax exemption, however, is strictly construed against the taxpayer. Indiana Dep't. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." Id. at 101. A statute which provides a tax exemption, however, is strictly construed against the taxpayer. Indiana Dep't of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). "[W]here such an exemption is claimed, the party claiming the same must show a case, by sufficient evidence, which is clearly within the exact letter of the law." Id. at 101 (citing Conklin v. Town of Cambridge City, 58 Ind. 130, 133 (1877)).

IC § 6-2.5-5-27 (in effect for tax years 2013) states:

In weighing Taxpayer's argument and the information provided along with Taxpayer's protest, the Department bears in mind that the public transportation exemption under IC § 6-2.5-5-27 - like all other exemption statutes - is "strictly construed" while assessment and collection statutes are liberally construed in favor of state's taxing authority. "In construing tax statutes a liberal rule of interpretation must be indulged in order to aid the taxing power of the state." Dep't of Treasury of Ind. v. Dietzen's Estate, 532, 21 N.E.2d 137, 139 (1939). The Department acknowledges - as does the audit - that Taxpayer made "an effort to show the full cost and income [for] providing transportation services to [Bottling Operation] . . . ." In effect, the Taxpayer and Bottling Operation resolved driver and mechanic costs by "truing up" their accounts and - if necessary - by Bottling Operation writing a check to Taxpayer. However, that amount simply covers the direct costs incurred by Taxpayer. As pointed out in the audit report, "[Taxpayer] bills and receives payment only for the direct costs they incur for fuel, tires, repairs, licenses, insurance, and depreciation . . . ." Taxpayer has failed to refute the audit's conclusion that "there is . . . no consideration being exchanged between the two entities for actual payroll cost of the drivers."

The relationship between Bottling Operation and Taxpayer becomes even more ambiguous when accounting for the administrative and management functions performed by Bottling Operation on behalf of Taxpayer. In this respect, Taxpayer has no management or administrative personnel of its own but relies entirely on Bottling Operation's employees to perform those functions. Taxpayer addresses this in two ways; Taxpayer states its own operating agreement calls for "day-to-day decisions concerning [its] business" affair to be performed by its "managing member." In this case, the managing member is Taxpayer's president. (Publicly available information indicates that Taxpayer's president is also Bottling Operation's president.) Taxpayer also states any remaining administrative functions performed by Bottling Operation personnel are accounted for in the 10 percent markup of the amount Taxpayer assesses each month for its driver and mechanic costs. In other words, Taxpayer assumes that day-to-day administrative costs go hand-in-glove with those purported labor costs. However, as noted in the audit report, Taxpayer admits that it has no "detailed records" accounting for the specific costs or labor expenses related to the administrative and supervisory functions performed on behalf of Taxpayer. In other words, all of Taxpayer's supervisory, management, personnel, billing, purchasing, dispatching, and compliance functions are subsumed into Bottling Operation's operation and are accounted for by means of a ten-percent markup not tied directly - or even indirectly - to those administrative and management costs.

D. Conclusion.

The arrangement between Bottling Operation and Taxpayer is not indicative of an arms-length business relationship between a public transportation company and a bottling company. The Department concludes that Taxpayer has failed to meet the criteria necessary to establish that it is a fully independent company providing public transportation services when it transports and delivers Bottling Operation's products. In short, Taxpayer has failed to demonstrate that it transports property belonging to others; Taxpayer does not qualify for the public transportation exemption pursuant to IC § 6-2.5-5-27.

Taxpayer's protest is respectfully denied.