in-20251126-IR-045250665NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE ORDER DENYING REFUND: 04-20210049 State Gross Retail and Use Tax  For the 2015-2017 Tax Years HOLDING Indiana Corporation failed to demonstrate that a public utility furnishing services qualified for the public transportation exemption. ISSUE

I. Gross Retail Tax – Public Transportation Exemption.

Authority:  IC 1-1-4-1; IC 6-2.5-1-27; IC 6-2.5-2-1; IC 6-2.5-4-1; IC 6-2.5-4-5; IC 6-2.5-5-11; IC 6-2.5-5-27; IC 8-1-2-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep’t of State Revenue v. Indianapolis Pub. Transp. Corp., 550 N.E.2d 1277 (Ind. 1990); Universal Health Realty v. Fluty, 144 N.E.3d 857 (Ind. Tax Ct. 2020); Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); Panhandle Eastern Pipeline Co. v. IDSR, 741 N.E.2d 816 (Ind. Tax Ct. 2001); Hyatt Corp. v. Dep’t of State Revenue, 695 N.E.2d 1051 (Ind. Tax Ct. 1998); Harlan Sprague Dawley, Inc. v. Indiana Dep’t of State Revenue, 605 N.E.2d 1222 (Ind. Tax Ct. 1992); 45 IAC 2.2-4-11; 45 IAC 2.2-4-12; 45 IAC 2.2-5-61; Sales Tax Information Bulletin 12 (July 2015); Sales Tax Information Bulletin 12 (December 2014); Sales Tax Information Bulletin 12 (July 2010); Sales Tax Information Bulletin 51 (April 2023); Memorandum of Decision 04-20170966R (May 2018); Letter of Findings 04-20170176 (August 2017); Supplemental Letter of Findings 04-20150416 (June 2016); Supplemental Letter of Findings 04-20140502 (June 2016); Arthur H. Northrup, The Indiana Gross Income Tax, 25 Ind. L.J. 148 (1950); The Retail Sales Tax, Current Studies of Indiana Taxation, First Report of the Commission on State Tax and Financing Policy for the 1961-1963 Biennium (June 1962). Taxpayer argues that it was not subject to use tax on purchases of property used to maintain natural gas pipelines because Taxpayer was providing public transportation. STATEMENT OF FACTS Taxpayer is a utility company regulated by the Federal Energy Regulatory Commission (“FERC”) and the Indiana Utility Regulatory Commission (“IURC”). FERC and IURC regulate the natural gas industry, including the gathering systems collecting gas from the wellheads, transmission lines moving gas away from where it is processed, and distribution lines which carry gas to its end users, both commercial and residential. Taxpayer owns an intrastate pipeline system in Indiana, consisting of natural gas transmission assets that move natural gas along the pipeline system to commercial and residential customers in the State. Although a natural gas customer’s home or business is connected to Taxpayer’s pipeline, it may choose to purchase gas either from Taxpayer or another provider. When one of Taxpayer’s customers in Indiana purchases natural gas from a third party, Taxpayer is compensated for moving the third party’s natural gas to the customer. The customer will see separate charges on its bill for the gas supply and the gas transmission. During 2015-2017 (the “Tax Years”), more than 75 percent of gas traveling through Taxpayer’s pipeline system is owned by third parties. To maintain its gas transmission assets, Taxpayer made purchases of tangible personal property during the tax years, on which it remitted use tax. Taxpayer filed a refund claim, stating that those purchases should be exempt as they were used for public transportation in accordance with IC 6-2.5-5-27. The Indiana Department of Revenue (“Department”) denied this refund claim, and Taxpayer timely protested the denial. An administrative hearing was held and this decision results.

