NOTICE: Under IC 4-22-7-7, this document is required to be published in the Indiana Register and is effective on its date of publication. It shall remain in effect until the date it is superseded or deleted by the publication of a new document in the Indiana Register. The publication of this document will provide the general public with information about the department's official position concerning a specific issue.

Sales and Use Tax - Tangible Personal Property Converted into Real Property

Authority: IC 6-2.5-1-14.7; IC 6-2.5-1-14.9; IC 6-2.5-1-27; IC 6-2.5-1-27.7; IC 6-2.5-2-1; IC 6-2.5-2-2; IC 6-2.5-3-2; IC 6-2.5-4-1; IC 6-2.5-4-9; IC 6-2.5-5-3; IC 6-2.5-8-8; IC 6-8.1-5-4; 45 IAC 2.2-4-2; 45 IAC 2.2-5-8; Indiana Dep't of State Revenue v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Sales Tax Information Bulletin #60 (November 2017).

A taxpayer ("Contractor") is seeking an opinion as to the tax treatment of its product lines that it uses to construct cleanrooms for its manufacturer clients. Specifically, Contractor asks the following:

Contractor performs specialty contracting work throughout the United States. One type of specialty work that Contractor performs is the building of cleanrooms that are generally used in manufacturing or scientific research in the life science or microelectronics industries. Contractor is generally included on such projects as a subcontractor working for the general contractor, but they do occasionally perform this work directly for the owner of the project. Contractor explains that they must create a controlled environment that regulates humidity, temperature, particulate matter, and contamination. Contractor claims it is vital to the products or research being produced within the cleanroom that they construct the cleanrooms in such a manner. Contractor uses the following materials for the two types of industries in which it offers cleanroom construction:

• Modular Wall & Ceiling Systems - includes walk-on ceilings, modular walls, or a combination of modular and stick built construction.

• Traditional Wall & Ceiling Systems - traditional drywall finishes which can be combined with modular systems.

• Specialty Doors - Contractor installs doors in a variety of configurations such as swing, sliding, and high-speed roll up doors.

• Laminar Flow Solutions - Contractor offers a wide range of laminar flow and air filtration solutions available, such as containment hoods, stainless steel plenums and air handling units.

• Lighting Systems - Contractor can install many lighting system options including walk-on, surface mounted and LEDs.

• Flooring Solutions - This includes a wide range including resinous floor solutions, various thicknesses, chemistries and finishes comprised of epoxy, vinyl flake or sheet vinyl systems. Vinyl seams are heat-welded, providing an impervious, hard-wearing, homogeneous floor finish. Floor coves are often incorporated into walls for ease of cleaning. In addition, Contractor offers the accurate configuration of raised access flooring to adhere to under-floor mechanical and electrical component specifications.

• Filtration Systems - Contractor can install filtration systems that are integrated and installed into the cleanroom facility.

• Specialties - Contractor provides a variety of specialty items such as slotted channels, pass throughs, utility boxes, grids and curtains, guard rails, bumper guards and gown room furniture.

• Cold Room Integration - Contractor creates the cold room with materials that meet the overall cleanroom specifications.

• Modular Wall & Ceiling Systems - This includes walk-on ceilings, modular walls, or a combination of modular and stick built construction.

• Air Filtration Systems - From fan-filter units, ducted filter units, plenums, and air handling units, Contractor delivers customized solutions to maximize the most sensitive and critical area of your manufacturing process.

• Specialty Doors - Contractor installs doors in a variety of configurations such as swing, sliding, and high-speed roll up doors.

• Flooring Solutions - This includes a wide range including resinous floor solutions, various thicknesses, chemistries and finishes comprised of epoxy, vinyl flake or sheet vinyl systems. Vinyl seams are heat-welded, providing an impervious, hard-wearing, homogeneous floor finish. Floor coves are often incorporated into walls for ease of cleaning. In addition, Contractor offers the accurate configuration of raised access flooring to adhere to under-floor mechanical and electrical component specifications.

• Strut Utility Racks - Contractor can install unistrut slot channel framing to serve a variety of support system applications. These include cable management, pipe and conduit, and HVAC and duct, lighting and equipment supports.

• Specialties - Contractor provides a variety of specialty items such as slotted channels, pass throughs, utility boxes, grids and curtains, guard rails, bumper guards and gown room furniture.

• Automated Material Handling Systems - Contractor can install cleanroom automation systems for a variety of industries, applications, and automated system types including conveyors, carousels, storage retrieval and guided vehicles.

• Tool Installation Services - Contractor provides a complete, comprehensive solution for tool installation services from system rigging to the final outfitting of technical instruments and machinery.

