A TTORNEYS FOR A PPELLANT A TTORNEYS FOR A PPE L LEE

Gregory F. Zoeller Randal J. Kaltenmark Attorney General of Indiana Larry J. Stroble Ziaaddin Mollabashy Andrew W. Swain Indianapolis, Indiana Chief Counsel , Tax Section India napolis, Indiana
Jessica E. Reagan Deputy Attorney General Indianapolis, Indiana

______________________________________________________________________________ 

# In the 

# Indiana Supreme Court

_________________________________ No. 49S10

- 0808

- TA

- 474

I NDIANA D EPARTMENT OF R EVENUE , Appellant (Respondent below) ,

v.

K ITCHIN H OSPITALITY , LLC,
Appellee (Petitioner below)

.

_________________________________ Appeal from the Indiana Tax Court, No. 49T10

- 0604

- TA

- 35 The Honorable Thomas G. Fisher, Judge

_________________________________ On Petition f

or Review Pursuant to Appellate Rule 63(A)

_________________________________

June 17 , 2009

Sullivan, Justice.

Indiana tax law was amended in 1992 to exempt hotel s from pay ing sales tax on “tangible personal property ” purchased by hotels that guests use up or otherwise consume such as soap, shampoo, ti s sue paper, and plastic cups

. Kit chin Hospi tality, LLC , a hotel operator , contends2

that a 2003 amendment to the tax law had the effect of extending this exemption to it s purchases
of electric ity , water, and gas as well

. We find that the exemption does not extend to utilities b ecause it is the hotel itself, and not its guests, that uses up and co n sumes electric ity , water, and

gas.

Background

Kitchin Hospitality, LLC, i s a wholly

- owned subsidiary of Jameson Inns, Inc. , a Georgia corporation. During the taxable periods ending December 31, 2004, and Oct o ber 31, 2005 , the years at issue in this case, Kitchin operated 14 hotels in Indiana

. Each hotel had an identical
floor plan , with guest rooms and guest

- accessible common areas comprising approximately 7 2%
and 22% , respectively , of a hotel‟s square footage. During the years at issue, Kitchin rented the guest rooms and the accessible common area s in exchange for the rental rates paid by its guests.

Under the lease agreement between Ki t chin and Jameson, Kitchin was responsible for all utility costs incurred in connection with operating the hotels

. For the years at issue, Kitchin pu rchased utilities for the hotel

. Each h otel had a single utility meter ; t he guest rooms had separate thermos tats and were equipped with various electrical amenities including televisions, alarm clocks, coffee makers, irons, and hair dryers. Kitchin allocated all utility costs from the common

a reas and guest rooms into the rental rate for i ts guest rooms, but guests were not billed separat ely for utilities

.

Ki t chin paid gross retail tax on its el ectric, water, and gas (“utilities ”) purchases during the years at issue. Kitchin subsequently f iled two claims with the Indiana Department of State
Revenue seeking a refund of approximately $89,700 in gross retail tax paid on utility purcha s es

. Kitchin based its claim on a statutory exemption from gross retail tax, to be discussed in d e tail in
this opinion, available to hotels for “tangible personal property” that guests use up, r e move, or otherwise consume while staying at a hotel

. The Department denied both claims; Kit chin a ppealed

. The Tax Court held that for the years at issue, the utilities c onsumed in the guest rooms , but not in the common areas, qualified for the tangible personal property exemption. Ki t chin3

Hospitality, LLC v. Ind. Dep‟t of State Revenue
, 881 N.E.2d 1124 ( Ind. Tax Ct. Mar. 3, 2008 ) (table )

.

The Department sought, and we granted, review , 898 N.E.2d 1221 (table). Ind. Appellate Rule 63(A)

.

We note two collateral matters related to this litigation . First, t he Department notes that since the Tax Court‟s decision
, many hotels have filed refund claims for utility purchases

. Second, in 2007, the Legislature amended the law to provide that that t he exem p tion at issue here “does not apply to transactions involving elec tricity, water, gas, or steam.” 2007 Ind. Acts 3031, Pub. L. No. 211, § 14 (codified at I.C. § 6

- 2.5

- 5

- 35(b) )

.