I. Gross Retail Tax – Public Transportation Exemption.

DISCUSSION Taxpayer claims to have incorrectly remitted tax on many transactions relating to the transmission of natural gas, stating that these purchases qualify for the public transportation exemption. The Department denied Taxpayer’s refund request categorically, finding that (1) Taxpayer did not qualify as a transportation company engaged in public transportation, and (2) public utilities may only claim a restricted subset of sales tax exemptions. “[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). Thus, all interpretations of Indiana tax law contained within this decision shall be entitled to deference. In its refund denial letter, the Department does not cite, reference, or analyze the public transportation exemption at IC 6-2.5-5-27. Instead, the Department relies on several factors from Sales Tax Information Bulletin 12, a publication that provides non-technical guidance on the public transportation exemption. (July 2015), 20150729-IR-045150221NRA; see also Sales Tax Information Bulletin 12 (December 2014), 20150128-IR-045150028NRA. This Bulletin includes a section titled “Public Transportation Requirements” that lists the following requirements for a “transportation company” to qualify for a public transportation exemption: The Department’s refund denial relied on Taxpayer’s failure to adhere to some of the listed “critical” requirements. But this section of Sales Tax Information Bulletin 12 focuses on the requirements for a “transportation company” to qualify its activity as public transportation. The remainder of Sales Tax Information Bulletin 12 refers to a “public transportation provider” instead and notes that these providers can be persons or companies. The plain language of this distinction compels us to infer a difference between a “public transportation provider” and a “transportation company.” This distinction is intended to provide a narrow, more strict set of rules for transportation companies to qualify for the public transportation exemption. There is historical context to the concept of a “transportation company.” This list of requirements was added to the July 2010 version of Sales Tax Information Bulletin 12 (July 2010), 20100623-IR-045100390NRA. At that time, the Department found itself needing to clarify the public transportation exemption. Companies had begun creating subsidiaries which provided transportation only to related entities and would then claim a public transportation exemption. E.g., Letter of Findings 04-20170176 (August 2017), 20170830-IR-045170383NRA; Supplemental Letter of Findings 04-20140502 (June 2016), 20160629-IR-045160244NRA. The factor test in Sales Tax Information Bulletin 12 was enumerated to ensure that the relationship between a transportation company and its parent exhibited “indicia of an arm’s-length transaction.” Memorandum of Decision 04-20170966R (May 2018), 20180530-IR-045180231NRA; Supplemental Letter of Findings 04-20150416 (June 2016), 20160629-IR-045160246NRA. Taxpayer does not claim to be a “transportation company,” nor does it operate as one. Because of this, Taxpayer’s transactions should not be evaluated with the transportation company factor test to determine if they qualify for a public transportation exemption. Taxpayer and the Department agree that Taxpayer qualifies as a public utility but disagree on the consequences of this classification for the purpose of sales and use tax exemptions. The Department argues that public utilities may only claim a restricted subset of sales tax exemptions, while Taxpayer believes that no such restriction exists. “In general, the furnishing of electricity, gas, water, steam or steam heating services by public utilities to consumers is subject to the state gross retail tax.” 45 IAC 2.2-4-11(a). That same regulation specifies that gross receipts of power subsidiaries are subject to sales tax. 45 IAC 2.2-4-11(b). However, exclusions and exemptions from these rules of taxability for public utilities are enumerated at IC 6-2.5-4-5, IC 6-2.5-5-11, and at 45 IAC 2.2-4-12(c). The Department’s refund denial letter states that, “[t]he Indiana Legislature did not exempt from the gross retail sales and use tax the purchases made by utilities which were used for transmission and distribution.” However, transmission and distribution are discussed in reference to electricity, not natural gas. See Sales Tax Information Bulletin 51 (April 2023) 20230510-IR-045230256NRA. This restriction and its context are more appropriately clarified elsewhere. The plain language of the above statutes and regulations establish the taxability of services furnished by public utilities and create specific exclusions and exemptions. This does not, however, prohibit other tax exclusions or exemptions from applying to public utilities or their services. For this reason, purchases made by public utilities are not excluded per se from qualifying for tax exemptions beyond those listed above. Since at least the 1930s, Indiana has recognized that public utilities provide a service that is taxed distinctly from other tangible personal property. See Arthur H. Northrup, The Indiana Gross Income Tax, 25 Ind. L.J. 148, 156-158 (1950) and The Retail Sales Tax, Current Studies of Indiana Taxation, First Report of the Commission on State Tax and Financing Policy for the 1961-1963 Biennium, 17 (June 1962). This distinction is recognized today in statute. IC 8-1-2-1 defines a public utility as an entity that, among other things, “control[s] any plant or equipment within the state for the . . . production, transmission, delivery, or furnishing of heat, light, water, or power.” That same statute explains that, for the purpose of public utilities and transportation, the definition of service is particularly inclusive, stating: “Service” is used in this chapter in its broadest and most inclusive sense and includes not only the use or accommodation afforded consumers or patrons but also any product or commodity furnished by any public or other utility and the plant, equipment, apparatus, appliances, property, and facility employed by any public or other utility in performing any service or in furnishing any product or commodity and devoted