in-20250326-IR-045250134NRA: DEPARTMENT OF STATE REVENUE
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Transportation and Excavating Company was not entitled to claim the sales and use tax mining exemption because Excavating Company did not purchase equipment and supplies consumed in or directly involved in mining coal.
The agency’s own summary, as published.
The rule, in full
3,249 words as published, March 26, 2025. View the original →
DEPARTMENT OF STATE REVENUE SUPPLEMENTAL LETTER OF FINDINGS: 04-20241336 Gross Retail and Use Tax For the Years 2019, 2020, 2021, and 2022 HOLDING Transportation and Excavating Company was not entitled to claim the sales and use tax mining exemption because Excavating Company did not purchase equipment and supplies consumed in or directly involved in mining coal. ISSUE
I. Gross Retail and Use Tax – Excavating Company Purchases and Exemptions.
Authority: IC 1-1-4-1; IC 6-2.5-1-2; IC 6-2.5-1-27; 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 et seq.; IC 6-2.5-5-5.1; IC 6-2.5-5-30; IC 6-8.1-5-1; Dep’t. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Conklin v. Town of Cambridge City, 58 Ind. 130 (1877); Wendt LLP v. Indiana Dep’t of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dep’t of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dep’t of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002); Mynsberge v. Dep’t of State Revenue, 716 N.E.2d 629 (Ind. Tax Ct. 1999); Tri-States Double Cola Bottling Co. v. Dep’t of State Revenue, 706 N.E.2d 282 (Ind. Tax Ct. 1999); Leehaug v. State Bd. of Tax Comm’rs, 583 N.E.2d 211 (Ind. Tax Ct. 1991); General Motors Corp. v. Indiana Dept. of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991) Indiana Dep’t of State Revenue v. Kimball Int’l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96 (Ind. Ct. App. 1974); 45 IAC 2.2-3-12; 45 IAC 2.2-5-9; 45 IAC 2.2-5-70; 45 IAC 15-5-1. Taxpayer argues that the Department made a mistake when it found that Taxpayer owed additional sales and use tax and that the original Letter of Findings’ decision, denying its protest, was wrong. STATEMENT OF FACTS Taxpayer is an Indiana excavating company. The Indiana Department of Revenue (“Department”) conducted an audit review of Taxpayer’s business records. The audit resulted in an additional assessment of approximately $250,000 in sales and use tax. Taxpayer disagreed with the assessment and submitted a protest to that effect. An administrative hearing was conducted by telephone, during which Taxpayer’s representative explained the basis for the protest. A Letter of Findings was issued in July 2024 in which the Department denied Taxpayer’s protest. The Letter of Findings concluded that Taxpayer was not entitled to claim the sales and use tax mining exemption because Taxpayer did not purchase equipment and supplies consumed in or directly involved in mining coal. Taxpayer disagreed with the Letter of Findings because the “Department misconstrued its business operations to intentionally exclude it from the mining process and further has employed an incorrect legal analysis for entitlement to the exemptions.” Taxpayer disagreed with the Department’s analysis and conclusion and requested a rehearing. The request was granted, a second hearing conducted, and this Supplemental Letter of Findings results.
I. Gross Retail and Use Tax – Excavating Company Purchases and Exemptions.
DISCUSSION The issue is whether Taxpayer has established that it is entitled to claim the mining exemption because Taxpayer is directly involved in mining coal. The issue raised by Taxpayer is that it is entitled to claim the exemption because Taxpayer’s equipment is directly used in mining coal.
A. Taxpayer’s Excavating and Transportation Business.
Taxpayer is an excavating contractor that performs work for Indiana surface coal mines pursuant to lump sum contracts. The coal mining company hires Taxpayer to manage the waste materials remaining after the processing of the coal. The processing takes place in the coal mines’ preparation facilities. These preparation facilities wash the coal, remove soil and rock, and then sort the coal into specified graded sizes. After the preparation facility’s washing and sorting process is completed, and pursuant to its contract with the mining company, Taxpayer removes the waste materials consisting largely of rock and dirt. Taxpayer is then responsible for moving the waste materials to a location specified by the coal mine. Much of Taxpayer’s work consists of constructing and maintaining the embankments surrounding the waste materials. Once transported, the waste material is compacted, and the site is eventually reclaimed by, for example, replanting the site with grass seed.
