in-20250528-IR-045250266NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 04-20242127 Indiana Sales and Use Tax  For the Years 2019, 2020, and 2021 HOLDING The Department disagreed with Indiana Manufacturer that it provided evidence sufficient to establish that purchases of items were not subject to Indiana’s use tax or that Manufacturer established that it was entitled to the “appropriate adjustments” requested by Manufacturer. ISSUE

I. Indiana Use Tax – Documenting Exempt Purchases.

Authority: IC 6-2.5-2-1; IC 6-2.5-3-1; IC 6-2.5-3-2; 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); 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. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Conklin v. Town of  Cambridge City, 58 Ind. 130 (Ind. 1877); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007; Rhoade v. Ind. Dep’t of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); 45 IAC 2.2-5-8; 45 IAC 15-5-1. Taxpayer argues that the Department’s assessment of additional use tax was wrong because Taxpayer paid sales tax on the original purchase or that the item qualifies for one of Taxpayer’s exemptions. STATEMENT OF FACTS Taxpayer is an Indiana company, organized as an S Corporation. Taxpayer is in the business of manufacturing “custom equipment for food service companies.” More specifically, Taxpayer constructs, sells, and then installs spiral freezer systems. The Indiana Department of Revenue (“Department”) conducted an audit review of Taxpayer’s sales and use tax returns. The resulting audit report found that “the taxable sales reported were materially correct.” However, the audit raised questions about Taxpayer’s own purchases and whether Taxpayer correctly calculated any sales or use tax liabilities attributable to those purchases. Due to the volume of records, the Department and the Taxpayer agreed to utilize a sample and projection method to complete the use tax audit of Taxpayer’s general expense purchases. Taxpayer and the Department agreed that the Taxpayer's general ledger would be reviewed for calendar year 2020. The results of that review would determine an error rate that would be projected and then applied to the 2019 and 2021 periods. The audit report explains: The Department’s audit of the 2020 general ledger found that Taxpayer purchased various items for which no documentation or vendor receipts were provided demonstrating that sales tax was paid or use tax was self-assessed. As a result, the audit calculated an “error rate” The total of errors represented the numerator of the error rate while the denominator represented total purchases. The audit found “errors” in Taxpayer’s building repair, computer, equipment, materials, maintenance supplies, office supplies, and repair accounts. This error rate was then applied against Taxpayer’s 2019, 2020, and 2021 purchases which resulted in a proposed assessment of approximately $100,000. Taxpayer did not agree with the assessment and submitted a protest to that effect. An administrative hearing was scheduled in order to permit Taxpayer’s representative an opportunity to explain the basis for its protest. This Letter of Findings results.

