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 Letter of Findings.

Utility Company was required to collect sales tax from customers from whom Utility Company did not possess a current ST-109 exemption certificate; the Department disagreed with Utility Company that it was relieved of its responsibility to collect the tax on the ground that certain customers may have consumed the electricity in an exempt manner. Utility Company's construction and equipping of a battery storage facility was not exempt from sales or use tax because the facility did not generate electricity but was a non-exempt component of Utility Company's distribution network.

I. Gross Retail Tax - Exempt Utility Customers.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-4 et seq.; IC § 6-2.5-8-8; IC § 6-2.5-9-3; IC § 6-8.1-5-1; Wendt LLP v. Indiana Dep't of state Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, (Ind. Tax Ct. 2007); 45 IAC 2.2-2-2; 45 IAC 2.2-3-24; 45 IAC 2.2-3-25.

Taxpayer argues it was not required to collect sales tax on utilities sold to certain customers on the ground that these customers consumed the utility for exempt purposes.

II. Gross Retail and Use Tax - Sampling Taxpayer's Purchases of Tangible Personal Property.

Authority: IC § 6-8.1-3-12.

Taxpayer maintains that the audit's sampling methodology - employed to determine Taxpayer's sales and use tax liability - was flawed resulting in an inflated assessment of sales and use tax.

III. Gross Retail Tax - Purchases of Equipment Used to Generate Electricity.

Authority: IC § 6-2.5-1-27; IC § 6-2.5-3-2(c); IC § 6-2.5-5-3; IC § 6-2.5-5-5.1(a); Conklin v. Town of Cambridge City, 58 Ind. 130 (1877); Indiana Dept. of State Rev. v. Kimball Int'l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Indiana Dep't of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); 45 IAC 2.2-4-26(a); 45 IAC 2.2-5-8(c), (g); Sales Tax Information Bulletin 60 (October 2020); Sales Tax Information Bulletin 60 (November 2017); Sales Tax Information Bulletin 60 (July 2006); Revenue Ruling 2012-03ST (July 27, 2012 ); Revenue Ruling 2009-06ST (June 2, 2009); Black's Law Dictionary (11th ed. 2019); Lump Sum Contracts, https://en.wikipedia.org/wiki/Lump_sum_contract;Battery Storage Power Station, https://en.wikipedia.org/wiki/Battery_storage_power_station.

Taxpayer states that it is entitled to an offsetting refund of sales tax paid on the purchase of equipment used to generate electricity.

Taxpayer is a utility company providing electric services to customers within Indiana and outside Indiana. The Indiana Department of Revenue ("Department") conducted a Gross Retail ("Sales") and Use Tax audit review of Taxpayer's tax returns and business records.

The audit resulted in an assessment of additional sales and use tax. Taxpayer disagreed with the assessment and submitted a protest to that effect. An administrative hearing was conducted by telephone during which Taxpayer's representatives explained the basis for the protest. This Letter of Findings results.

I. Gross Retail Tax - Exempt Utility Customers.

The Department assessed Taxpayer additional sales tax because the Department was unable to verify that sales of utilities to certain customers were exempt. The issue is whether Taxpayer has established that Taxpayer is not now responsible for paying the uncollected tax.

Indiana law imposes on Taxpayer the burden of establishing that the audit assessments were wrong.

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). Thus, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of state Revenue, 977 N.E.2d 480, 486, fn. 9 (Ind. Tax Ct. 2012).

Taxpayer, in this instance, is required to collect sales tax on utility sold to its customers pursuant to IC § 6-2.5-2-1 and IC 6-2.5-4 et seq. unless its customers provide properly executed exemption certificates. Taxpayer, as an agent for the state, is responsible for the tax pursuant to IC § 6-2.5-9-3.

The Department's audit found that Taxpayer sold utilities to customers but did not collect sales tax. After further review, the audit found that Taxpayer did not have on file an ST-109 ("Indiana Utility Exemption Certificate") for all of its customers. As a result, Taxpayer was issued an AD-14 "Notice of Noncompliance" form which allowed Taxpayer 30 days to obtain a proof of exemption form ("AD-70") from those customers. Taxpayer did not provide the documentation. According to the audit report, "The taxpayer was unable to provide exemption certificates or other documentation supporting the exemption."

In other instances, Taxpayer was able to provide the requisite ST-109 but the meter number did not match the meter number on the customer invoice. For example, customer A claimed an exemption for electricity sold to meter number 123 but the customer invoice indicated that the electricity was sold through meter number 456.

