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.

Indiana Business was not entitled to the $137.74 refund because it failed to demonstrate that it was entitled to the manufacturing exemptions under IC 6-2.5-5.

I. Sales Tax - Refund.

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; 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); Indiana Dep't. of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520 (Ind. 1983); General Motors Corp. v. Indiana Dep't. of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991); Indiana Dep't. of Revenue v. Interstate Warehousing, Inc., 783 N.E.2d 248 (Ind. 2003); 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 (Ind. Ct. App. 1980); 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 2.2-5-12; 45 IAC 2.2-3-4; 45 IAC 2.2-3-14; Black's Law Dictionary (8th ed. 2004).

Taxpayer protests the refund denial of sales tax paid concerning its purchases of tangible personal property.

Taxpayer is an Indiana business who filed a refund claim, requesting a $137.74 refund of sales tax paid on items it purchased during 2020.

The Indiana Department of Revenue ("Department") reviewed the refund request and denied the refund. In its March 10, 2021 letter, in relevant part, the Department stated the following:

Taxpayer protested the refund denial and requested that the Department make "Final determination without a hearing." This final determination results. Further facts will be provided, as necessary.

I. Sales Tax - Refund.

Upon initial review, the Department denied Taxpayer's refund claim, finding that Taxpayer registered as a service provider and was not entitled to manufacturing exemptions.

Taxpayer disagreed. According to Taxpayer, it requested the refund of sales tax paid "on materials purchased which were consumed in the manufacture of products" which it then sold online. In relevant part, Taxpayer stated the following:

Accordingly, the issue is whether Taxpayer demonstrated that it is a manufacturer and its purchases qualified for the manufacturing 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).

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 when a manufacturer "acquiring the property acquires it for direct consumption as a material to be consumed in the direct production of other tangible personal property in [its] business of manufacturing . . . ." 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. The tangible personal property "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 tangible personal property 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.

Similarly, "[d]irect consumption in the production process begins at the point of the first operation or activity constituting part of the integrated production process and ends at the point that the production process has altered the item to its completed form, including packaging, if required." 45 IAC 2.2-5-12(d)(1).

"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. at 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.

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 248, 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.

In this instance, Taxpayer submitted purchase invoices and an Excel spreadsheet to support its $137.74 refund claim. Taxpayer contended that it paid sales tax on its purchase of tangible personal property - including polylactic acid (PLA), oval top screws, different plastic bags, a reverse-tuck chipboard box, Scotch tape, shipping labels, and hex wrenches - to be used to manufacture Item One and Item Two for sale. In particular, according to Taxpayer, (1) it purchased polylactic acid (PLA), which was "utilized in 3-D printers to form into the final product" and (2) its products, Item One and Item Two, were sold online. As such, Taxpayer asserted that it was entitled to the refund of tax paid pursuant to the manufacturing exemptions.

Upon review, however, the Department is not able to agree that Taxpayer is in the business of manufacturing because Taxpayer did not provide any supporting documentation to substantiate its manufacturing production process, including the beginning and the end of its production process. Also, publicly verifiable information demonstrates that Taxpayer primarily offers engineering services to small businesses and it is not a company manufacturing product for sale.

Even if, for the purposes of argument, assuming that Taxpayer could establish that it is in the business of manufacturing Item One and Item Two for sale, Taxpayer's documentation in this instance failed to establish that it directly consumed tangible personal property, such as oval top screws, different plastic bags, a reverse-tuck chipboard box, Scotch tape, shipping labels, and hex wrenches, in its direct manufacturing production. Taxpayer's statement failed to establish that its use of the tangible personal property in question - namely, oval top screws, different plastic bags, a reverse-tuck chipboard box, Scotch tape, shipping labels, and hex wrenches - met the "double direct" requirement and would have been non-production or post-production.

As mentioned above, the fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required either by law or by practical necessity does not itself mean that the property "has an immediate effect upon the article being produced." In short, the Department is not able to agree that Taxpayer demonstrated that it was entitled to the refund.

Taxpayer's protest is respectfully denied.

June 15, 2021