B. Taxpayer’s Burden.
As a threshold issue, it is the Taxpayer’s responsibility to establish that the existing tax assessment is incorrect. As stated in IC 6-8.1-5-1(c), “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.” 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). In meeting that burden, a taxpayer is required to provide documentation explaining and supporting his or her 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 a taxpayer’s argument against that of the Department, it 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 preceding audit, are entitled to deference.
C. Indiana’s Gross Retail and Use Tax.
Pursuant to IC 6-2.5-2-1, a sales tax, known as state gross retail tax, is imposed on retail transactions made in Indiana unless a valid exemption is applicable. IC 6-2.5-5 et seq. Retail transactions involve the transfer of tangible personal property. IC 6-2.5-1-2; IC 6-2.5-4-1. Indiana’s use tax runs parallel to, but separate from, the state’s sales tax. Indiana use tax is imposed on a person’s 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); IC 6-2.5-1-27. “Use” means the “exercise of any right or power of ownership over tangible personal property.” IC 6-2.5-3-1(a). In evaluating Taxpayer’s arguments, the Department highlights that the use tax is generally equivalent to the sales tax. See Rhoade v. Indiana Dep’t of State Revenue, 774 N.E.2d 1044, 1047 (Ind. Tax Ct. 2002). The presumption in Indiana is that all retail sales are subject to sales tax unless expressly exempted by statute. IC 6-2.5-2-1 (“An excise tax, known as the state gross retail tax, is imposed on retail transactions made in Indiana . . .” IC 6-2.5-3-2(a)). The Department’s use tax assessment fulfilled the Department’s responsibility set out in IC 6-8.1-5-1(b). That statute defines the Department’s 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 .
D. Audit Assessments.
The audit assessed sales/use tax as follows:
E. Taxpayer’s Objections.
Taxpayer argues that the Department’s audit erred in assessing the additional sales/use tax. According to Taxpayer, it is entitled to claim the exemption allowed to mining companies on purchases of equipment “directly used in the production process.” Taxpayer specifically disagrees with the Department’s categorizing its business as the “excavation and transportation business” because removal of the overburden and maintaining the impoundments is part-and-parcel of coal mining. Taxpayer summarizes: Taxpayer objects to the assessment of tax based on ninety invoices documenting the sale of items in Illinois but never brought into or used in Indiana. Taxpayer makes a secondary argument. Taxpayer points out that “[t]he waste overburden (rock, dirt, soil) is placed and compacted to meet the specifications of the Department of Natural Resources.” As such, Taxpayer is entitled to claim Indiana’s “environmental” compliance regulation.
F. Taxpayer’s Burden of Establishing it is Entitled an Exemption.
45 IAC 2.2-5-9, IC 6-2.5-5-5.1(b), and IC 6-2.5-5-30, like all tax exemption provisions, are strictly construed against exemption from the tax. Tri-States Double Cola Bottling Co. v. Dep’t of State Revenue, 706 N.E.2d 282, 283 (Ind. Tax Ct. 1999); Mynsberge v. Dep’t of State Revenue, 716 N.E.2d 629, 636 (Ind. Tax Ct. 1999). Indiana law has long held that “[W]here [] 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.” Indiana Dep’t of State Revenue, Sales Tax Division v. RCA Corp., 310 N.E.2d 96, 101 (Ind. Ct. App. 1974). (Citing Conklin v. Town of Cambridge City, 58 Ind. 130, 133 (1877)). In interpreting and 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). Nevertheless, the Department is also aware of the countervailing rule that a “statute must not be construed so narrowly that it does not give effect to legislative intent because the intent of the legislature embodied in a statute constitutes the law.” General Motors Corp. v. Indiana Dept. of State Revenue, 578 N.E.2d 399, 404 (Ind. Tax Ct. 1991). Evaluating any sales and use tax exemption requires “line drawing” based on the information available to the Department and circumscribed by the requirement that “the party claiming [the exemption] must show a case, by sufficient evidence, which is clearly within the exact letter of the law.” RCA Corp., 310 N.E.2d at 101; Conklin, 58 Ind. at 133. Taxpayer’s argument requires that the Department evaluate Indiana’s statutes beginning with the “plain and ordinary meaning of the language used.” E.g., Leehaug v. State Bd. of Tax Comm’rs, 583 N.E.2d 211, 212 (Ind. Tax Ct. 1991). IC 1-1-4-1 requires in part:
