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 final determination.

Business failed to establish that items purchased for its landfill operations qualified for the environmental exemption. However, Business did demonstrate that some items of tangible personal property were partially eligible for the manufacturing exemption. Business was entitled to additional refund of tax paid on those items.

I. Sales and Use Tax - Refund - Exemptions.

Authority: IC § 6-2.5-2-1; IC § 6-2.5-3-1; IC § 6-2.5-3-2; IC § 6-2.5-3-4; IC § 6-2.5-4-1; IC § 6-2.5-5-3; IC § 6-2.5-5-5.1; IC § 6-2.5-5-30; Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); 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); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Brandenburg Indus. Serv. Co. v. Indiana Dep't of State Revenue, 60 N.E.3d 300 (Ind. Tax Ct. 2016); General Motors Corp. v. Indiana Dep't. of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991); Indiana Dep't. of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520 (Ind. 1983); Indiana Dep't. of Revenue v. Interstate Warehousing, Inc., 783 N.E.2d 248, 250 (Ind. 2003); Rotation Products Corp. v. Indiana Dep't of State Revenue, 690 N.E. 2d 795 (Ind. Tax Ct. 1998); White River Envtl. P'ship v. Indiana Dep't of State Revenue, 694 N.E.2d 1248 (Ind. Tax Ct. 1998); Indianapolis Fruit Co. v. Indiana Dep't of State Revenue, 691 N.E.2d 1379 (Ind. Tax Ct. 1998); Mechanics Laundry & Supply, Inc. v. Indiana Dep't of State Revenue, 650 N.E.2d 1223 (Ind. Tax Ct. 1995); Mumma Bros. Drilling Co. v. Indiana Dep't. of State Revenue, 411 N.E.2d 676, 678 (Ind. Ct. App. 1980); Merch. Warehouse Co. v. Indiana Dep't of State Revenue, 87 N.E.3d 12 (Ind. 2017); 45 IAC 2.2-5-3; 45 IAC 2.2-5-6; 45 IAC 2.2-5-8; 45 IAC 2.2-5-9; 45 IAC 2.2-5-10; 45 IAC 2.2-3-4; 45 IAC 2.2-3-14; Black's Law Dictionary (8th ed. 2004); United States Environmental Protection Agency, Basic Information about Landfill Gas, available at https://www.epa.gov/lmop/basic-information-about-landfill-gas; Indiana Department of Environmental Management, Landfills, available at https://www.in.gov/idem/waste/2398.htm.

Taxpayer protests a partial refund denial, claiming that it was entitled to additional refund.

Taxpayer operates a solid waste landfill in Indiana to collect waste from the community in Indiana. In addition to waste management, Taxpayer collects landfill gas - a natural byproduct of the decomposition of organic material in landfills - and turns a small portion of it into usable energy.

Taxpayer timely filed a claim for refund for 2013, 2014, 2015, and 2016 ("Tax Years at Issue), requesting that the Indiana Department of Revenue ("Department") refund sales and use tax paid on the purchase of certain tangible personal property. The Department reviewed and granted a partial refund claim.

Taxpayer protested the partial refund denial. This final determination results. Further facts will be provided, as necessary.

I. Sales and Use Tax - Refund - Exemptions.

In granting the partial refund, the Department's audit noted the following:

. . .

Taxpayer disagreed with the partial denial. Taxpayer claimed that it "provides landfill services as well as produces methane gas for sale." Taxpayer argued that, through its landfill operation, it "works to collect methane gas from its landfill and transport it for processing at its CPL building." As such, Taxpayer claimed that it was entitled to statutory exemptions, including exemption of environmental quality compliance, on the following tangible personal property it purchased and used in its landfill operation.

• Equipment, including Bulldozers, compactors, and crawler tractors.

• The leachate collection system, which "contains various layers of clay, sand, gravel, and geosynthetic liners, pipes, pumps, meters and valves.

• A Gas Collection System consisting of piping, pumps, valves, meters, wellheads, and condensate knockouts.

