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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Business did not produce sufficient documentation showing that its graphic design service was separate from other taxable services it listed on one invoice. Therefore, the entire transaction on the invoice became subject to sales tax. Additionally, Business did not prove that its equipment lease transaction was tax exempt. Therefore, the equipment is subject to use tax.

I. Sales Tax–Graphic Design Service.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-4-1; IC § 6-2.5-1-27; IC § 6-2.5-1-1; 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); Galligan v. Indiana Dept. of State Revenue, 825 N.E.2d 467 (Ind. Tax 2005); 45 IAC 2.2-4-1.

Taxpayer protests the imposition of sales tax.

II. Use Tax–Equipment Lease.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-4-10; IC § 6-2.5-5-3; 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.

Taxpayer protests the imposition of use tax.

Taxpayer is a printing, graphics, and design shop located in Indiana. As a result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer provided graphic design services to its customers in 2013, 2014, and 2015 without collecting or remitting sales tax to the Department. The Department further found that Taxpayer's equipment lease was subject to use tax. The Department, therefore, issued proposed assessments for sales and use tax, penalty, and interest for those years specific to those items. Taxpayer timely protested the assessment of sales tax on its graphic design service and use tax on its equipment lease. An administrative hearing was held and this Letter of Findings results. Further facts will be supplied as required.

I. Sales Tax–Graphic Design Service.

Taxpayer protests the assessment of sales tax on transactions in which it provided graphic design service to its customer which it states was not connected to producing tangible personal property ("TPP"). Taxpayer produces and sells signage, wraps, and other TPP. In addition, Taxpayer provides graphic design service connected to its printing service. With regard to some transactions which Taxpayer had with its customers, the Department considered charges for graphic design to be part of a single transaction which included both TPP and services, when Taxpayer listed both items on its customer's invoice. Taxpayer disagrees with the Department's characterization and argues that the separate graphic design service is not subject to taxation.

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:

Next, IC § 6-2.5-4-1 provides the following:

In addition, IC § 6-2.5-1-27 provides that "tangible personal property" means "personal property that (1) can be seen, weighed, measured, felt, or touched; or (2) is in any other manner perceptible to the senses. The term includes electricity, water, gas, steam, and prewritten computer software."

Thus, in the audit report, the Department referred to 45 IAC 2.2-4-1, which provides:

The court in Galligan v. Indiana Dept. of State Revenue, 825 N.E.2d 467, 481 (Ind. Tax 2005), reiterated the provision of services as not taxable. However, that court also emphasized, in relevant part that:

That case also provided that invoices reflecting the combined costs of the material, the sales tax on the materials, and the cost of services indicate a unitary transaction. Id. at 481.

IC § 6-2.5-1-1 defines a unitary transaction, in relevant part, as follows:

Here, Taxpayer contends that some of its invoices list graphic design and printing, but that the graphic design services on that invoice are prepared for their customer's next print job rather than the printing services listed on the invoice. Upon delivery, this constitutes "services performed in respect to or labor charges for work done with respect to such property prior to transfer," as defined by 45 IAC 2.2-4-1(b)(2).

Next, Taxpayer argues that the graphic design service listed on its invoice may not be connected with other taxable products listed on the same invoice. Relevant to this case is Taxpayer's bookkeeping methodology. Given that Taxpayer mixes both transactions, distinguishing the taxable sale of property from the non-taxable sale of services is often difficult, as explained by the court in Galligan. Since Taxpayer listed several charges on its invoices, the Department was unable to discern separate transactions. Therefore, Taxpayer has not met the burden of proving the proposed assessment wrong, as required by IC § 6-8.1-5-1(c).

Taxpayer's protest is denied.

II. Use Tax–Equipment Lease.

Taxpayer protests the imposition of use tax on its equipment lease from an Indiana-based lessor. Specifically, Taxpayer states that it purchased an envelope-stuffing machine which it used to fulfill its customers' mailing orders. The Department determined that the equipment leased did not produce tangible personal property ("TPP"), was subject to use tax, and therefore issued proposed assessments for years 2013, 2014, and 2015. Taxpayer disagrees with the Department's determination.

As provided above in Issue I and 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:

Use tax is imposed by IC § 6-2.5-3-2(a), which states:

In the audit report, the Department referred to 45 IAC 2.2-3-4, which provides:

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.

Next, IC § 6-2.5-5-3(b) states:

Also, IC § 6-2.5-4-10 provides:

Therefore, renting or leasing TPP is subject to sales tax and use tax in the same manner as the sale of TPP. It is therefore incumbent on a person claiming an exemption to establish that the rental is indeed eligible for the exemption.

Here, Taxpayer used the equipment to provide a service to its customers. The equipment counts Taxpayer's customers' correspondence in envelopes, seals the envelopes, and affixes postage to the envelopes. No new TPP is created. Since the equipment was used in conjunction with service and not the actual production process, the lease transaction did not qualify for an exemption, pursuant to IC § 6-2.5-5-3(b). Therefore, Taxpayer's equipment lease is subject to use tax, pursuant to 45 IAC 2.2-3-4. Taxpayer has not met the burden of proving the proposed assessment wrong, as required by IC § 6-8.1-5-1(c).

Taxpayer's protest is denied.

Taxpayer is denied in Issue I regarding the imposition of sales tax on its graphics charges which were part of unitary transactions. Taxpayer is denied in Issue II regarding the imposition of use tax on its equipment lease for non-exempt equipment.