G. Mining Exemption.
Taxpayer cites to 45 IAC 2.2-5-9(b), which provides as follows: These are the “plain and ordinary” words at issue. IC 6-2.5-5-5.1(b) provides: In relying on this exemption, Taxpayer states that it is in the business of mining and extracting coal because the services it provided “[are] an essential part of the mining process and [it] truly believes to be exempt from Sales and Use Tax under this Code Section.” Taxpayer explains why it is “in the business of mining and extracting coal”: Taxpayer believes that its argument, that it is entitled to the “mining” exemption, is bolstered by “example two” included in 45 IAC 2.2-5-9 which provides: Essentially, Taxpayer believes its excavation and transportation of the waste materials is part and parcel of the mining company’s production of coal. In addition, Taxpayer believes that the transportation of the waste requires it to purchase “equipment, repairs and parts used in the direct mining process” all of which together constitute “an integral part of the mining process. . . .” The issue is most directly addressed in 45 IAC 2.2-5-9(b), which qualifies the exemption provision found at 45 IAC 2.2-5-9c). Taxpayer explains that it is entitled to claim the exemption because it is directly involved in the mining and excavation of coal and that each item it purchases “has an immediate effect on the article being produced.” The article being produced is, of course, the coal. In its rehearing request, Taxpayer described the “impoundments” it builds and maintains. Taxpayer continues by explaining its responsibility for the construction and maintenance of the impoundments. Taxpayer summarizes its secondary “environmental” argument. Because it is directly involved in the direct production of coal and because it is required to comply with federal and state environmental requirements, Taxpayer is entitled to rely on the relevant exemptions. Taxpayer is essentially claiming the mining exemption on the grounds that the mining exemption “flows through” from the coal mining company to participants contributing to or participating in that process. The “purchaser” here is an excavation and transportation company, and not the company mining the coal. The equipment, supplies, and property addressed in the audit – and claimed by Taxpayer – are not “directly used” in mining coal. Instead, the contract between Taxpayer and the mining company is one in which Taxpayer functions as a service provider. The mining company’s contract specifically states that “[Taxpayer] shall be paid for services under this Agreement pursuant Exhibit A.” Exhibit A denotes the specific responsibilities performed by Taxpayer: Elsewhere, Taxpayer is specifically designated as a “contractor” and is tasked with the construction and maintenance of: In seeking to satisfy the mining company’s requirements, Taxpayer was required to “include the following;” The “Standard Service Agreement” between Taxpayer and the coal company called for Taxpayer to be paid for “services performed under This Agreement . . . ” In that agreement, Taxpayer is designated as a “contractor” working for and under the direction of the mining company. As the “contractor,” Taxpayer was required “to perform all work and provide all materials, equipment and labor, pursuant to the terms of this Agreement.” A search of the source documents provided by Taxpayer reveals nothing which indicates Taxpayer was being hired to mine coal, nothing to indicate that Taxpayer acquires coal, that it warehouses coal, or that Taxpayer has the capacity to sell or provide coal to Taxpayer’s customers. As such, Taxpayer is bound by 45 IAC 2.2-3-12(c) which provides: The equipment, supplies, and materials were purchased for the purpose of fulfilling the service contract signed by Taxpayer and the coal mine. None of those items were purchased and used “by the purchaser in extraction or mining.” 45 IAC 2.2-5-9(c) Taxpayer objects to the Letter of Finding’s characterization of Taxpayer’s argument as “piggybacking” on an exemption granted to and held by the coal mining company. However, the term seems to accurately capture the essence of that argument. It bears repeating that the Department does not minimize the importance of the function performed by Taxpayer and does not disagree that, as claimed by Taxpayer, that the production of the coal would cease without Taxpayer’s participation in that process. However, in this instance, Taxpayer’s interpretation would stretch the “plain words” of the statutory exemption beyond all recognition because Indiana law, 45 IAC 2.2-5-9(b) and 45 IAC 2.2-5-9(b), requires that Taxpayer’s activities and equipment – items used in the construction and maintenance of the mining companies’ impoundments – have a “direct effect” on the product being mined. Taxpayer essentially seeks permission to “stack exemptions.” Under Taxpayer’s interpretation of Indiana law, it is entitled to an exemption because it