Discussion

I

T he Indiana General Assembly has imposed excise taxes, formally known as the “state gross retail tax , ” and commonly referred to as “sales tax,” on retail transactio ns made in Indiana

. Ind. Code § 6

- 2.5

- 2

- 1(a). There is no dispute that Kitchin ‟s utility purchases at issue are “r e tail transactions” for this purpose. The provisions enacted by the Legislature that govern the gross retail tax, including exemption provisions and applicable definitions, are contained in a r ticle 2.5
of title 6 of the Ind i ana Code. 1

In 1992, the General Assembly created an exemption from the gross retail tax for the benefit of the hospitality industry. The exemption , contained in section 35 of chapter 5 of article 2.5, provided that :

1 “The Indiana Code . . . is . . . divided by subjects into 36 „titles.‟ (Title [ 6 contains the laws dealing with taxes ].) Each title is further d i vided, first into „articles,‟ then into „chapters,‟ and then into „sections.‟ This organization is easily understood, thanks to a citation scheme that separates each of these divisions by hyphens. For example, Ind. Code § 1

- 2

- 3

- 4 stands for se c tion 4 of chapter 3 of article 2 of title 1 of the Indiana Code.” Util. Ctr., Inc. v. City of Fort Wayne , 868 N.E.2d 453, 455 (Ind. 2007).4 T ransactions involving ta ngible personal property are exempt from the state gross retail tax if:
(1) the: (A) person acquires the property to facilitate the service or consumption of food and food ingredients that is not exempted from the state gross retail tax under section 20 o f this chapter; and (B) property is: (i) used, consumed, or removed in the service or consumption of the food and food ingr e dients; and (ii) made unusable for further service or consum ption of food and food ingredients after the property‟ s first use for se rvice or consumption of food and food ingr edients; or
(2) the: (A) person acquiring the property is engaged in the bus iness of renting or furnishing rooms, lodgings, or accommodations in a commercial hotel, motel, inn, tourist camp, or tourist cabin; and (B) property acquired is:

(i) used up, removed, or otherwise co n sumed during the occupation of the rooms, lodgings, or acco m modations by a guest; or (ii) rende red nonreusable by the property‟ s first use by a guest during the occupation of the rooms, lod g in gs, or accommodations.

1992 Ind. Acts 2226, Pub. L. No. 43, § 8 (codified at I.C. § 6

- 2.5

- 5

- 35 )

. We will refer to this 1992 addition to the statute as the “Section 35 Exemption.” The portion of the Section 35 E xemption at issue in this case is contained in subd i vision (2)(A) & (2)(B)(i).

In May, 1994, the Department issued an “Information Bulletin” declaring that it would exempt items in cluding “ complimentary toiletry items such as soap, shampoo, tissue paper, pla stic cups and any other items not reu sab le

. ” See Ind. Dep‟t of Rev e nue , Information Bulletin No.
66 ( 1994).

When the Legislature adopted the Section 35 Exemption , article 2.5 did not include a d efinition of “tangible personal property.” In 2003 , while adopting the “Streamli ned Sales and Use
T ax Agreement ” (SS U TA)

– part of a multi

- state cooperative effort called the “Streamlined5

Sales Tax Project ” (SSTP)

– the Legislature made multiple amendments to article 2.5

. 2 See Ind. Acts 2003 2660, Pub. L. No. 257 , § 18. T he SSTP provisions included a definition of “tang i ble personal property,” added as section 27 of chapter 1 of article 2.5. It defined “ t angible pe r sonal property” to include personal property that: “can be seen, weighed, measured, felt or touched ; or [] is in any other man ner percepti ble to the senses. The term includes electricity, water, gas, steam, and prewritten computer soft ware.” I.C. § 6

- 2.5

- 1

- 27.

The language of the Section 35 Exemption was not amended by the SSTP and remained unchanged until after this litigation commence d. As noted above, i n 2007, the Legislature
amended the Section 35 Ex emption to specify that it did not apply to t ransactions involving ele ctricity , w a ter, gas, or steam. See 2007 Ind. Acts 3031, Pub. L. No. 211, § 14 (codified at I.C. §
6

- 2.5

- 5

- 35(b)).

It is well established that the exemption statutes are strictly construed against a taxpayer so long as the intent and purpose of the Legislature is not thwarted. Ind. Dep‟t of Revenue v. Interstate Warehousing, Inc. , 783 N.E.2d 248, 250 (Ind. 2003). Th us, the burden was on Kitchin to establish its entitlement to the exemption. Id. “Nevertheless, a statute must not be construed so narrowly that it does not give effect to legisl a tive intent because the intent of the legislature
embodied in a statute con stitutes the law.” Gen. Motors Corp. v. Ind. Dep‟t of State Revenue
, 578 N.E.2d 399, 404 (Ind. Tax Ct. 1991), aff‟d
, 599 N.E.2d 588 (Ind. 1992).

