in-20250625-IR-045250297NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE MEMORANDUM OF DECISION: 04-20242146 Sales and Use Tax For the Years 2020, 2021, and 2022 HOLDING Taxpayer established that the Department erred when it denied Taxpayer’s refund request for use tax on two items which should have been exempt from use tax under Indiana law. ISSUE

I. Use Tax – Refund.

Authority: IC 6-2.5-1-2; IC 6-2.5-2-1; IC 6-2.5-3-1; IC 6-2.5-3-2; 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 Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Indiana Dept. of State Revenue v. Kimball Int’l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Rhoade v. Indiana Dept. of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); 45 IAC 2.2-2-1; 45 IAC 2.2-5-8 Taxpayer protests the Department’s denial of refund for use tax on two items. STATEMENT OF FACTS Taxpayer is an Indiana company that manufactures printed materials. The Indiana Department of Revenue (“Department”) conducted an audit for tax years 2020, 2021, and 2022. As a result of the audit, the Department assessed additional use tax for all three years. The audit involved a review of items purchased by Taxpayer. Taxpayer remitted use tax on the audited purchases that were deemed taxable. Subsequently, Taxpayer submitted a Form GA-110L Request for Refund with the Department for two items that were deemed taxable after the Department’s audit that Taxpayer believes should have been exempt. The Department denied the refund request citing that the audit found the items to be taxable. Taxpayer disagreed with the refund denial and submitted a protest to that effect. An administrative hearing was held, and this Memorandum of Decision results. Additional facts will be provided as necessary.

I. Use Tax – Refund.

DISCUSSION The Department conducted an audit of sales and use tax for the 2020, 2021, and 2022 tax years. As a result of the audit, the Department determined that Taxpayer failed to remit sales or use tax on several purchases. The Department then issued Notices of Proposed Assessment to Taxpayer for tax on those items plus penalty and interest. Taxpayer paid the assessments and sought a refund of use tax on two items that it argues are exempt because they are used directly in Taxpayer’s manufacturing process. As a threshold issue, it is the Taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving the proposed assessment is wrong rests with the person against whom the proposed assessment is made. Id.; See e.g. Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). A taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. Further, “[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). 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 a part of its ordinary business for the purpose of reselling the property; (2) that property is 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(a). Under Indiana law, certain items or transactions may be exempt from tax if certain conditions are met. However, “tax exemptions are strictly construed in favor of taxation and against the exemption.” Indiana Dept. of State Revenue v. Kimball Int’l Inc., 520 N.E.2d 454, 456 (Ind. Ct. App. 1988). Taxpayer contends that two items are exempt from use tax: a bundling machine and a reversing motor starter. In regard to the bundling machine, Taxpayer explained: As authority for its conclusion that the bundling machine is exempt, Taxpayer relies on IC 6-2.5-5-3(b) which provides, in part: See also 45 IAC 2.2-5-8(b). Items must meet this “double direct” test to qualify for an exemption. The property at issue must have “an immediate effect on the article being produced” and be “an essential and integral part of an integrated process which produces tangible personal property.” 45 IAC 2.2-5-8(c). It should be noted, however, that “[t]he fact that particular property may be considered essential to the conduct of the business of manufacturing because its use is required…by practical necessity does not itself mean that the property ‘has an immediate effect upon the article being produced.’” 45 IAC 2.2-5-8(g). In determining whether the bundling machine is exempt, the Department must consider at what point “production” ends. 45 IAC 2.2-5-8(d) states: Further, 45 IAC 2.2-5-8(e), provides the following example: During the hearing, Taxpayer’s representative provided a video of the bundling machine and how it is used in the production process. In the video, the machine can be observed bundling small stacks of books together in plastic before moving the bundles down a ramp where employees gather them into boxes for shipment. Taxpayer stated during the hearing that the boxes of bundled books are delivered to customers in that form. The Department agrees with Taxpayer that the bundling machine should have been exempt from use tax. As noted in Taxpayer’s statement, the bundling machine is connected to the binding machine. The bundling of the product is a part of the integrated process of manufacturing the product. Further, it is clear from the example in 45 IAC 2.2-5-8(e) that packaging can be exempt as a part of the production process so long as it alters the product into its completed form. The bundling machine alters the product to its completed form and is, therefore, a part of the production process as opposed to the post-production process. As to the reversing motor starter, Taxpayer states that the “reversing motor starter is…a replacement part for [an] air compressor.” The air compressor, which includes the reversing motor starter, powers Taxpayer’s color press. Taxpayer points specifically to 45 IAC 2.2-5-8(c)(2) which provides: 45 IAC 2.2-5-8(c)(2). Additionally, 45 IAC 2.2-5-8(h)(2) provides “[r]eplacement parts, used to replace worn, broken, inoperative, or missing parts or accessories on exempt machinery and equipment, are exempt from tax.” The Department agrees with Taxpayer that the reversing motor starter is exempt from Indiana’s use tax. Taxpayer has established that the air compressor powers its color press which is directly used in the production of Taxpayer’s product of printed materials. The reversing motor starter is a replacement part for the air compressor and is therefore exempt under 45 IAC 2.2-5-8(h)(2). In summary, Taxpayer has met its burden of showing that the two items in question should have been exempt from use tax. Taxpayer established that the bundling machine was a part of the production process as it alters the product to its completed form. Taxpayer also established that the reversing motor starter was a replacement part for the air compressor which powers Taxpayer’s color press, an exempt piece of machinery. The Department erred when it denied Taxpayer’s refund request. FINDING Taxpayer’s protest is sustained. April 22, 2025 Replaces Finding Document: New