NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 requires 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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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.

Business did not provide sufficient documentation to prove the Department's assessment of sales tax incorrect.

I. Gross Retail Tax–Audit Methodology.

Authority: IC § 6-8.1-5-1; IC § 6-8.1-3-12; Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014).

Taxpayer protests the Department's statistical sampling methodology.

II. Gross Retail Tax–Exempt Medical Devices.

Authority: IC § 6-2.5-5-18; IC § 6-8.1-5-1; IC § 6-2.5-2-1; IC § 6-2.5-4-1; Indiana Dep't of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Indiana Dep't of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); 45 IAC 2.2-5-36; 45 IAC 2.2-2-1.

Taxpayer protests the imposition of additional sales tax.

Taxpayer distributes medical and surgical supplies. The company serves acute-care hospital customers. Taxpayer has a facility in Indiana.

The Indiana Department of Revenue ("Department") conducted a sales and use tax audit for the tax years ending 2012-2014. The Department used a statistical sample that resulted in the determination that Taxpayer owed additional sales and use tax for the tax periods at issue. Taxpayer protested the assessments. An administrative hearing was held and this Letter of Findings results. Further facts will be supplied as necessary.

I. Gross Retail Tax–Audit Methodology.

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).

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.

Taxpayer raises two issues in its protest regarding the audit methodology. The first argument Taxpayer raises is that the Department's statistical sample is invalid in that credit memos should have been excluded from the sample population. Second is that the unrelated third party service center's ("Service Center") activities should be excluded from the sample and assessments.

Taxpayer protests that the Department's statistical sample is invalid. Taxpayer stated that:

IC § 6-8.1-3-12 states:

The Department has the authority to use statistical sampling methodology when investigating a taxpayer's business records for tax purposes. Taxpayer challenges the inclusion of the credit memos and that the inclusion of them invalidates the sample. After review of the Department's sampling methodology, the Department treated the credit memos as non-adjustments and no tax was assessed on the transactions.

The Department was able to show that Taxpayer's concerns were taken into account while conducting the statistical sample. Furthermore, no tax was assessed against the credit memos. The Department agrees that the ratio estimator should not be used if the sampling unit contains both positive and negative values. In this case the sampling unit is the "Amount Exempt" field so this principle was not broken. As part of the process to evaluate results the difference estimator was reviewed to confirm that it provides a similar result to the separate ratio estimator used. The separate ratio estimator calculated tax due of X while the difference estimator calculated tax due of X plus $2,000. These figures support that the use of the separate ratio estimator is valid. In addition, it shows that the use of the difference estimator would not be beneficial for Taxpayer.

Taxpayer has not shown that the Department's statistical sample is invalid. Taxpayer has not met its burden as required under IC § 6-8.1-5-1(c). Thus, Taxpayer's protest regarding the statistical sample including the credit memos is denied.

Next, Taxpayer argues that this Service Center, a significant part of their appeal, should be excluded from the sample. Taxpayer stated that the Service Center was audited by the Department for tax years 2012-2014 and that they were assessed additional sales tax. Taxpayer argues that some of the transactions in which additional sales tax was assessed for Service Center is also included in Taxpayer's audit. Taxpayer requested a copy of the Service Center's audit report from the Service Center, but could not obtain it. Taxpayer has provided no additional evidence that there has been any double taxation. Thus, since Taxpayer could not show that the Service Center paid tax on any of the protested transactions, Taxpayer's protest is denied.

Taxpayer's protest regarding audit methodology is denied.

II. Sales Tax–Exempt Medical Devices.

Taxpayer protests sales tax assessed on a list of transactions; Taxpayer argues these transactions are exempt. Indiana imposes a sales tax on retail transactions made in Indiana. IC § 6-2.5-2-1(a); 45 IAC 2.2-2-1. A retail transaction is a transaction made by a retail merchant that constitutes "selling at retail." IC § 6-2.5-1-2(a). Selling at retail occurs when a person "(1) acquires tangible personal property for the purpose of resale; and (2) transfers that property to another person for consideration." IC § 6-2.5-4-1(b). A person who acquires tangible personal property in a retail transaction (a "retail purchaser") is liable for the sales tax on the transaction. IC § 6-2.5-2-1(b).

There are also various tax exemptions available outlined in IC 6-2.5-5. 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 (internal citations omitted) (emphasis added). Thus, in applying any tax exemption, the general rule is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Indiana Dep't of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988) (Emphasis added).

With respect to the taxability of tangible personal property purchased by a licensed medical practitioner, 45 IAC 2.2-5-36 states:

The previous version of IC § 6-2.5-5-18, in effect for tax year 2013 until June 30, 2015 i.e. the tax periods at issue, provided, in relevant part:

In this instance, Taxpayer sells the protested items to hospitals and doctors. It is not a person licensed to issue the drugs, devices, or prescriptions. As stated by IC § 6-2.5-5-18 the items "are exempt from state gross retail sales tax, if the sales [] are prescribed by a person licensed to issue the prescription." Taxpayer has not been able to show that these items should be exempt from sales tax, and therefore, has not met its burden as provided by IC § 6-8.1-5-1(c).

Taxpayer's protest is denied.

Taxpayer's protest regarding the audit methodology is denied. Taxpayer's protest of the imposition of sales tax is denied.

December 21, 2018