Kitchin contends that the utilities are tangible personal property according to the plain language of the d efinitional statute , I.C. § 6

- 2.5

- 1

- 27

. The Department counters that the refe rence to utilities in the definition of tangible personal property does not apply to the Section 35 Exemption and that, in any event, utilities do not fall under the language of the Section 35 E xemption because it is a hotel , and not hotel guests, that “use[] up . . . or otherwise consume ” util i-

2 The SSTP, organized in 2000, is a multi

- state project intended to simplify the administration of sales and use taxes in order to reduce substantially the burden of tax compliance. The SSTP seeks to acco mplish this goal by, among other things, providing uniform definitions within tax laws. For states to pa rti c ipate in the SSTP, the state must enact the SSUTA and conform to its provisions. Strea m lined S ales Tax Governing Board, Inc

. , About the Project, http://www.streamlinedsalestax.org/oprules.html (last v isited June 1, 2009)

.6

ties. Kitchin responds that the tang i ble personal property exemption does not require the guests

to use up or consume the util i ties direc tly

.

II

The Department maintains that utilities were not eligible for the Section 35 E xemption during the years at issue. It argues that the definition of “ tangible personal property ” added in 2003 to chapter 1 of article 2.5 has nothing to do with hote ls, and that the Section 35 Exemption has never been interpreted to include utilities. Rather, the Department says, the definition of tangible personal property was added to article 2.5 as part of the Legislature‟s ado p tion of the
SS U TA in Pub. L. No. 257

- 2003, § 18 , and is applicable exclusively in that co n text

.

We find it unnecessary to resolve whether utilities were “tangible personal property” within the meaning of the Section 35 Exemption because, even if so, we do not find that hotel guests consumed the utilities in a manner that qualified Kitchin for the exemption.

During the years at issue, the tangible personal property exemption required the prope r ty

to be “used up, removed, or otherwise consumed during the occupation of the rooms, lodgings,

o r accommodations by a guest

. ” 3 The Tax Court concluded that the utilities need not be directly consumed by a guest because it found that “consumed” modifies “during the occup a tion of the
rooms.” See Kitchin , slip op. at 7

- 8. We believe it is more proper ly construe d to apply to pro perty “consumed by a guest” during the occupation of the rooms, lodgings, or accommod a tions.

The Tax Court read the phrase “by a guest” to modify the phrase “during the occup a tion of the rooms, lodgings, or accommodations.” This led the Tax Court to conclude that the la nguage of the Section 35 Exemption did “not require a hotel guest to directly consume the util ities.” Kitchin , slip op. at 7

- 8.

We parse the language of the Section 35 Exemption differently. We believe tha t the u sing up or consumption of the tangible personal property in question must meet two tests in order

3 I.C. § 6

- 2.5

- 5

- 35(2)(B)(i).7

for the property to be exempt from tax: first, the property must be used up or otherwise co nsumed “during occupation of the rooms .” S econd, the proper ty must be used up or otherwise

co n sumed “by a guest.”

We reach this conclusion for several reasons. First, the Tax Court‟s interpretation would extend the Section 35 Exemption to property far beyond that which we believe the Legislature
intended it to r each. If the property does not have to be used up or consumed by a guest, as the Tax Court held, but only used up or consumed during the occupation of a room by a guest, the

e x emption would extend to products the hotel used to clean a room or wash the lin ens during a guest‟s stay

– or even to office supplies used during a guest‟s stay.

Second , the other two parts o f the Section 35 Exemption make it clear that what the Le gislature attempted to exempt from tax was property that guests themselves used

– su bdivision (1) covering paper napkins, pre

- packaged condiments, and other property used by food service guests ; and subdivision (2) covering property “ rende red nonreusable by the property‟ s first use by a guest .” It seems far more consistent with the statu tory scheme that subdivision (2) would

ope r ate in the same way.