• Protocol, Cleaning and Certification Services - Contractor provides onsite operations training and staff monitoring throughout the construction process to ensure the cleanroom environment is not comprised. Contractor also offers postconstruction cleaning and sanitization services to eliminate debris and static buildup through full super cleans and particle testing.

Pursuant to IC 6-2.5-2-1(a) and IC 6-2.5-2-2(a), sales tax is imposed on retail transactions made in Indiana. IC 6-2.5-4-1(a) provides that "[a] person is a retail merchant making a retail transaction when he engages in selling at retail." A retail transaction is defined in IC 6-2.5-4-1(b) as the transfer, in the ordinary course of business, of tangible personal property for consideration. IC 6-2.5-4-1 goes on to provide in pertinent part:

"Tangible personal property" is defined in IC 6-2.5-1-27 as:

A contractors' use tax responsibilities with respect to the purchase, use, and sale of construction material are found in subsection (c) of IC 6-2.5-3-2, which provides the following:

"Construction material" is defined in IC 6-2.5-1-14.7 as "any tangible personal property to be converted into real property." IC 6-2.5-1-14.9 defines "Contractor" as "any person engaged in converting construction material into real property on behalf of another person. The term includes, but is not limited to, general or prime contractors, subcontractors, and specialty contractors." Finally, "time and material contract" is defined by statute at IC 6-2.5-1-27.7 to mean "a contract in which the cost of construction material and the cost of labor or other charges are stated separately."

Sales Tax Information Bulletin #60 (November 2017) provides additional guidance as to how the Department determines whether or not items remain tangible personal property:

There is a difference in the tax collection and remittance requirements for construction material purchased by a contractor depending on whether the contractor is operating under a time and material contract or non-time and material contract (in this case, a lump sum contract). In interpreting the IC 6-2.5-4-9(b), Sales Tax Information Bulletin #60 provides that "contractors are retail merchants selling construction material when they (1) dispose of, or (2) convert construction material into real property under a time and material contract." Due to sales of tangible personal property being subject to sales tax, which includes construction materials, "contractors converting construction material into real property under a time and material contract must collect and remit sales tax on the material portion of their contracts." Id.

On the other hand, in interpreting IC 6-2.5-3-2(c), the bulletin provides that when operating under a lump sum contract, contractors "purchase construction material for their own use or consumption in the fulfillment of contractual obligations to provide real property improvement services." Therefore, when a contractor operates this way, they "are not reselling construction material and should not charge their customers sales tax." Id. A lump sum contractor's tax obligations would be the following:

Id.

Whether Contractor operates as a subcontractor or directly for the project owner might impact the tax responsibility with regards to the general contractor. This can be illustrated in four different scenarios where Contractor acts as a subcontractor working for a prime contractor on the construction of a cleanroom, changing the combination of construction contracts each could use:

Regarding the application of the manufacturing exemption to Contractor's product lines, there is an exemption from sales tax for machinery, tools, or equipment that will be directly used in direct manufacturing and production at IC 6-2.5-5-3(b). More context on the exemption at IC 6-2.5-5-3 is provided in the Department's regulations. 45 IAC 2.2-5-8(c) provides that machinery, tools, and equipment qualify for the exemption only if they have an "immediate effect" on the article produced and are "an essential and integral part of an integrated process which produces tangible personal property." Furthermore, 45 IAC 2.2-5-8(g) goes on to provide the following:

In looking over the product lines, it is not possible to say with certainty that any of the items would be exempt from sales tax, with the exception of the Protocol, Cleaning and Certification Services (to the extent that only a de minimis amount of tangible personal property is conferred with the services if this is a unitary or bundled charge for the service). It is important to note that the taxpayer claiming an exemption has the burden of showing the terms of the exemption statute are met. Indiana Dep't of State Revenue v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). Additionally, "where 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 100-01.

