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 Indiana Department of Revenue'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 This document is effective as of its date of publication and remains in effect until the date it is superseded by the publication of another document in the Indiana Register.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.

Indiana supplier was entitled to a reduction of additional tax assessments for certain fixed assets. Indiana supplier was also entitled to an adjustment of additional taxable amounts for nonreturnable packaging materials and a waiver of penalty. Indiana supplier was entitled to a partial adjustment of additional taxable amounts for service contract transactions, and interest on the remaining assessment cannot be waived.

I. Use Tax - Imposition - Fixed Assets.

Authority: IC § 6-2.5-3-2; IC § 6-8.1-5-1; IC § 6-8.1-5-4; Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463,466 (Ind. 2012); Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014); 45 IAC 2.2-3-4.

Taxpayer requests abatement of use tax assessed on five assets.

II. Use Tax - Nonreturnable Packing Materials.

Authority: IC § 6-2.5-5-9; IC § 6-2.5-5-9 (effective July 1, 2012); 45 IAC 2.2-5-16.

Taxpayer argues that certain of its purchases of wrapping materials should be exempt from use tax.

III. Use Tax - Service Contract.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-3-1; Rhoade v. Ind. Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, (Ind. Tax Ct. 2012); 45 IAC 2.2-4-27; 45 IAC 2.2-4-2; Sales Tax Information Bulletin 2 (March 2013); Sales Tax Information Bulletin 2 (December 2006).

Taxpayer argues that it is not liable for tax on charges it incurred under an optional maintenance agreement.

IV. Tax Administration - Negligence Penalty.

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

Taxpayer requests that the Department abate the negligence penalty.

V. Tax Administration–Interest.

Authority: IC § 6-8.1-10-1.

Taxpayer protests the imposition of interest on the portion of its tax liability at issue.

Taxpayer is a "leading supplier of maintenance, repair, and operations products to the managers and owners of multifamily, hospitality and commercial properties as well as healthcare, and government facilities." Taxpayer was subject to an Indiana sales and use tax audit for tax years 2011 through 2014. The audit determined that Taxpayer purchased and used certain tangible personal property but did not pay sales tax at the time of the purchase of the property. As a result, Taxpayer was assessed additional use tax and negligence penalty.

Taxpayer agreed to and paid a portion of the assessment. Taxpayer protested the remaining assessment as well as the negligence penalty and interest. An administrative hearing was held. This Letter of Findings results. Further facts will be supplied as required.

I. Use Tax - Imposition - Fixed Assets.

Pursuant to the audit, the Indiana Department of Revenue ("Department") assessed use tax on purchases of fixed assets, including the purchase of five vehicles. Taxpayer notes that, during the audit, documentation showing that tax was collected when the vehicles were purchased was not available. This documentation was made available as a part of Taxpayer's protest.

As a threshold issue, all tax assessments are prima facie evidence that the Department's claim for the tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463,466 (Ind. 2012). The retail merchant "must keep books and records so that the department can determine the amount, if any, of the [retail merchant's] liability for that tax by reviewing those books and records." IC § 6-8.1-5-4(a). Thus, a taxpayer is required to provide documentation explaining and supporting its challenge that the Department's assessment 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.'" 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.

"An excise tax, known as the use tax, is imposed 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. "Tangible personal property, purchased in Indiana, or elsewhere in a retail transaction, and stored, used or otherwise consumed in Indiana is subject to Indiana use tax for such property, unless the Indiana state gross retail tax has been collected at the point of purchase." 45 IAC 2.2-3-4.

The audit assessed use tax on purchases of trucks made during the audit period for which no sales tax was paid. Taxpayer provided copies of each truck's Indiana Application for Certificate of Title ("Title") in which the amount of sales tax charged by Indiana is listed. Taxpayer also provided copies of the invoices for the purchase of each truck. Indiana sales tax charged per the invoices matched the sales tax listed on the Title for each truck. This is sufficient to show that Indiana sales tax was charged at the time each truck was purchased. Transactions involving these vehicles should be removed from the audit assessment.

The Department's supplemental audit will remove these transactions from the assessment.

Taxpayer's protest is sustained.

II. Use Tax - Nonreturnable Packing Materials.

In reviewing Taxpayer's expenses, the audit noted that Taxpayer "maintains that certain of its purchases of [c]orner boards[,] [t]ape[, and] [p]oly bags qualify for the 'nonreturnable packages exemption' found in IC § 6-2.5-5-9(d)." The audit determined that these items did not qualify for the exemption as they do not "act to enclose or contain a product." As such, use tax was assessed on these purchases.

