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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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 provided sufficient evidence to show that its raw materials qualified as scrap metal and that it engaged in processing of recycling materials. Business therefore qualifies for the recycling exemption.

I. Use Tax–Exemption.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-2; IC § 6-2.5-5-45.8; 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); Brandenburg Indus. Serv. Co. v. Indiana Dep't of State Revenue, 60 N.E.3d 300 (Ind. Tax Ct. 2016); 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 assessment of use tax.

Taxpayer operates a steel mill in Indiana. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had not paid proper amounts of Indiana sales tax for the 2015-2017 tax years. This underpayment resulted in a proposed assessment of Indiana use tax. Taxpayer is protesting the imposition of use tax resulting from the proposed assessment findings. An administrative hearing was held and this Letter of Findings results. Further facts will be supplied as required.

I. Use Tax–Exemption.

Taxpayer protests proposed assessments of use tax for the 2015-2017 tax years. Taxpayer claims certain items used in the business are exempt under the recycling exemption found in the Indiana code. In an audit, the Department concluded that Taxpayer did not use scrap as raw materials and did not engage in the processing of recycled materials.

As a threshold issue, it is 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 under IC § 6-2.5-3-2(a), which states:

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, or if there is an applicable exemption to sales and use taxes.

Taxpayer claims that it qualifies for the recycling exemption found at IC § 6-2.5-5-45.8 which states:

The audit completed by the Department found that Taxpayer did not qualify for this exemption for two reasons. First, the audit states that Taxpayer's raw materials are not "recycling materials" because they are not scrap. Notably, the Taxpayer's scrap specifications manual includes descriptions of the chemical composition allowed in the metals Taxpayer buys, as well as the size, density, and source restrictions.

The Indiana Tax Court discussed the requirements of scrap metal in Brandenburg Indus. Serv. Co. v. Indiana Dep't of State Revenue, 60 N.E.3d 300 (Ind. Tax Ct. 2016). Brandenburg removed metal from buildings being demolished and produced scrap metal. The Tax Court found that "Brandenburg's process substantially transforms the metal from obsolete, valueless, and unmarketable debris into newly marketable scrap steel." Id. at 307. In that case, the standards for scrap steel were dictated by the Scrap Specifications Circular, published by the Institute of Scrap Recycling Industries. Id. at 307. 306 n.7. This same guide is specifically referenced in Taxpayer's guide for scrap, and the two guides share terminology and requirements for quality and composition. Although Taxpayer requires specific composition and quality for metal it purchases, this does not mean that the metal is not scrap metal. The ISRI establishes industry standards for scrap metal, and the Taxpayer's standards correlate with these standards. Therefore, based on industry standards, Taxpayer purchases scrap metal based.

Second, the audit states that the Taxpayer was not engaged in the "processing of recycled materials" because it was not changing the original form, use, or composition of the metal it was purchasing. The audit notes instead that Taxpayer's raw material suppliers were changing the form of the metals sold to Taxpayer. But this does not preclude the Taxpayer from also changing the form of the metal it was purchasing.

IC § 6-2.5-5-45.8(a)(3)(B) explains that "the processing of recycled materials" requires "creating a product for sale by changing its original form." This can be done through sorting, grading, shredding, or one of several other listed methods. The statute also allows for "other means" of changing the form of the scrap metal. In this case, Taxpayer melts the scrap metal and casts or rolls it into steel products. This qualifies as a change in form accomplished by "other means" under IC § 6-2.5-5-45.8(a)(3)(B).

In conclusion, Taxpayer buys scrap metal, as defined by industry standards, which it uses directly in its process to manufacture salable steel products. Taxpayer is occupationally engaged in the business of recycling and thus qualifies for an exemption under IC § 6-2.5-5-45.8(b).

Taxpayer's protest is sustained.

August 19, 2019