NOTICE: IC § 4-22-7-7 permits the publication of this document in the Indiana Register. The publication of 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. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Memorandum of Decision.

Businesses were able to provide sufficient analysis to show that some of the sixty-two locations at issue qualified for the predominant use exemption. All locations qualify for some level of exemption. The Department will therefore issue refunds reflecting the appropriate level of exemption for each location.

I. Sales Tax–Refund.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-5-5.1; IC § 6-8.1-9-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); 45 IAC 2.2-4-13; Black's Law Dictionary 1122, (11th ed. 2019).

Taxpayers protest the partial denial of their claims for refund.

Taxpayers are related restaurants operating in Indiana. Each restaurant filed a claim for refund of sales tax paid on utilities consumed at its Indiana location during the 2015 and 2016 tax years. Taxpayers claimed the manufacturing exemption on the purchase of utilities. Because all sixty-seven locations are related and use identical equipment, Taxpayers stated, they filed their refund claims using the same utility study. This utility study was used in a successful appeal of this same issue for the 2014 tax year. Nonetheless, the Indiana Department of Revenue ("Department") denied Taxpayers' exemption claims on all but two of the restaurant locations. For the other stores, the Department approved exemptions at various rates for the non-predominant use of electricity in production. Taxpayers protested sixty-two of these partial denials, maintaining that most locations did qualify for the predominant use exemption and that all of these locations had a higher exemption rate than the rate determined by the Department. Because of the relationship of Taxpayers and the identical nature of the refund claims and protests and for administrative ease, this document will address all sixty-two refund denial protests. An administrative hearing was held and these Memoranda of Decision result. Further facts will be supplied as required.

I. Sales Tax–Refund.

Taxpayers protest the partial denial of their sales tax refund claims for the 2015 and 2016 tax years. The Department partially denied these claims due to a disagreement in methodology.

As an initial point, the Department notes that, "[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 initial refund determination, shall be entitled to deference.

Sales tax is imposed by IC § 6-2.5-2-1, which states:

Next, IC § 6-2.5-5-5.1 states:

Also, IC § 6-8.1-9-1(a) provides:

Taxpayers' refund claims state that not only was the electricity used in an exempt manner, but that they were entitled to the predominant use exemption found at 45 IAC 2.2-4-13, which states:

The utility study in this case, which analyzes the Taxpayers' exempt and non-exempt uses of electricity, originated in a separate protest from the 2014 tax year. As part of that protest process, Taxpayers provided a utility study which suggested that all sixty-two restaurants currently at issue qualified for the predominant use exemption. The Department reviewed the study and attempted to verify its contents by visiting one of the restaurant locations. From this review process, the Department found several problems with the Taxpayers' study, including an overstated number of operational fryers in each restaurant, overstated number of hours each restaurant is open, and incorrect classification of some nonexempt equipment as exempt. Based on its review of the Taxpayers' study, the Department recalculated the percentages of exempt electrical use for each location. The recalculations found that none of the sixty-two stores qualified for the predominant use exemption. The Department therefore allowed varying percentages for exempt electrical use and agreed to refund each location's sales tax on utilities at these recalculated percentages.

Taxpayers only challenged the Department's recalculations to the utility study on one issue: they disagreed with the Department's load factor for calculating the amount of electricity used by grills and fryer in the Taxpayers' stores. Those items use a substantial percentage of the overall electricity used by the stores, and Taxpayers and the Department agree that this electricity is exempt. Thus, calculating the actual amount of electricity used by these items is pivotal to determining the percentage of electricity that is exempt.

A load factor is "the ratio of a utility customer's usage levels during a given period compared to the customer's demand during peak periods." Black's Law Dictionary 1122 (11th ed. 2019). In this application, the peak demand of a fryer or grill is the maximum amount of electricity it can use. Thus, load factor expresses the amount of electricity an appliance actually uses in a set period of time as a percentage of this maximum.

Taxpayers explained that their load factors were determined by an engineer who observed the different levels of grill and fryer usage throughout the day. This helped the engineer determine the amount of electricity used by the items when they were most and least heavily used. Next, the engineer discussed the run and cycle times of these items with the store manager. That discussion, along with sales data from each store, provided the approximate frequency and length of busy and slow hours. With this information, Taxpayers were able to recalculate the estimated average daily electricity usage for the grills and fryer in each store, which the utility study expressed as load factors. This analysis showed higher loads than those used by the Department in its calculations.

By providing this additional analysis, Taxpayers were able to show that the percentage of exempt electrical usage was higher than the Department's revised calculations. As a result, of the sixty-two locations under protest, fifty-one qualified for the predominant use exemption. Those locations will receive refunds in the entire amount claimed. The remaining eleven locations had varying exempt percentages of electrical usage and will receive refunds based on those exempt use percentages as provided by Taxpayers to the Department with their protest.

Finally, the Department takes this opportunity to note that refund claims are initiated by taxpayers and that there is not necessarily the same amount of information available as if the Department had conducted an audit and issued a written audit report. In the event of an audit, the Department would perform its own review of utility usage independent of any utility study provided by a taxpayer. In that case, the percentages of taxable and exempt utility usage could potentially change from what a taxpayer had previously reported. Therefore, statutorily required record-keeping and availability along with diligent and accurate calculations of utility use is strongly recommended for all taxpayers.

Taxpayers' protests are sustained to the extent described above.

August 19, 2019