Taxpayer disagrees with this assessment noting that the items it fabricates and resells such as "aluminum window screen frames, doors, [and] cabinets, have "irregular and custom sizing." In order to properly package these items, "corner board, stretch film, tape, and strapping are used to enclose the product." Taxpayer further explains that it "also encloses smaller items, such as springs and anchors, in poly bags based on a customer's specified order quantity. These poly bags are then placed in larger enclosures (boxes or envelopes) for shipment . . . ." As such, Taxpayer believes the "corner board, strapping, stretch film, tape, and poly bags are used in a nontaxable manner in accordance with Ind. Admin. Code 2.2-5-16(a)."

IC § 6-2.5-5-9, effective July 1, 2012, states:

Prior to July 1, 2012, IC § 6-2.5-5-9 similarly read:

Under 45 IAC 2.2-5-16(a), "[t]he state gross retail tax shall not apply to sales of nonreturnable wrapping materials and empty containers to be used by the purchaser as enclosures or containers for selling contents to be added . . . ." Further, "[t]o qualify for this exemption, nonreturnable wrapping materials and empty containers must be used by the purchaser in the following way: (A) [t]he purchaser must add contents to the containers purchased; and (B) [t]he purchaser must sell the contents added." 45 IAC 2.2-5-16(d)(1). "Returnable containers" are those which are "customarily returned by the buyer of the contents for reuse as containers; "nonreturnable containers" are "all containers which are not returnable containers." 45 IAC 2.2-5-16(e).

Thus, sales of nonreturnable containers or wrapping materials and empty containers are exempt if the purchaser uses the items as nonreturnable packages to which it adds contents which the purchaser sells. The audit makes the distinction that wrapping materials or containers qualify for the exemption only if they "act to enclose or contain a product." The audit explained its determination stating that:

In support of its protest, Taxpayer provided several pictures to demonstrate the use of the corner board, strapping, stretch film, tape, and poly bags. The pictures clearly show that the corner board, strapping, stretch film and tape are used to contain and package the items Taxpayer sells to its customers. These materials form a container that is customized to contain the product Taxpayer adds and cannot be reused. Taxpayer also uses small plastic "poly bags" to contain the springs and anchors that are a part of its products. The poly bags are placed in larger boxes or envelopes along with instructions and presumably other items packaged for shipping. The poly bags themselves contain the product and are not returned to the Taxpayer.

Taxpayer has established that the corner board, strapping, stretch film, tape, and poly bags in question were used as nonreturnable enclosures for selling tangible personal property. Taxpayer's use of these materials qualifies for the exemption under IC § 6-2.5-5-9.

The file will be sent back to audit so that these purchases will be removed from the assessment.

Taxpayer's protest is sustained.

III. Use Tax - Service Contract.

As a part of its review of expenses, the audit noted that Taxpayer rents trucks from a third-party vendor ("Vendor"). The audit determined that the rental agreements were subject to Indiana sales tax. Taxpayer disagrees with this assessment and argues instead that the agreement is not a lease agreement, rather, it is "an optional service and maintenance agreement."

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). The person who sells the property in a retail transaction (a "retail merchant") "collect[s] the tax as agent for the state." 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. Ind. Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002).

The audit noted that Taxpayer pays a monthly fee to Vendor based on mileage driven. Vendor also charges Taxpayer for repairs to the trucks. The audit found these transactions to be subject to tax under 45 IAC 2.2-4-27, which states:

The audit's determination relies on the assumption that the arrangement between Taxpayer and Vendor is that of a lease or rental. At the hearing, Taxpayer provided a copy of the Vehicle Maintenance Agreement ("Agreement") at issue, noting that "this agreement does not include the rental/lease of vehicles. All of the vehicles under the . . . optional service and maintenance agreement are owned and operated by [Taxpayer]." This statement is verified by the first line in the Agreement which reads, "[i]t is expressly understood and agreed that this is a contract of maintenance ONLY, and that [Vendor] has not and does not by these presents acquire any title to vehicles described in Schedule 'A' to this Agreement." Thus, it is apparent that the trucks in question are owned by Taxpayer and are not rented or leased from Vendor. As such, 45 IAC 2.2-4-27 does not apply to the Agreement.

Upon review of the Agreement, it is apparent that this is an arrangement for certain services, maintenance, and upkeep of vehicles which Taxpayer owns and Vendor maintains. At times, these services include the furnishing or use of tangible personal property. Taxpayer explains and a review of the Agreement confirms, that Vendor charges Taxpayer three different charges under the Agreement. Fixed charges "represent a fixed amount billed for each vehicle included in the [Agreement] and relate to general administration services provided by Vendor." Mileage charges "account for estimated preventive maintenance under the [Agreement]." "[Vendor] agrees to perform periodic maintenance, as well as, furnish operating parts and supplies necessary for the proper and efficient operation of the vehicle." Finally, Maintenance charges cover "unscheduled maintenance or repairs that do not fall under the [Agreement] (i.e. car accident repairs, flat tires, broken windows)."

