in-20260128-IR-045260004NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE MEMORANDUM OF DECISION: 04-20241728 Sales and Use Tax  For The Tax Years 2018, 2019, and 2020 HOLDING Business provided documentation showing that certain purchases should not have been included in the statistical sampling for an updated SUTCA agreement because the purchases were exempt as they were directly used in the manufacturing process. Business also provided documentation showing contracts were lump sum contracts not subject to tax. Interest does not accrue on any refunds issued or owed to Business because the refunds originated from an audit and not a refund claim. ISSUE

I. Sales and Use Tax – Imposition.

Authority: IC 6-2.5-1-2; IC 6-2.5-1-27.7; 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 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep’t of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520 (Ind. 1983); Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); USAir, Inc. v. Indiana Dep’t of State Revenue, 623 N.E.2d 466 (Ind. Tax Ct. 1993); General Motors Crop. V. Indiana Dept. of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991); 45 IAC 2.2-2-1; 45 IAC 2.2-5-8; Sales Tax Information Bulletin 60 (March 2024); Sales Tax Information Bulletin 60 (November 2017); Black’s Law Dictionary (Westlaw 12th ed. 2024). Taxpayer protests the assessment of use tax on tangible personal property and lump sum contracts.

II. Interest – Tax Administration.

Authority: IC 6-8.1-9-1; IC 6-8.1-9-2; General Tax Information Bulletin 101 (December 2019). Taxpayer argues it was entitled to interest on a refund. STATEMENT OF FACTS Taxpayer is a manufacturing company with several Indiana locations. In 2020, Taxpayer approached the Indiana Department of Revenue (“Department”) to update its Sales and Use Tax Compliance Agreement (“SUTCA”). To update its SUTCA, Taxpayer agreed to an audit encompassing tax years 2018, 2019, and 2020. During the audit review, the Department determined that Taxpayer had overpaid sales or use tax on some items. The Department also determined that other items were subject to sales or use tax for which Taxpayer had not remitted any tax. After various adjustments, the Department determined that Taxpayer was entitled to a refund for some items where an overpayment of sales and use tax related to tax years 2018, 2019, and 2020 occurred. Taxpayer believed that multiple additional items the Department determined were taxable during the audit were also exempt, and the final dollar amount of the refund was incorrect. Taxpayer filed a protest to that effect. An administrative hearing was held, and this Memorandum of Decision results. Additional facts will be provided as necessary.