IC § 6-2.5-8-8 provides in part as follows:

The statute was amended in 2015 by adding IC § 6-2.5-8-8(b)(3) and IC § 6-2.5-8-8(f) as highlighted above in bold text:

In instances where Taxpayer was unable to provide a customer exemption certificate, was unable to provide the requested AD-70, and was unable to "provide other documentation supporting the exemption," Taxpayer has provided no basis upon which it should not now be responsible for collecting the tax.

In instances where the "the meter number on the exemption certificate did not match the meter number on the pull list," Taxpayer was permitted during the audit "to provide internal documentation showing meter number changes so the exempted meter could be tied to the pull list." However, Taxpayer has provided no additional argument or documentation then or now establishing that it should not now be responsible for collecting the tax in instances where "the meter number could not be shown to match the meter number on the pull list . . . ."

Under either the 2015 version of IC § 6-2.5-8-8 or under the regulations in effect prior, Taxpayer was required to collect sales tax from customers for whom there was no clear, verifiable, documented exemption. 45 IAC 2.2-2-2 provides that in such instances, "The retail merchant acting as an agent for the state of Indiana, must collect the tax."

Taxpayer argues that the Department assessed sales tax on the sale of electricity to two different manufacturing companies. Taxpayer maintains that it was not required to collect sales tax from these companies because they are entitled to purchase electricity which was being used in "direct production" of the businesses' products.

Taxpayer provided a list of its customers arguing that the entities were exempt manufacturers using the electricity in the "direct production" of those customers' products. See IC § 6-2.5-5-5.1.

Taxpayer also indicated that certain of its other customers were restaurants entitled to purchase electricity consumed in the direct production of the restaurants' food products. See IC § 6-2.5-5-5.1.

Taxpayer argues that the Department failed to notify Taxpayer that these customers were not exempt from sales tax. IC § 6-2.5-8-8(f) in part provides as follows:

The Department does not believe that Taxpayer was "relieved of the responsibility to collect state gross retail or use tax . . . ." because there is no indication that the customers' exemption certificates had "expired or . . . [were] revoked" which would have triggered the Department's own obligation to notify Taxpayer of the expiration or revocation. Instead Taxpayer asks the Department to abate the assessments attributable to these customers because they are manufacturers or restaurants engaged in qualifying "manufacturing-like" activities." Perhaps so, but the customers might just as well be purchasing utilities for non-exempt purposes such as air conditioning or lighting. The Department is disinclined to take the "leap of logic" required to accept Taxpayer's argument.

In a few instances, Taxpayer indicates that it has obtained ST-109s from some of these customers. To the extent that Taxpayer has presented additional ST-109s, the Department will adjust the proposed assessment to reflect the utility customer's exempt status.

Taxpayer maintains that it was not required to collect sales tax from a health care facility because its parent company possess a "blanket exemption." Taxpayer explains that it sold utility to "Family Medicine" but that it possessed a 2004 blanket exemption issued "Health Care Center". Taxpayer has verified that Family Medicine is included in the entities covered by the blanket exemption certificate, and therefore Taxpayer has met the burden imposed under IC § 6-8.1-5-1(c).

Taxpayer is sustained in part and denied in part. Taxpayer was not required to collect sales tax on the sale of utilities to "Family Medicine." Taxpayer is not required to collect sales tax on the sale of utilities to entities for which Taxpayer has now produced exemption certificates. In all other respects, Taxpayer is respectfully denied.

II. Gross Retail and Use Tax - Sampling Taxpayer's Purchases of Tangible Personal Property.

Because Taxpayer made numerous routine purchases during the 2014 through the 2016 audit period, the Department's audit conducted a statistical sampling of those transactions. Accordingly, the Taxpayer "pulled the sample transactions and those were reviewed by the auditor." According to the audit report, the following procedure was then followed.

In reviewing the sampled transactions, the Department found "areas of noncompliance." As explained in the audit period:

In other instances, Taxpayer was unable to produce "documentation or vendor receipts" demonstrating that sales tax paid was paid or that Taxpayer had self-assessed use tax. In addition, the Department's audit assessed additional tax on delivery charges. In those instances, "Sales Tax was paid on the tangible personal property but not charged on the delivery charges."

It is these various instances which led to an assessment of additional use tax to which Taxpayer here objects.