In the RCA decision cited above, the taxpayer, RCA Corp., claimed that it purchased certain environmental control equipment (i.e., air conditioning equipment and air exchange equipment) to be directly used in the direct production of color television picture tubes, and, therefore, was exempt from sales/use tax. Id., at 97-98. In making its case, RCA Corp. argued that the environmental control equipment was "used to control the temperature, humidity and presence of foreign particles in the air, in around and on the surfact [sic] of color television picture tubes during the manufacturing process." Id. (Emphasis added). The trial court agreed with the RCA Corp., but the Indiana Court of Appeals disagreed. Reversing the trial court's decision, the RCA Court ruled in favor of the Department. Applying the "double direct standard," the RCA Court found that:

The Court thus determined that RCA Corp. was not entitled to the manufacturing exemption for its purchase of the environmental control equipment/air conditioning equipment. Similarly, it would be presumed that a cleanroom environment, while practically necessary and essential in order to ensure that the product was created in a setting where humidity, temperature, particulate matter, and contamination are regulated, doesn't actually have an immediate effect on the article being produced. Like the matter in RCA, the cleanroom only has an immediate effect "on the surroundings in which the manufacturing process takes place." Thus, without further evidence from the taxpayer's customers explaining how the product lines would be used in an exempt manner pursuant to IC 6-2.5-5-3, there is a presumption that the items that represent tangible personal property in the product lines would not be exempt.

With this presumption in mind, if a customer provides Contractor with an Indiana General Sales Tax Exemption Certificate (Form ST-105) or a Streamlined Sales and Use Tax Agreement (SSTGB Form F0003), it is Contractor's responsibility to ensure that their customer will be using their product lines in an exempt manner. If Contractor's customer can properly document in writing how the product lines will be used in an exempt manner, then with their customer's properly executed ST-105, Contractor is not required to collect Indiana sales or use tax. IC § 6-2.5-8-8(a). However, Contractor would need to retain such records for at least three years pursuant to IC 6-8.1-5-4.

Similarly, Contractor can provide their own ST-105 or SSTGB Form F0003 to their vendors (not their customer's exemption certificates) in order to purchase any items under the sale for resale exemption (IC 6-2.5-5-8) as long as they are operating under a time and material contract. If they are not operating under a time and material contract, then they are not purchasing the construction material for resale and cannot use ST-105 or SSTGB Form F0003 for that purpose. Further, a contractor can purchase materials exempt from sales tax "if the ultimate purchaser or recipient" of construction material were exempt from Indiana sales tax if that purchaser had directly purchased the construction material themselves, which is an exemption that would apply regardless of whether a contractor was operating under a time and material contract or not. IC § 6-2.5-4-9(c). However, with the presumption that Contractor's customers would not be able to use the product lines in an exempt manner, Contractor would first need to obtain the required documentation described in the paragraph above before claiming this exemption on an ST-105.

Finally, regarding pre-construction design services, services are generally not subject to Indiana sales tax. 45 IAC 2.2-4-2. If performed as part of a time and material contract, it would be part of the nontaxable "time" or labor part of the contract. If performed as part of a non-time and material contract, there is no retail transaction, so sales tax would not be charged to the customer anyway. If the services are charged as a stand-alone service in a separate invoice or contract, then the service would be presumed to be nontaxable as long as no tangible personal property is conferred as part of the service.

Contractor's product lines are subject to Indiana sales tax when Contractor purchases the materials if Contractor is not operating under a time and material contract, but if it is operating under a time and material contract, Contractor would collect sales tax on the billings to their customers. This is true regardless of whether Contractor works as a subcontractor or directly for the project owner; however, the tax consequences for the prime contractor would depend on what type of contract they are operating under with the project owner.

Contractor's product lines would be presumed to not qualify for the manufacturing exemption under IC 6-2.5-5-3. However, if Contractor does receive written documentation from its customer properly explaining how the product lines would qualify, Contractor may sell the product lines exempt from Indiana sales tax if the documentation is accompanied by a properly executed exemption certificate (Form ST-105 or STGB Form F0003). Contractor must keep such records for at least three years.

Contractor would need to provide a properly executed exemption certificate (Form ST-105 or STGB Form F0003) to their vendors to purchase materials exempt from sales tax under the sale for resale exemption when they operate under a time and material contract. It may not be used when they operate under a lump sum or other non-time and material contract.

Finally, pre-construction design services are not subject to sales tax if part of a construction contract, and if a standalone charge, then they are not subject to sales tax to the extent that no tangible personal property is also conferred as part of the charge.

This ruling is issued to the taxpayer requesting it on the assumption that the taxpayer's facts and circumstances as stated herein are correct. If the facts and circumstances given are not correct, or if they change, then the taxpayer requesting this ruling may not rely on it. However, other taxpayers with substantially identical factual situations may rely on this ruling for informational purposes in preparing returns and making tax decisions. If a taxpayer relies on this ruling and the Department discovers, upon examination, that the fact situation of the taxpayer is different in any material respect from the facts and circumstances given in this ruling, then the ruling will not afford the taxpayer any protection. It should be noted that subsequent to the publication of this ruling a change in statute, regulation, or case law could void the ruling. If this occurs, the ruling will not afford the taxpayer any protection.