I. Sales and Use Tax – Imposition.

DISCUSSION Taxpayer operates three Indiana locations. The Department and Taxpayer agreed on a sampling methodology for the audit that combined a statistical sampling from the three locations. The Department determined that certain items purchased by Taxpayer were purchased without the payment of sales tax. As such, those items were subject to use tax. Other purchases made by Taxpayer had tax paid when the items purchased should have been considered exempt items. As a result, Taxpayer was owed a refund of taxes paid on those purchases. Taxpayer argues that additional items should have been tax exempt because they are directly used in its manufacturing process. Taxpayer also argues that contracts involving “lump sum” contracts are not subject to tax. Finally, Taxpayer argues that it is entitled to interest on the overpayment refunds already issued by the Department as well as interest on any additional refund(s) owed on exempt purchases as a result of this protest. As a threshold issue, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. “[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). Indiana imposes an excise tax called “the state gross retail tax” or “sales tax” on retail transactions made in Indiana. IC 6-2.5-2-1(a); 45 IAC 2.2-2-1. A person who acquires property in a retail transaction is liable for the sales tax on the transaction. IC 6-2.5-2-1(b). Indiana also imposes a complementary excise tax called a “use tax” 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 a functional equivalent to the sales tax. See Rhoade v. Indiana Dept. of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002). The complementary relationship between sales and use tax ensures non-exempt retail transactions that escape sales tax liability remain taxed. Id.; USAir, Inc. v. Indiana Dept. of State Revenue, 623 N.E.2d 466, 468 (Ind. Tax Ct. 1993). If sales tax is paid at the time of the transaction, an exemption from use tax is granted under IC 6-2.5-3-4. A statute which provides a tax exemption is strictly constructed against the taxpayer. Indiana Dept. of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 97 (Ind. Ct. App. 1974). To trigger the imposition of Indiana’s use tax, tangible personal property must be acquired in a retail transaction. A taxable retail transaction occurs when: (1) a party acquires tangible personal property as part of its ordinary business for the purpose of reselling the property; (2) that property is then exchanged between parties for consideration; and (3) the property is used in Indiana. See IC 6-2.5-1-2; IC 6-2.5-4-1(b) and (c); IC 6-2.5-3-2(a). Generally, all purchases of tangible personal property by persons engaged in the direct production, manufacture, fabrication, assembly, or finishing of tangible personal property are taxable. 45 IAC 2.2-5-8. Taxpayer argues that several items included in the statistical sampling are tax exempt because the items and/or repair parts are directly used in the manufacturing process. In support, Taxpayer provided purchase invoices, contracts, and an explanation, which included photographs and videos, of the manufacturing process. The relevant statute is IC 6-2.5-5-3, which states, in part, Items must meet this “double direct” test to qualify for an exemption. As discussed in General Motors Corp. v. Indiana Dept. of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991), the “double direct” test inquiry focuses on the production process itself, broadly defined to encompass all the production steps involved in transforming a work in progress into a finished marketable product. Id. at 401. Equipment meets the double direct standard when it is an essential and integral part of an integrated production process. Id. The Indiana Supreme Court has broadly defined the production process in Dept. of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520, 524 (Ind. 1983) by stating, “the production or processing of the stone begins at the time of the initial stripping, drilling, and blasting at the quarry and ends at the time the stone is stockpiled. The production process is continuous and indivisible." The Court's reasoning behind this decision was “unless the stone is transported from the quarry to the crusher and from the crusher to the stockpiles, no marketable product will result.” Id. 45 IAC 2.2-5-8(g) provides: Additionally, 45 IAC 2.2-5-8(h) discusses the taxability of maintenance and replacement equipment. If machinery, tools, and equipment are used in the normal repair and maintenance of production machinery, those items are subject to tax. Id. However, replacement parts, used to replace worn, broken, inoperative, or missing parts or accessories on exempt machinery and equipment are exempt from tax. Id. The example provided states that if a manufacturer of sheet metal repairs and upgrades used machinery by relacing worn or broken parts and adds new elements or features available in state-of-the-art equipment, all items which become components of the upgraded machinery are exempt from tax. All tools and equipment used to repair or upgrade the used machinery would be taxable. Id. Taxpayer’s manufacturing process involves the production of large steel products. Taxpayer mines raw materials in other states and transports the materials to its Indiana location via barge and railway. The raw materials are processed at the mining location so that they are in a usable form when arriving in Indiana. The raw materials are transferred from the barge or railcar into the ore yard, where they are temporarily stored prior to being moved into the blast furnace. When the raw materials are added to the blast furnace, the ore is melted into a liquid form. Molten steel drains from the blast furnace to continue with the manufacturing process. The molten steel is transferred to other machinery within Taxpayer’s plant and eventually formed into solid steel slabs. The slabs are marked with identifying information for tracking and movement throughout the rest of the plant. As part of the finishing process, the slabs are processed through the hot strip mill, which makes the slabs thinner and longer. As the slabs change form, they are moved through several other stations within Taxpayer’s facility to complete the finishing process. Eventually, the slabs are formed into usable products as specified by Taxpayer’s customers. The finished products usually consist of steel sheets and coils completed per a customer’s specifications. After review, it is clear that Taxpayer’s manufacturing process starts at the time the raw materials are mined. Taxpayer explained that immediately after the raw materials are mined, those raw materials are processed so the result is consistent in size and material content (i.e., type of ore). Taxpayer utilizes this procedure so when the product is transferred to the ore yard and later moved to the blast furnace, Taxpayer is certain of the ore’s content, which can affect the final product. As Taxpayer explained, there is no final product without the mining and immediate processing of the raw materials. This is similar to the manufacturing process discussed in Cave Stone where without the processing of the raw materials, a final marketable product does not result. Taxpayer argues that various items considered taxable during the audit are items that should be exempt because they are directly used in the manufacturing process. The Department determined that transactions related to overhead cranes should be taxed at a rate of five percent. This percentage was based on observations made during a plant tour in which the Department determined some items “were used in a non-exempt manner.” Taxpayer informed the Department that any taxable use was less than one percent. Without additional documentation during the audit, the Department maintained that five percent of the cranes’ usage was taxable. During the protest, Taxpayer provided a detailed explanation of its manufacturing process and explained that the specific cranes under protest are fixed along the manufacturing process. Per Taxpayer, “Each crane has a specific task or series of tasks related to moving in process materials from one manufacturing stage to another.” The nature of Taxpayer’s manufacturing process involves moving large amounts of ore and molten steel via ladles as well as moving large steel slabs and coils. These items cannot physically be moved by Taxpayer’s employees, and a significant portion, if not all, of the manufacturing process, consists of moving these large items with the overhead, fixed cranes throughout the plant. After review, the Department agrees the cranes are directly used in the manufacturing process and are not used for other purposes. The cranes should be 100 percent exempt and reclassified as exempt in the statistical sample for calculation purposes. Further, a large majority of the overhead crane transactions under protest involve repairs to the cranes and replacement of parts for the cranes, cranes girders, etc. As discussed in 45 IAC 2.2-5-8(h), replacement parts to replace broken, inoperative, or missing parts on exempt machinery are exempt from tax. The transactions detailed by Taxpayer involve replacement parts and should be exempt. These transactions should also be reclassified as exempt in the statistical sample. The Department notes that, among all of the cranes Taxpayer used in its operations, there were two specific cranes Taxpayer protested as exempt; however, Taxpayer now states that those two cranes were only used for maintenance purposes. Taxpayer withdrew those two cranes from the protest, so these transactions are no longer at issue. The second issue Taxpayer is protesting relates to “lump sum” contracts. A “lump sum contract” is a contract setting a fixed total price for a construction project. Black’s Law Dictionary (Westlaw 12th ed. 2024). The Department determined that certain construction contracts were subject to sales tax. During the audit, Taxpayer provided a variety of documentation including Master Service Agreements, purchase orders, and proposals; however, the Department determined the documentation failed to provide specific details regarding work to be performed by the contractors. As a result, the Department determined the burden was on the Taxpayer to provide sufficient information related to each contractor job, and further adjustments were unwarranted. A “time and material contract” is a contract that states the cost of construction material and the cost of labor separately. IC 6-2.5-1-27.7. Per Sales Tax Information Bulletin 60 (November 2017), 20180131-IR-045180051NRA, Purchases and use of construction material by contractors that operated under a construction contract or other installation contract that does not meet the definition of a time and material contract (i.e., a lump sum contract) purchase construction materials for their own use/consumption in the fulfillment of contractual obligations to provide real property improvement services and therefore pay sales tax or use tax themselves rather than charge sales tax to their customers. Sales Tax Information Bulletin 60 (March 2024), 20240417-IR-045240129NRA. Taxpayer protested the Department’s determination that certain contracts were taxable and argued that these particular contracts were lump sum contracts. In support, Taxpayer provided copies of the Master Service Agreements along with purchase orders and invoices related to the specific jobs performed by various contractors. After review, the contracts in question are lump sum contracts. Generally, for each transaction, Taxpayer provided a Master Service Agreement related to the specific contractor as well as a purchase agreement and/or invoice for each job performed by the contractor. The purchase agreements and invoices clearly show the contract is a lump sum contract consisting of a total dollar amount for the job. The Department recognizes that some of the supporting documentation does include a “breakdown” of time and materials on a spreadsheet; however, review of contract language confirms that the contracts were lump sum contracts and not a time a materials contract. Further, Taxpayer’s contracts with its vendors also detail who was responsible for paying any sales tax due. Any ambiguity is clarified by a review of the documentation for that particular transaction. The contracts are lump sum contracts and should be reclassified as not subject to use tax in the statistical sampling since the contractor pays sales tax or use tax on the materials used in lump sum contract jobs. Taxpayer was the customer in these transactions and thus was not responsible for sales tax or use tax. FINDING Taxpayer’s protest is sustained.