Taxpayer argues that the Department's sampling of its sales was inaccurate on the ground that the sample chosen contained duplicate entries, one of the months chosen for sampling was duplicated, and another month - which should have been in the sampling period - was omitted. Moreover, Taxpayer states that simply correcting the cited errors - e.g., removing duplicate entries - will not correct the flaws inherent in the chosen sample. In effect, Taxpayer believes that the only way to address the issue is by entirely recalculating the sample, e.g. a "do-over."

IC § 6-8.1-3-12 in part states:

Under IC § 6-8.1-3-12, the Department has the authority to employ a statistical sampling methodology when investigating a taxpayer's business records for tax purposes.

It bears repeating that it was Taxpayer which "pulled the sample transactions" and it was only after Taxpayer did so were those transactions reviewed by the Department's auditor.

Taxpayer now has performed its own alternate calculations using the "Multistate Tax Commission's" software program and by adjusting the "level of confidence" factor downward. According to Taxpayer, its alternate calculation would result in a 15 percent reduction in the pending assessment. (Taxpayer originally requested a 40 percent reduction but has since decided that a 15 percent reduction is warranted.)

Taxpayer's primary objection is that the sample included a duplicate month -April 2015. However, the error is attributable to Taxpayer because it was responsible for preparing the sample and, in this case, provided duplicate files one of which was labeled ""0415_Sales Use Tax by Month - Audit Test" and a second file which was labeled as "0416_Sales Use Tax by Month - Audit Test." (Emphasis added). However, it was later discovered the second file duplicated the contents of the first. The file labeling error was only discovered a year-and-one-half after the audit was begun, and Taxpayer only objected to the results of the sample some two months after the error was discovered, alternatives discussed, and Taxpayer had taken steps to assure that such sampling errors would not be repeated in the future.

Taxpayer's second objection is that 163 vendors were omitted from the sample. However, the omission was discussed with Taxpayer's representatives during the course of the audit. At that time, Taxpayer apparently agreed with the sample as prepared and offered no further objections.

In sum, the only apparent substantive objection is that the April 2015 entries were duplicated. Even though it was Taxpayer's own error which led to the duplication, the Department will - of course - not stand by a numerical calculation which is plainly wrong. However, the duplication is not a simple numerical miscalculation which lends itself to a readily identifiable remedy. Taxpayer's proposed remedy is to reduce the assessment by 15 percent (approximately $250,000) but Taxpayer has provided nothing which ticks-and-ties the duplicate entries to the very specific reduction in tax requested by Taxpayer. Taxpayer invites the Department to speculate on the results of an alternative calculation, but the Department could just as well speculate that eliminating or substituting the April 2016 entries would result in an additional assessment of $250,000. Just as there is no substantive reason allowing an administrative decision increasing the assessment, there is nothing in the record which justifies the Department granting the requested reduction. Therefore, Taxpayer has not met the burden imposed under IC § 6-8.1-5-1(c) of proving that the proposed assessment was wrong on this issue.

Taxpayer's protest is respectfully denied.

III. Gross Retail Tax - Construction of Battery Energy Storage Facility and Control House.

Taxpayer maintains that is entitled to an offsetting refund of use tax it paid on the purchase of equipment used to temporarily store electricity. Taxpayer explains it developed and constructed a "battery energy storage facility." Such a facility is "a type of energy storage power station that uses a group of batteries to store electrical energy." Battery Storage Power Station, https://en.wikipedia.org/wiki/Battery_storage_power_station (Last visited October 26, 2020). A battery storage facility, such as Taxpayer's "is used for short-term peak power and ancillary services, such as providing a frequency-response reserve to minimize the chance of power outages." Id.

Taxpayer argues that purchases of equipment and supplies utilized in constructing the battery facility are exempt pursuant to IC § 6-2.5-5-3(b) which states:

As further authority, Taxpayer cites to 45 IAC 2.2-5-8(c) and (g):

. . . .

(Emphasis added).

For purposes of Indiana's sales and use tax, IC § 6-2.5-5-5.1(a) and IC § 6-2.5-1-27 provide that electricity is defined as tangible personal property.

Generally, electric utilities and the Department recognize three stages in providing electricity to customers: (1) production, (2) transmission, and (3) distribution. "Production" refers to the generation of electricity. "Transmission" involves the transfer of electricity from generating sources to local distribution systems. "Distribution" involves the transfer of electricity from local distribution systems to the customer. See Revenue Ruling 2012-03ST (July 27, 2012 ), 20120829-IR-045120487NRA; Revenue Ruling 2009-06ST (June 2, 2009), 20180131-IR-045180057NRA.