• Landfill Roads.

• Daily Cover/Tarping system.

• Erosion Control and Surface Water/Run-off Control Systems.

• Leachate Collection System.

• Liners, Geomembranes, and Geotextiles.

• Flares.

• Fugitive Dust.

• Rock for Drainage Layer of Cell.

Accordingly, the issue is whether Taxpayer demonstrated that its purchases used for its landfill operation qualified for the statutory exemptions under IC 6-2.5-5.

IC § 6-2.5-2-1(a) imposes a sales tax on retail transactions made in Indiana. IC § 6-2.5-4-1 provides that a retail transaction occurs when a seller "acquires tangible personal property for the purpose of resale; and . . . transfers that property to another for consideration." IC § 6-2.5-4-1(b). In addition, the Indiana use tax is imposed "on the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction, regardless of the location of that transaction or of the retail merchant making that transaction." IC § 6-2.5-3-2(a). "Use" means the "exercise of any right or power of ownership over tangible personal property." IC § 6-2.5-3-1(a). The use tax is generally functionally equivalent to the sales tax. See Rhoade v. Indiana Dep't of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002).

Accordingly, all purchases of tangible personal property are taxable unless specifically exempted under Indiana law. 45 IAC 2.2-5-3(b); 45 IAC 2.2-5-6(a); 45 IAC 2.2-5-8(a); 45 IAC 2.2-5-9(a); 45 IAC 2.2-5-10(a). An exemption from the use tax is granted for transactions where the sales tax was paid at the time of purchase pursuant to IC § 6-2.5-3-4 and 45 IAC 2.2-3-4. There are various tax exemptions available outlined in IC 6-2.5-5 which are applicable to both sales tax and use tax. 45 IAC 2.2-3-14(2). 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). 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). Thus, in order for Taxpayer to prevail on the issue it raised in its claim for a refund of sales or use tax, Taxpayer is required to provide documentation explaining and supporting its challenge. 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 n.9 (Ind. Tax Ct. 2012).

A. Manufacturing exemption.

IC § 6-2.5-5-3(b), in relevant part, states:

IC § 6-2.5-5-5.1(b) provides:

The Legislature granted Indiana manufacturers a sales tax exemption for certain purchases, which are for "direct use in direct production, manufacture . . . of other tangible personal property." In enacting the exemption, the Legislature clearly did not intend to create a global exemption for any and all equipment which a manufacturer purchases for use within its manufacturing facility. "Exemption six, fairly read, is meant to exempt capital equipment that meets the 'double direct' test." Mumma Bros. Drilling Co. v. Indiana Dep't. of State Revenue, 411 N.E.2d 676, 678 (Ind. Ct. App. 1980). The capital equipment "in order to be exempt, (1) must be directly used by the purchaser and (2) be used in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of tangible personal property." Indiana Dep't. of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520, 525 (Ind. 1983). "The test for directness requires the equipment to have an 'immediate link with the product being produced." Id. Accordingly, the sales tax exemption is applicable to that equipment which meets the "double direct" test and is "essential and integral" to the manufacture of taxpayer's tangible personal property. General Motors Corp. v. Indiana Dep't. of State Revenue, 578 N.E.2d 399, 401 (Ind. Tax Ct. 1991). The application of Indiana's double-direct manufacturing exemptions often varies based on a determination of when a taxpayer's manufacturing process is considered to have begun and ended.

An exemption applies to manufacturing machinery, tools, and equipment directly used by the purchaser in direct production. 45 IAC 2.2-5-8(a). Machinery, tools, and equipment are directly used in the direct production process if they have an immediate effect on the article being produced. 45 IAC 2.2-5-8(c). A machine, tool, or piece of equipment has an immediate effect on the product being produced if it is an essential and integral part of an integrated process that produces the product. Id. An integrated process is one where the total production process is comprised of activities or steps that are functionally interrelated and where there is a flow of "work-in-process." 45 IAC 2.2-5-8(c), example 1.