to the purposes in which such public or other utility is engaged and to the use and accommodation of the public. IC 8-1-2-1(e) (Emphasis added). In the context of moving natural gas through pipelines, this means that a public utility’s furnished services include, by definition, 1) the use of the natural gas pipeline, 2) the natural gas provided in that pipeline, and 3) the pipeline itself. This broad understanding of public utilities as taxable service providers is further supported by the existence of IC 6-2.5-4-5, which states, among other things, that a public utility is a retail merchant making a retail transaction when it sells or furnishes natural gas. In conjunction with IC 6-2.5-2-1, this imposes state gross retail tax on both the sale and furnishing of public utility services. In contrast, IC 6-2.5-4-1 states that an entity is a retail merchant making a retail transaction when it acquires tangible personal property for the purpose of resale and then proceeds to sell it. Because IC 6-2.5-1-27 has defined tangible personal property to include natural gas since 2003, these statutes together mean that IC 6-2.5-4-5 is not necessary to tax the sale of natural gas. Moreover, IC 6-2.5-4-5 does not tax all entities which furnish natural gas, but instead only power subsidiaries and public utilities. We cannot presume that the Legislature “intended to enact a statutory provision that is superfluous, meaningless, or a nullity.” Universal Health Realty v. Fluty, 144 N.E.3d 857, 862 (Ind. Tax Ct. 2020). Furthermore, “when the Court considers two or more statutes that relate to the same general subject matter, it will not read the statutes piecemeal, but rather will read them in pari materia and construe them harmoniously.” Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d 1044, 1048 (Ind. Tax Ct. 2002); see also Harlan Sprague Dawley, Inc. v. Indiana Dep’t of State Revenue, 605 N.E.2d 1222, 1229 (Ind. Tax Ct. 1992) (“Regulations that deal with the same subject matter . . . must therefore be construed in context and harmonized”). The continued existence of IC 6-2.5-4-5 (and its modification as recently as 2022) therefore must imply that public utilities are treated differently for tax purposes than other entities selling or furnishing natural gas. Read harmoniously with IC 8-1-2-1, this means IC 6-2.5-4-5 is correctly understood as subjecting a public utility’s services to sales tax. Taxpayer cites Panhandle Eastern Pipeline Co. v. IDSR to support its claim that the Tax Court has already determined that a public utility transporting natural gas through pipelines qualifies for the public transportation exemption. 741 N.E.2d 816 (Ind. Tax Ct. 2001). This reliance is misplaced. In Panhandle Eastern Pipeline, the Court found on summary judgment that (1) the public transportation exemption is an “all-or-nothing” exemption, and (2) Panhandle qualified for the exemption by providing undisputed evidence that it predominately transported gas for third parties. The Court did not discuss public utilities because the parties did not argue about the application of the public transportation exemption to a public utility. To resolve this protest, we must determine whether Taxpayer, a public utility, has demonstrated that it qualifies for the public transportation exemption. The public transportation exemption is found at IC 6-2.5-5-27 and states, in part: The Department has also promulgated regulations to provide guidance on the application of the public transportation exemption. One such regulation is 45 IAC 2.2-5-61, which defines “public transportation” as follows: Exemption statutes must be strictly construed against the taxpayer. Harlan Sprague Dawley, Inc. v. Indiana Dep’t of State Revenue, 605 N.E.2d 1222, 1225 (Ind. Tax Ct. 1992). When interpreting statutory language, the Indiana Tax Court has explained: Hyatt Corp. v. Dep’t of State Revenue, 695 N.E.2d 1051, 1053 (Ind. Tax Ct. 1998) (internal citations omitted); see also IC 1-1-4-1. More recently, the Court further expounded this idea: Universal Health Realty v. Fluty, 144 N.E.3d 857, 862 (Ind. Tax Ct. 2020). Regulations are subject to the same rules of construction as statutes. Harlan Sprague Dawley, Inc. v. Indiana Dep’t of State Revenue, 605 N.E.2d 1222, 1229 (Ind. Tax Ct. 1992). To qualify for the public transportation exemption, Taxpayer must demonstrate that a public utility furnishing its services can correctly be understood as transporting property. This analysis highlights an ambiguity. A public utility may be understood as furnishing services in an indivisible sense, which aligns with IC 8-1-2-1. By statute, the natural gas would therefore be defined as a service, and a service cannot qualify as “property” under 45 IAC 2.2-5-61. Alternatively, a public utility may be understood concurrently as providing natural gas as a service under Title 8 and transporting natural gas as property for purposes of Title 6. While the Department believes that an indivisible understanding of public utility services aligns with legislative intent and harmoniously construes these statutes and regulations, such a finding is unnecessary to resolve this case. “[A]n ambiguous exemption statute generally is strictly construed against the party seeking the exemption.” Indiana Dep’t of State Revenue v. Indianapolis Pub. Transp. Corp., 550 N.E.2d 1277, 1278 (Ind. 1990). In this case, the ambiguity above dictates construction against the Taxpayer. Taxpayer cannot demonstrate that its services qualify as public transportation according to the definition at 45 IAC 2.2-5-61. Therefore, it fails to qualify for the public transportation exemption under IC 6-2.5-5-27. Public utilities are not categorically prohibited from claiming sales tax exemptions. The Department erred in applying the transportation company analysis from Sales Tax Information Bulletin 12 and the restrictions on distribution and transmission from Sales Tax Information Bulletin 51. However, Taxpayer failed to demonstrate that its utility services qualify as public transportation. Therefore, Taxpayer’s refund request, based on the public transportation exemption, is respectfully denied. FINDING Taxpayer’s protest is denied. April 30, 2025 Replaces Finding Document: New