IC § 6-2.5-5-3(c) provides that the exemptions found in IC § 6-2.5-5-3(b) "do not apply to transactions involving distribution equipment or transmission equipment acquired by a public utility engaged in generating electricity."

Taxpayer claims that its battery facility is exempt because it "generates" electricity sold to its utility customers. Taxpayer explains:

. . . .

Taxpayer concludes that equipment and supplies incorporated into the facility are exempt from sale tax under the "manufacturing exemption" because the equipment and supplies are utilized in the "direct production and [] injection of electricity into [the] grid.

In interpreting the applicability of the exemption sought by Taxpayer, the Department bears in mind that the general rule is that "tax exemptions are strictly construed in favor of taxation and against the exemption." Indiana Dept. of State Rev. v. Kimball Int'l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988). 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 (citing Conklin v. Town of Cambridge City, 58 Ind. 130, 133 (1877)).

The Department does not agree that Taxpayer has met its burden of establishing by "sufficient evidence" that the battery storage facility is part and parcel of its electrical production function and that its analysis and argument meets "the exact letter of the law." Id. Instead, the Department concludes that the battery facility is a basic element of Taxpayer's distribution network and is "downstream" of Taxpayer's "manufacturing" or "production" of electricity. As such, Taxpayer is precluded from claiming the exemption under IC § 6-2.5-5-3(c) which specifically excludes both distribution equipment and transmission equipment.

The Department concludes that the battery facility is not involved in the direct production of Taxpayer's electricity and is not entitled to the manufacturing exemption because the battery facility involves the economics of transmission and distribution, not production. As such, Taxpayer's battery facility is not a continuation of the industrial production process, but merely part of the transmission and distribution process.

Taxpayer states that it accrued and paid use tax on purchases from a company called Electrical Power Products. This vendor built a "permanently affixed control house" (separate from the battery storage facility addressed above) at one of Taxpayer's substations. According to Taxpayer, the vendor sold and constructed the facility pursuant to a lump sum contract and that the price it paid was for "a non-taxable lump sum construction project." Accordingly, Taxpayer seeks a refund of the tax paid pursuant to this project.

A "lump-sum" contract is an agreement by which "a single price is quoted for an entire project based on plans and specifications, covers the entire project, and the owner knows exactly how much the work will cost in advance." Lump Sum Contracts, https://en.wikipedia.org/wiki/Lump_sum_contract (Last visited November 12, 2020). See also Black's Law Dictionary 408 (11th ed. 2019) "A contract setting a fixed total price for a construction project."

Taxpayer relies to IC § 6-2.5-3-2(c) as authority for its position that the price it paid to Electrical Power Products is exempt from sales and use tax.

Taxpayer also cited to the Department's regulation, 45 IAC 2.2-4-26(a), as further authority for its position that the Electrical Power Products payments were not subject to sales or use tax. The regulation provides:

The Department's guidance on the issue is found at Sales Tax Information Bulletin 60 (July 2006), 20060823 Ind. Reg. 045060287NRA which provides in part:

. . . .

The current version of the bulletin provides:

Taxpayer provided copies of the three Electrical Power Products invoices. In each case, the invoice calls for payment to:

The Department finds that Taxpayer has provided sufficient information to establish that it paid Electrical Power Products a "lump sum" amount for the construction and installation of the control house as provided under 45 IAC 2.2-4-26(a). Under such an arrangement, Electrical Power Products was responsible for self-assessing use tax or paying sales tax on the tangible personal property utilized in the project, and Taxpayer was not required to pay sales tax or self-assess use tax on the price paid the vendor. Therefore, Taxpayer has met the burden imposed under IC § 6-8.1-5-1(c) of proving that the assessment was wrong on this issue.

Equipment and supplies installed in Taxpayer's battery storage facility are not exempt from sales tax. It was the lump-sum vendor's responsibility to pay tax on items utilized in the construction of the control house. To the extent Taxpayer self-assessed use tax on the price paid Electrical Power Products for the construction of the control house, Taxpayer is entitled to a refund or credit.

Taxpayer was not required to collect sales tax on the sales of utilities to "Family Medicine" or customers for whom Taxpayer has now provided additional exemption certificates. Taxpayer is entitled to an offsetting credit of tax it paid on the purchase of a control house but not for equipment installed in the battery storage facility. In all other respects, Taxpayer's protest is respectfully denied.

December 4, 2020