B. Environmental quality compliance Exemption.

A separate exemption is provided under IC § 6-2.5-5-30(a), which states:

To claim exemption of environmental quality compliance, the claimant must meet (1) the production requirement and (2) the environmental compliance requirement. Specifically, in Mechanics Laundry & Supply, Inc. v. Indiana Dep't of State Revenue, 650 N.E.2d 1223, 1232 (Ind. Tax Ct. 1995), the Indiana Tax Court explained that the environmental compliance requirement must be "in connection with" with the production requirement.

C. Protest Analysis.

Taxpayer, in this instance, cited to specific portions of the Indiana Administrative Code (e.g., 329 IAC 10), which govern the installation, maintenance, and regulation of landfills, to support its protest. While the manufacturing exemption from sales tax requires that Taxpayer demonstrate that it directly used the items in question in its direct production (a "double direct" test), the environmental quality compliance exemption requires that Taxpayer demonstrate that its use of the items for its production is in connection with the environmental compliance requirement. Therefore, the issue becomes whether Taxpayer's landfill operation met the production requirement. In other words, Taxpayer must first demonstrate that (1) it is engaged in the "production of other tangible personal property" in its landfill operation; and (2) its landfill operation is the business of "manufacturing, processing, refining, repairing, mining . . . ." Indiana Dep't. of Revenue v. Interstate Warehousing, Inc., 783 N.E.2d 248, 250 (Ind. 2003).

"Manufacture" is defined as "[a] thing that is made or built by human being, as distinguished from something that is a product of nature; esp. any material form produced by a machine from an unshaped composition of matter." Black's Law Dictionary 984 (8th ed. 2004). While statutes are silent on what constitutes "manufacture," courts, on several occasions, have attempted to answer this question through statutory construction.

In Mechanics Laundry & Supply, Inc. v. Indiana Dep't of State Revenue, 650 N.E.2d 1223 (Ind. Tax Ct. 1995), the taxpayer, who operated a commercial laundry, claimed it was entitled to the statutory exemptions, such as exemption of environmental quality compliance, under IC § 6-2.5-5 for sales/use taxes concerning cleaning supplies, water, gas, electricity, and other products consumed during the laundering of soiled textiles. Id. 1226-27. Referring to the statutory and regulatory requirements, the Tax Court stated that the taxpayer failed to demonstrate that its "end product" was "substantially different from the component materials used." The Tax Court found that the taxpayer did not "place tangible personal property in a form, composition, or character substantially different from that in which it was acquired." Id. at 1229. The Tax Court thus concluded that the laundering of soiled textiles did not constitute "production," and, therefore, the taxpayer was not engaged "in an overall process directed to the production of textiles;" rather, the taxpayer was "perpetuat[ing] textiles that were produced by others." Id. at 1229-30. The Tax Court thus determined that the taxpayer was not entitled to the statutory exemptions, including "Environmental Quality Exemption," outlined in IC § 6-2.5-5.

In Indianapolis Fruit Co. v. Indiana Dep't of State Revenue, 691 N.E.2d 1379 (Ind. Tax Ct. 1998), the taxpayer, Indianapolis Fruit Co., claimed that it was entitled to agricultural and manufacturing exemptions for the tangible personal property it had purchased for ripening bananas and tomatoes. The Tax Court stated that:

The court, in Indianapolis Fruit, found that the bananas had undergone substantial change and had transformed from "green, hard, inedible, and unmarketable bananas" to yellow, edible, and sellable bananas after the bananas were placed in air and temperature controlled banana ripening booths and the taxpayer applied ethylene gas to the bananas. Id. at 1385. The court, however, declined to find the same result for the taxpayer's tomatoes. The court determined that "production" occurred as the taxpayer created the sellable bananas, but the taxpayer did not actively perform the same or similar activities to produce the sellable tomatoes. As a result, the court, in Indiana Fruit, concluded that the taxpayer was entitled to the exemptions for its purchases of tangible personal property to be used or consumed in the bananas' production process, but not the tomatoes' production process.