I. Indiana Use Tax – Documenting Exempt Purchases.

DISCUSSION The issue is whether Taxpayer has met its burden of establishing that purchases of selected items of tangible personal property were not subject to Indiana’s sales or use tax. Having found that Taxpayer failed to pay use tax on items purchased without paying sales tax, the Department was required to issue a proposed assessment. IC 6-8.1-5-1(b) explains that responsibility. “If the [D]epartment reasonably believes that a person has not reported the proper amount of tax due, the [D]epartment shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment.” (Emphasis added). See also 45 IAC 15-5-1. Because Taxpayer disagreed with the proposed assessment, IC 6-8.1-5-1(c) and Indiana case law requires that an affected taxpayer establish that the assessment was wrong. “The notice of proposed assessment is prima facie evidence that the [D]epartment’s claim for the unpaid tax is valid . . . . The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.” Id. See also Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Thus, a taxpayer is required to provide documentation explaining and supporting [its] challenge that the Department’s position is wrong. 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). In weighing the Department’s original assessment, the S Corporation’s audit report, the relevant Indiana law, and Taxpayer’s arguments, the Department bears in mind that “when [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, interpretations of Indiana tax law contained within this decision, as well as the findings contained within the audit report, are entitled to deference. Indiana’s “use tax” piggybacks on and operates in parallel with Indiana’s sales tax. 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). A person who acquires property in a retail transaction (a “retail purchaser”) is liable for the tax on the transaction. IC 6-2.5-2-1(b). Indiana also imposes a complementary excise tax called “the 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). In effect and practice, the use tax is functionally equivalent to the sales tax. See Rhoade v. Ind. Dep’t of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002). As in this case, if a taxpayer purchases a non-exempt service or tangible personal property without paying sales tax, Indiana assesses “use” tax on that purchase. In general, the sales and use tax liability was attributed when “the purchase records revealed that the taxpayer purchased various items for which no documentation or vendor receipts were provided demonstrating that sales tax was paid or use tax was remitted.” In other words, because Taxpayer purchased items during 2019, 2020, and 2021 and because there was no evidence that sales tax was paid on the transactions, the Department assessed Taxpayer the corresponding use tax. Both the Department’s audit and Taxpayer now agree that Taxpayer repeatedly failed to provide documents requested during the three-year course of the audit. Although Taxpayer agrees that requested documents were not provided, Taxpayer indicates that there were personal, mitigating circumstances which explain why the documents were not produced. The Department here agrees that the cited circumstances may very well provide an explanation for Taxpayer’s repeated failure to provide the necessary documentation. However, the Department also notes that Taxpayer originally argued that its sale of freezers was conducted pursuant to “lump sum contracts” and that “that there was no need to look at sales invoices.” In support of its protest and its request that the Department make “appropriate adjustments,” the Department here notes that Taxpayer provided some 130 multipage bank statements, credit card statements, exemption certificates, payroll summaries, freight costs, office expenses, chart of accounts, trial balances, computer costs, and various tax forms such as 1099s, ST-103s, WH-3s and the like. Taxpayer challenges the Department sampling methodology in which the audit calculated a 2020 “error rate” and then extrapolated that rate against 2019 and 2021 purchases. As Taxpayer explains: According to Taxpayer’s representative, the Department was primarily interested in closing the audit rather than arriving at “an accurate conclusion and assessment.” Taxpayer explains: Taxpayer explains that the “new information” will lead the Department to implement “appropriate adjustments.” The Department recognizes Taxpayer’s efforts to gather and then provide numerous documents in support of its argument. Presumably, these documents were intended to establish that it paid sales tax at the time it purchased the items or that its particular use of the items qualify for one of Indiana’s exemptions. Although Taxpayer’s protest does not specify, Taxpayer assumes that the Department will either abate the entire assessment or reduce the assessment to a number which more closely lives up to Taxpayer’s expectations. Unfortunately, the documentation provided is insufficient to sustain Taxpayer’s protest because Taxpayer has taken a scatter-shot approach in providing documents which purportedly buttress its arguments. Instead, the cumulative effect of these documents leads to the conclusion that Taxpayer purchased many items during the three-year period and that it paid for those items over that same period. There is nothing to correlate the purchases delineated in the audit report (Scotch Brite Pads, Iron Out Spray Cleaner, Germicidal Gel) with the documents and information Taxpayer provided. There is nothing to correlate the purchases delineated in the audit report with any of the sales tax exemptions potentially available. Taxpayer’s list of purchases does include items which could be exempt such as a compressor, roof repair, or electrical wiring equipment under one of Indiana’s exemptions. However, Taxpayer has not explained how or why specific purchases clearly come within one of those exemptions. For example, a compressor might fall under the “manufacturing exemption” found at IC 6-2.5-5-3(b) and 45 IAC 2.2-5-8 but Taxpayer has not developed or explained why this compressor, used in this way, and purchased for this purpose comes within that specific exemption. Taxpayer failed to specify what it regards as the correct outcome to its protest but simply states that the Department should implement “appropriate adjustments.” However, Taxpayer does not identify what “appropriate adjustments” are required or what documents justify such adjustments. The Department acknowledges that a limited number of the items, such as compressors, might well fall within an exemption and further acknowledges that the assessment could have been different. However, such a conclusion requires much speculation on the Department’s part and falls far short of the statutory requirement under IC 6-8.1-5-1(c) that Taxpayer carry the burden of establishing that any portion of the assessment is wrong or that a claimed exemption is supported by sufficient evidence and clearly within the exact letter of the law. Conklin v. Town of Cambridge City, 58 Ind. 130, 133 (Ind. 1877). As mentioned above, poorly developed and non-cogent arguments are subject to waiver. Taxpayer’s argument relies on the premise that the audit was concluded prematurely and in haste thereby denying Taxpayer the opportunity to make its case. The Department finds little in the record which supports that argument. The Department submitted multiple requests for documents but Taxpayer’s responses were incomplete or ambiguous. The response to one such request was that the representative “would not provide [any] documents until after tax season.” The Department’s response was to explain that “deadlines for documents are very flexible if there is communication regarding times that will be most convenient.” However, the audit indicates that “nothing was received.” Taxpayer declined to respond to foundational questions such as whether “[t]he Department asked Taxpayer to establish that it conducted manufacturing at its facility.” Nonetheless, the Department agreed to Taxpayer’s request for repeated extensions of time in which to respond to the document requests. Taxpayer requested and the Department agreed to four successive extensions for an audit which took place beginning in 2022 and only concluded in 2024. The Department did what it was required to do under IC 6-8.1-5-1(b) which provides that “[i]f the [D]epartment reasonably believes that a person has not reported the proper amount of tax due, the [D]epartment shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment.” FINDING Taxpayer’s protest is respectfully denied. March 28, 2025 Replaces Finding Document: New