The audit suggests, that "even if the charges are for maintenance, in accordance with the contract, since materials are guaranteed to be supplied, the entire charge would also be subject to sales tax." This statement is supported by Sales Tax Information Bulletin 2, which states:

The Agreement involves a third-party (Vendor) who provides services to Taxpayer's vehicles. At times, the services include the furnishing of certain tangible personal property. There are only seven transactions at issue here; three Fixed charges, three Mileage charges and one Maintenance charge. Taxpayer provided copies of Vendor statements which show these charges. Fixed and Mileage charges are listed by Vendor location and truck. A total charge is shown, but there is no breakdown between services performed and tangible personal property used in the total. The Maintenance charge in question is simply listed as "Miscellaneous Maintenance Activity." There is a reference to an invoice and a tire, but no breakdown between the cost of the tire and the cost of labor. Taxpayer was able to provide a copy of the purchase order detail which showed the breakdown between the cost of the tire and labor. Of the total $384.70 charge, $219.05 or 57 percent was for the tire. Thus, according to the guidance provided in Sales Tax Information Bulletin 2, the amount subject to tax in the audit should be $219.05, not $384.70. The audit assessment will be adjusted to reflect just the cost of the tire.

As Fixed charges only represent charges for services, Taxpayer argues that these should not be taxable. This argument comports with the guidance provided in 45 IAC 2.2-4-2 which provides that "services in respect to property not owned by the person rendering such services are not 'transactions of a retail merchant constituting selling at retail', and are not subject to gross retail tax."

Regarding Mileage charges, Taxpayer argues that Vendor was already audited by the Department for these charges and Vendor "affirmed that they in fact pay sales or use tax on the parts or property" included in these charges. The same is true for the single Maintenance charge. Taxpayer argues that because these transactions were included in Vendor's audit, they should be excluded from Taxpayer's audit as to avoid double taxation.

The Department cannot agree. Taxpayer has not provided proof to support its claim. Taxpayers are required to provide documentation in support of their challenge that the Department's assessment is wrong. Without supporting documentation, Taxpayer's argument is poorly developed and non-cogent and is therefore subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). Further, the State is not barred from auditing the same transaction in separate taxpayer audits and the Department does not have a mechanism to determine if a given transaction has already been reviewed in another audit.

In summary, Taxpayer is not liable for tax on those charges which are Fixed charges as described above. Taxpayer is liable for tax assessed on the Mileage charges and the Maintenance charge, as adjusted to reflect only the purchase of the tire. If tax has already been collected and remitted to the Department by Vendor, it is up to the two parties to reconcile this between themselves.

Taxpayer is sustained in part and denied in part.

IV. Tax Administration - Negligence Penalty.

Pursuant to the audit and the Department's policy, the Department imposed a ten percent negligence penalty for the tax years at issue. Taxpayer argues that it should not be subject to the penalty and requests an abatement.

Pursuant to IC § 6-8.1-10-2.1(a), the Department may assess a ten (10) percent negligence penalty if the taxpayer:

The Department may waive a negligence penalty as provided in 45 IAC 15-11-2(c), as follows:

As the result of the audit, the Department assessed a ten percent negligence penalty in addition to the tax assessment. Taxpayer requested that the penalty be abated because "[d]uring the audit period, [Taxpayer] underwent many restructuring changes. Due to the changes, employee turnover was extensive. Despite the turnover and many changes beyond our control, [Taxpayer] remitted all taxes collected and filed the returns in a timely manner."

The audit noted that penalty was assessed due to the large percentage of under-reported use tax found in the audit. However, Taxpayer has been sustained on many of these issues. Specifically, Taxpayer's liability as it relates to fixed assets and nonreturnable containers has been abated as a whole while the assessments relating to the service contract has been abated in part. Thus, the majority of the penalty will be eliminated with these adjustments.

The remaining penalty relates to service contracts, specifically mileage charges. Because Taxpayer cannot show which portion of these charges relate to services and which part relates to tangible personal property, the penalty will not be waived. This should serve as incentive for Taxpayer to work with Vendor to obtain invoices that detail these charges.

Taxpayer's protest is denied.

V. Tax Administration–Interest.

Taxpayer requests a reduction in interest corresponding to the assessments at issue. Indiana imposes interest on overdue tax pursuant to IC § 6-8.1-10-1(a), which states:

In the case of the interest assessed, the Department has no discretion to abate or adjust the amount of interested owed. IC § 6-8.1-10-1(e). Where Taxpayer has been sustained, a reduction in the assessment will result in a reduction of interest, otherwise, Taxpayer's request is denied.

Taxpayer's protest of interest is denied.

Taxpayer is sustained in relation to its fixed asset, nonreturnable containers and penalty protests. Taxpayer is also sustained in part as it relates to its service contract protest. Taxpayer's interest protest is denied.