Similarly, in White River Envtl. P'ship v. Indiana Dep't of State Revenue, 694 N.E.2d 1248 (Ind. Tax Ct. 1998), the taxpayer, White River Environmental Partnership (WREP), which operated a wastewater treatment facility, claimed that it was entitled to statutory exemptions for the equipment which it purchased to be used in its wastewater treatment process. The Indiana Tax Court first followed the well-established case law stating that a taxpayer must "engage in production before receiving an exemption." Id. at 1250.

The Tax Court in White River explains:

. . .

The Tax Court, in White River, further referred to Mumma Bros., where the Indiana Court of Appeals determined that the taxpayer, who drilled water wells and installed pumps and plumbing for residences, farms, and commercial entities in order to provide water for animal and human consumption, was not entitled to exemptions because the taxpayer did not produce a marketable good. Following the same analysis in Mumma Bros., the Tax Court in White River illustrated:

Thus, the Tax Court in White River determined that WREP, like the taxpayer in Mumma Bros., was not entitled to statutory exemptions because WREP failed to demonstrate that it produced a marketable good. The Tax Court concluded that "[w]here something is made, but not sold, the danger of tax pyramiding does not exist." Id.

Furthermore, in Interstate Warehousing, the taxpayer, Interstate Warehousing, Inc. ("Interstate"), claimed that it was entitled to an exemption under IC § 6-2.5-5-5.1 on its consumption of the electricity used to convert the ammonia from gas form to a liquid. Indiana Dep't of Revenue v. Interstate Warehousing, Inc., 783 N.E.2d at 249. The Tax Court ruled in favor of the taxpayer. The Indiana Supreme Court, in reversing the Tax Court's determination, found that the taxpayer, Interstate Warehousing, Inc., was not qualified for the exemption in two respects: the court found that (1) the taxpayer was not engaged in the "production of other tangible personal property" (namely, the "distinct marketable good" requirement); and (2) the taxpayer was not in the business of "manufacturing, processing, refining, repairing, mining, agriculture, horticulture, floriculture, or arboriculture" (namely, the "transformation" requirement). Id. at 250. The court, in pertinent part, explained that:

. . .

Accordingly, to meet the production requirement, a taxpayer must engage in the business of production and its production must result in a marketable good.

Throughout the protest process, Taxpayer, referring to Cave Stone and Rotation Products Corp. v. Indiana Dep't of State Revenue, 690 N.E. 2d 795 (Ind. Tax Ct. 1998), and Merch. Warehouse Co. v. Indiana Dep't of State Revenue, 87 N.E.3d 12 (Ind. 2017), asserted that:

Taxpayer also relied on Brandenburg Indus. Serv. Co. v. Indiana Dep't of State Revenue, 60 N.E.3d 300 (Ind. Tax Ct. 2016) to support its position that its landfill operation has been "the integrated process yielded a marketable product that can be sold, and thus a manufacturing process . . . While methane gas does naturally occur within the cell in some capacity, without the collection and processing of such methane gas via the process described above, the gas would not be marketable for sale. . . ." (Emphasis added). Taxpayer thus asserted that it was entitled to additional refund of tax paid on various categories of equipment, materials, and supplies acquired and incorporated into Taxpayer's landfill. Taxpayer essentially argued that its production of gas for sale began in its landfill cells. As such, Taxpayer contended that "the roads within the landfill, the daily tarping system, erosion control, the leachate collection system, the pug mill, the gas flare, and the machinery" used for its landfill operation were exempt. Taxpayer further offered several photos and a video to support its protest.