works for a company or entity which is entitled to the exemption. Presumably, Taxpayer would not be entitled to claim an exemption if it performed excavation work for a church, constructs a softball field for a public school, or constructs a roadway for an exempt municipality. Taxpayer’s argument that it is entitled to piggyback on the mining company’s exemption does not fulfill Taxpayer’s burden under IC 6-8.1-5-1(c) that its claim falls within the “exact letter of the law.” RCA Corp., 310 N.E.2d at 101. Taxpayer argues that its purchases are exempt from either sales or use tax because Taxpayer’s activities are intended to comply with federal, state, or local environmental regulations. Taxpayer points to a statement in the audit report which explains that the waste materials are “placed and compacted to meet the specifications of the Department of Natural Resources.” The exemption is set out in IC 6-2.5-5-30 which states in part that: The Department’s regulation restates the exemption as follows: 45 IAC 2.2-5-70(a). As noted previously, IC 6-2.5-5-30, like all tax exemption provisions, is strictly construed against exemption from the tax. Tri-States Double Cola Bottling Co., 706 N.E.2d at 283; Mynsberge, 716 N.E.2d at 636. Taxpayer’s claim to the exemption is based on its obligation to fulfill federal and state regulations governing the construction and maintenance of impoundments. Taxpayer explains: . . . . Taxpayer elaborates on its obligation to conduct its excavation and dirt moving functions within the four corners of federal, state, or local regulations. . . . . The Department is unable to agree that Taxpayer is entitled to claim the exemption because the exemption is available to a “person engaged in the business of manufacturing, processing, refining, mining, or agriculture.” 45 IAC 2.2-5-70. As explained above, Taxpayer is not engaged in the business of mining coal but is a service provider working under contract for a coal mining company to construct and maintain impoundments. Even if Taxpayer was in the business of mining coal, the items purchased – gloves, lumber, equipment parts, mobile office – do not then become “a material or integral part of the finished product.” 45 IAC 2.2-5-70(a). The coal mining company’s “finished product” is the coal prepared for and ready for the company’s customers. Taxpayer provided a list of approximately ninety invoices. Taxpayer states that the Department should not have assessed use tax on these purchases because the vendors were located in Illinois, and the items purchased stayed in Illinois. Alternatively, the goods purchased in Illinois were destined for use in Kentucky. Indiana’s use tax statute, IC 6-2.5-3-2(a), provides: The invoices reflected Taxpayer’s purchase of lumber, concrete, gloves, pipe, grass seed, bucket and the like. In the Letter of Findings, the Department agreed that these purchases from Illinois vendors, which were then used at an out-of-state location, did not come within the purview of Indiana’s taxing jurisdiction. However, the Letter of Findings concluded that: In its rehearing request, Taxpayer asked the Department to reconsider the issue. Taxpayer again explained, “[T]hese items were purchased in states other than Indiana, were used outside of Indiana and never brought into Indiana, Indiana does not have the authority to tax those items[,] and they are not subject to Indiana retail sales and consumer use tax.” On review, Taxpayer was partially correct and the Department partially wrong. For example, a 2022 invoice (2099265) documents Taxpayer’s purchase of various parts from an Illinois dealership which were delivered to one of two Illinois mines. To the extent the Department assessed use tax on these particular purchases, Taxpayer is correct. The transactions are exempt. However, in other instances, the invoice lacks a verifiable “delivered to” notation. In other instances, the invoice contains only Taxpayer’s handwritten delivery notation such as “coal ky.” The invoice itself is silent on the delivery questions, and the after-the-fact notation does not establish that any portion of the assessment was wrong. Taxpayer has met its burden under IC 6-8.1-5-1(c) of establishing that it is entitled to a substantive review of the invoices provided. To the extent the Department assessed use tax on purchases from out-of-state vendors and to the extent the purchased items were delivered to another out-of-state location, Taxpayer is not subject to Indiana’s use tax. FINDING On the question of whether Taxpayer is entitled to claim either the mining or environmental sales or use tax exemptions, Taxpayer’s protest is respectfully denied. Taxpayer’s argument that it is not subject to use tax on purchases from Illinois vendors is sustained to the extent described above. January 9, 2025 Replaces Finding Document at: New
Documents
- Full text (state register) · March 26, 2025
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