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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Company did not establish that the shrink wrapping of stacks of product bundles, when the product bundles had already been shrink wrapped, was part of its production process.

I. Sales & Use Tax–Post-Production.

Authority: 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); Scopelite v. Indiana Dept. of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); North Central Industries, Inc. v. Indiana Dept. of State Revenue, 790 N.E.2d 198 (Ind. Tax Ct. 2003); Wendt LLP v. Indiana Dept. of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); 45 IAC 2.2-5-10; 45 IAC 2.2-5-8.

Taxpayer protests the Department's proposed assessments.

Taxpayer manufactures packaging materials from recycled materials. The Indiana Department of Revenue ("Department") conducted a sales and use tax audit for the tax years 2014 through 2016. The Audit Report states that regarding Indiana sales tax, "[n]o changes are proposed for sales tax for the period January 1, 2014 through December 31, 2016." However, the Audit Report did find "purchases of tangible personal property where sales tax was not paid at the time of purchase nor was use tax self-assessed." As a result of the Department's audit, Taxpayer was issued proposed assessments for base tax and interest. Taxpayer filed a protest. An administrative hearing was held and this Letter of Findings results. More facts will be provided below as needed.

I. Sales & Use Tax–Post-Production.

As a threshold issue, all tax assessments are prima facie evidence that the Department's claim for the unpaid 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 Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012). Thus, the taxpayer is required to provide documentation explaining and supporting its challenge that the Department's assessment is wrong. The Department also notes that when an agency is charged with enforcing a statute, the courts defer to the agency's reasonable interpretation of that statute "over an equally reasonable interpretation by another party." Indiana Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014).

Taxpayer states in its protest letter that the auditor found, in general, that the items at issue in the protest "are used outside of the manufacturing process and, therefore, are not exempt from the Use Tax." Taxpayer states that the Audit Report is incorrect regarding its process:

And further, Taxpayer states that "[u]ntil the appropriate number of bundles of the product is grouped in a pallet stack, the integrated production process is not complete." Taxpayer's protest is organized into four categories: Miscellaneous, Stretch Wrap Machine, Manuals, and Capital Assets. The protested categories are addressed below.

Miscellaneous

The items within the rubric of the category "Miscellaneous" are as follows: tape dispensers, mini-base hand wrapper, and hand wrappers. Taxpayer states that "these items [are] use[d] in the integrated production process to properly package the product for the customer and is the same as the final packaging onto the case palletizers in the whiskey example . . . ." That example from the Indiana Administrative Code is found at 45 IAC 2.2-5-10(2)(D), and states:

Taxpayer states, "[o]ur integrated production process is the same as the whiskey production example . . . ." It should be noted that Taxpayer's process is in fact not the same as the whiskey production example–Taxpayer does not produce whiskey–but the two processes may be similar (that issue is addressed below).

Turning to the Audit Report, it states that the hand wrapper is "used after the product has been packaged . . . ."

The auditor cites to 45 IAC 2.2-5-8(a) for the taxability of the hand wrappers; that regulation states:

Taxpayer, as noted, cites to the whiskey production example found at 45 IAC 2.2-5-10(2)(D). Since Taxpayer believes that this example is germane to its protest, it is incumbent upon Taxpayer to establish that its facts are materially similar to the items in whiskey example. Taxpayer fails to establish this similarity. Taxpayer's operation is not a "filling operation," which is what the whiskey example involves (e.g., "equipment to fill the bottles with product"). In the whiskey example, Taxpayer manufactures not the content but the package itself. Thus the whiskey example is inapplicable to the specific facts of Taxpayer's case. Taxpayer has not met its burden of proof found at IC § 6-8.1-5-1(c).

Stretch Wrap Machine

Taxpayer asserts that its "Stretch Wrap Machine" is exempt because it is used in its "integrated production process to ensure the finished goods are properly packaged, clean and sanitary (because they are used in the food industry) and not damaged . . . ." The Audit Report found that the stretch wrap machine was used "after the product has been packaged. The drink carriers and egg cartons are placed into stacks as they come off the dryer. These stacks are packaged by applying shrink wrap around the stack." The Audit Report states that the "stretch wrap machine . . . [is] used in this area to apply shrink wrap around the completed shrink wrapped packages that are on the pallet."

For sales and use tax purposes, a manufacturer's process can be characterized as having the following division: processes that occur prior to production (i.e., pre-production); the production process itself; and what occurs after production (post-production). Taxpayer, argues that the stretch wrap machine is part of its production process, whereas the Audit Report found that it is post-production. After the hearing, Taxpayer provided the Department's Legal Division with a video of the shrink wrap machine in use. The video shows a bundle of cartons (the size of a large box that a person can lift)–that have already been shrink wrapped as part of the production process–moving along on a conveyor belt. The conveyor takes this shrink wrapped bundle of cartons to a robotic arm that lifts this shrink wrapped bundle and stacks the bundles onto another conveyor. The stack appears to be comprised of over thirty shrink wrapped bundles. The next stage is this pallet/stack being further wrapped by the stretch wrap machine.

The Department notes the Indiana Tax Court case North Central Industries, Inc. v. Indiana Dept. of State Revenue, 790 N.E.2d 198 (Ind. Tax Ct. 2003). North Central involved a shrink wrap machine:

Taxpayer asserted at hearing that "SQF" certification is a requirement of some of its customers. Subsequently, Taxpayer provided the Department with a scanned copy of the SQF Code. That SQF Code is over two hundred pages; Taxpayer did not specify where, within the SQF Code, a second level of shrink wrapping is listed as a requirement for SQF purposes. When the Department sent Taxpayer a follow-up question regarding this, Taxpayer stated in relevant part:

Taxpayer further states that, "The shrink wrapping of the product prevents cross contamination, prevents damage, maintains product integrity and prevents foreign matter contamination." Even if, arguendo, a customer requirement could be considered relevant in the determination of when a production process ends, Taxpayer did not provide the Department with any documents (e.g., contracts) establishing that its customers require the bundles be stacked and then collectively shrink wrapped. Given this, the Department finds that the additional stacking of the bundles and second level shrink wrapping of the pallet/stack is post-production.The second level of shrink wrapping is not substantially changing or transforming the already shrink wrapped bundle(s). Taxpayer's protest is denied.

Manuals

Taxpayer states that it "disagree[s]" with the assessment of tax on "manuals" that "are required . . . to properly operate the production equipment and to assist us in correcting any problems we may have with the operation of the production equipment." Taxpayer cites to no law for its contention that the manuals are exempt. The Department notes that 45 IAC 2.2-5-8(b) states:

The manuals do not meet the double direct test–they are not directly used in direct production. Taxpayer's protest is denied.

Capital Assets

The Audit Report addresses the category of "Capital Assets," stating:

Regarding which capital assets Taxpayer is protesting, Taxpayer states the following: gripper for palletizing; heavy duty plastic belt conveyor; change order; zipline conveyor; freight; vinyl robosuit, controller; pallet tool, pallet pro V8, handling pro v8 PC. In its written protest, Taxpayer also states that "software" is at issue. As to the specifics of its protest, Taxpayer does not engage in any detailed and particularized argument for the protested capital assets. Instead, Taxpayer refers to them collectively as "Capital Assets" and cites once again to the whiskey example in 45 IAC 2.2-5-10. Taxpayer concludes:

Taxpayer has not demonstrated how each of the Capital Assets is used by Taxpayer. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dept. of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dept. of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). Taxpayer has not met its burden of proof; Taxpayer's protest is denied.

Taxpayer's protest for all protested items is denied.

July 31, 2018