Upon review, however, the Department is not able to agree that Taxpayer's landfills met the production requirement. Specifically, first, the taxpayer in Brandenburg Indus., "acquires the metal that it processes either by directly purchasing retired assets (e.g., boats, machinery, or railroad scrap) or by performing services in its related businesses, such as building demolition or environmental remediation, in exchange for the metal." Id. at 301. Taxpayer here, as a landfill operator, did not do so. Rather, the publicly verifiable information showed that Taxpayer has been operating the landfills since 1995 to collect solid waste from the community in Indiana. As such, the business purpose of Taxpayer's landfills is to serve as waste disposal facility. Thus, Taxpayer's reliance on Brandenburg Indus. is misplaced.

Additionally, landfill gas "is a natural byproduct of the decomposition of organic material in landfills." United States Environmental Protection Agency, Basic Information about Landfill Gas, available at https://www.epa.gov/lmop/basic-information-about-landfill-gas (last visited February 25, 2021). The Indiana Department of Environmental Management ("IDEM") further explains:

Since landfill gas naturally occurs when operating landfills, in order to become a certified Indiana landfill operator, Taxpayer must first comply with the state environmental regulations to properly construct, maintain, monitor, manage, and close the landfills - every step along the way throughout the landfill operation - including 30 years after completing closure of landfills. As such, "[g]as extraction" is one of the statutorily required responsibilities of waste management when Taxpayer began to operate landfills in Indiana since 1995. Without IDEM's approval, there would be no landfill operation. Regardless of whether the gas is sold, the collection of the gas is required by IDEM.

Finally, like the taxpayer in Indianapolis Fruit, in this instance, the audit noted that Taxpayer actively performed activities within the CPL building but Taxpayer did not actively perform the same or similar activities to create "a marketable good" - namely "landfill gas" - in its landfill cells. As Taxpayer admitted earlier, "methane gas does naturally occur within the cell in some capacity" because landfill gas "is a natural byproduct of the decomposition of organic material in landfills."

As mentioned earlier, to claim exemption of environmental quality compliance, the claimant must meet (1) the production requirement and (2) the environmental compliance requirement. Specifically, the Indiana Tax Court, in Mechanics Laundry & Supply, Inc. v. Indiana Dep't of State Revenue, 650 N.E.2d 1223, 1232 (Ind. Tax Ct. 1995), explained that the environmental compliance requirement must be "in connection with" the production requirement. As such, this final determination first addresses the production requirement. Like the taxpayer in Mechanics Laundry, in this instance, Taxpayer's documentation failed to demonstrate that its landfill operation was "in connection with" its production. As such, Taxpayer's purchases and use of the items for its landfill operation did not qualify the above-mentioned exemptions.

As explained above, IC § 6-2.5-5-3(b) provides an exemption for equipment used in a production process. The Department has already agreed that Taxpayer's gas processing constitutes a production process. Also, the Department had previously decided and has now confirmed that Taxpayer's landfill operations do not constitute any part of a production process. Therefore, tangible personal property ("TPP") associated with the gas processing is exempt under IC § 6-2.5-5-3(b), while TPP associated with landfill operations is not exempt in any manner.

In the instant case, there is some TPP that is used for both landfill operations and for gas processing. Specifically, the Gas Collection System consisting of piping, pumps, valves, meters, wellheads, and condensate knockouts is used in landfill operations for natural gas control purposes and is also used in gas processing by gathering and transporting the natural gas to Taxpayer's processing building. This situation is not uncommon, and the Department has a regulation explaining how such TPP is treated for sales and use tax purposes. 45 IAC 2.2-5-8(c), Example 3 provides:

Therefore, the Gas Collection System consisting of piping, pumps, valves, meters, wellheads, and condensate knockouts are partially used in an exempt manner and partially used in a taxable manner and Taxpayer's refund claim will be granted with respect to this equipment in the same percentage that Taxpayer uses the collected gas in its gas processing. The refund will be denied in the same percentage that Taxpayer uses the collected gas in its landfill gas control operations. These percentages will be determined in a supplemental refund review by the Department. Taxpayer's protest is denied in all other respects.

Taxpayer's protest is partially sustained and partially denied, as explained above.

March 23, 2021