Reading the Section 35 Ex emption in this way comports with the tenet that exemption statutes are strictly construed against a taxpayer so long as the intent and purpose of the Legisl ature is not thwarted. See Interstate Warehousing, Inc. , 783 N.E.2d at 250. And it also comports
with the deference we traditionally give to the interpretation of a statute by an administrative agency charged with the duty of enforcing it. LTV Steel Co. v. Griff in , 730 N.E.2d 1251, 1257 (Ind. 2000); Ind. Dep‟ t of Stat e Revenue v. Bulkmatic Transp., Co. , 648 N.E.2d 1156, 1158 (Ind. 1995).

Finally , we consider the 2007 amendment to the Section 35 Exemption that expressly provides that utilities are excluded. Wher e it appears that the Legislature amends a statute to e xpress its original intention more clearly, the normal presumption that an amend ment change s a statute‟s meaning does not apply

. See Ind. Dep‟ t of State Revenue v. Endress & Hauser, Inc. ,8

404 N.E.2d 1 173, 1175 (Ind. Ct. App. 1980) ( citing Econ. Oil Corp. v. Ind . Dep‟t of State Rev enue , 162 Ind. App. 658, 321 N.E.2d 215 , 219 (1974) ) , trans. denied

.

It certainly seems to us that in this case the Legislature was clarifying existing law. Prior
to the ena ctment of the definition of “tan g ible personal property” in I.C. § 6

- 2.5

- 1

- 27, the sales
and use tax scheme of article 2.5 did not define the term. And the Tax Court had twice held that utilities did not constitute “tangible personal property.” See e.g. , Mynsberge v. Dep‟t of State
Revenue , 716 N.E.2d 629, 637 (Ind. Tax Ct. 1999) (declaring that “there is no principled basis for finding that electricity constitutes tangible personal property”); UACC Midwest, Inc. v. Ind. Dep‟t of State Revenue , 667 N.E.2d 232, 237 (Ind. Tax Ct. 1996) (holding that cable telev i sion programming did not constitute tangible pe r sonal property).

R eading the 2007 amendment to the Section 35 Exemption as a clarification of the law is consistent with the purpose of Indiana‟s ado ption of the SSTP and its model provisions

– to si mplify and modernize the administration and collection of the state‟s sales and use taxes. The u ltimate goal of the SSTP e f fort is to allow states that have simplified their tax systems to require

an out

- o f

- state seller to co l lect tax on purchases sent to those states, even when the seller does not have a physical pre s ence in that state. The theory behind this goal is that the SSTP system will eliminate the burdens on interstate commerce that, according to Quill Corp. v. N orth Dakota , 504 U.S. 298 (1992), currently justify denying states such authority. The Department persu asively argues that the SSUTA‟s uniform definitions “are not intended to invalidate or amend any provision of a member state‟s laws.” (App. 15.) Thus the Legislature in all likelihood enacted the definition of “tangible personal property” in I.C. § 6

- 2.5

- 1

- 27 to bring the state into co mpliance with the SSUTA, not to render utilities eligible for the Section 35 Exem p tion.

Kitchin purc hased water, electricity, and gas from utilit y companies in order to supply its lodging operations for the tax year s at issue. Each hotel ha d a single electric meter, water m e ter, and gas meter for the enti re facility. The guest rooms did not have separa te utility meters or
thermos tats; Kitchin did not monitor each guest‟s use of utilities. Most importantly for the stat utory scheme, water, electricity, and gas is used up or otherwise consumed in guest rooms whether9

the rooms are occupied or vacant

– they are used up or otherwise consumed by a hotel, not “by a guest.”

We hold that the Section 35 Exemption of I.C. § 6

- 2.5

- 5

- 35 (2) applies to items used up or
otherwise consumed by guests. B ecause Kitchin , and not its guests, use up or otherwise co nsumed the utilities, K it chin is not entitled to the Section 35 Exemption for the utilities used in its
Indiana h o tels

.

Conclusion

We reverse the judgment of the Indiana Tax Court and affirm the decision of the Ind i ana Department of Revenue denying Kitchin exem ption from sales tax under I.C. § 6

- 2.5

- 5

- 35.

Shepard, C.J., and Boehm, J., concur.

Dickson, J., dissents with a separate op inion in which Rucker, J., concurs

.Dickson, J ustice, dissenting.

I dissent, believing that the facts and law of thi s case warrant our deferring to the dete rmination of the Tax Court which was created “ to consolidate tax

- related litigation in one court of

e x per tise.” State v. Sproles , 672 N.E.2d 1353 , 1357 (Ind. 1996).

Rucker, J., concurs.