II. Interest – Tax Administration.

Taxpayer argues that it is entitled to interest on the refunds already provided as well as any additional refunds resulting from this protest under IC 6-8.1-9-2(d). Taxpayer reasoned that because all payments were remitted timely via its monthly returns, an overpayment resulted each month and the overpayment has now been “confirmed” by the audit. Because an overpayment existed, any overpayment that is being refunded has accrued interest to which Taxpayer is entitled. IC 6-8.1-9-1(a) provides that if a person has paid more tax than is legally due for a particular taxable period, the person may file a claim for refund with the Department. The claim must be made within three years after the due date of the return or the date of payment. Id. IC 6-8.1-9-2(a) provides that if a person has paid more tax for a taxable year than is legally due, the Department shall apply the excess amount to outstanding tax liabilities for the same tax and listed taxes. If any excess remains, the Department shall either refund the amount or, at the person’s request, credit the amount to future tax liabilities. Id. If an excess tax payment is not refunded or credited within ninety days after the refund claim is filed, then interest accrues. IC 6-8.1-9-2(d). Finally, General Tax Information Bulletin 101 (December 2019), 20200401-IR-045200137NRA, (previously Commissioner’s Directive 34 dated May 2016), states in part, In this instance, Taxpayer remitted payment under the old SUTCA agreement. Taxpayer conducted an internal evaluation and determined that it was overpaying taxes based on the taxability of various transactions. Taxpayer voluntarily approached the Department about updating the SUTCA agreement. As part of that updating process, Taxpayer agreed to participate in an audit. The refunds stemmed from audit adjustments. Taxpayer did not file a refund claim. Because Taxpayer did not file a refund claim and the refunds originated from the audit, Taxpayer is not eligible for interest on any of the refunds. See IC 6-8.1-9-1(a), IC 6-8.1-9-2(d); General Tax Information Bulletin 101. FINDING Taxpayer’s protest is denied. CONCLUSION After review, Taxpayer provided documentation showing certain items in the statistical sampling should not be subject to tax, and the Department’s assessment was incorrect under IC 6-8.1-5-1(c). The Department will update the statistical sampling via a supplemental audit and recalculate any refund(s) owed to Taxpayer. Taxpayer is not entitled to interest on the previously issued refunds or any additional refunds stemming from this protest. November 14, 2025 Replaces Finding Document: New