Source: http://www.in.gov/legislative/iac/20120328-IR-045120126NRA.xml.html
Timestamp: 2017-01-21 15:17:52
Document Index: 431606197

Matched Legal Cases: ['§ 6', '§ 6', '§ 6', '§ 6', '§ 6', '§ 6']

04-20110235.LOF
Letter of Findings: 04-20110235
I. Sales and Use Tax–"Maintenance Agreements"
II. Sales and Use Tax–"Kitting Activities"
Authority: IC § 6-2.5-2-1; IC § 6-2.5-5-3; IC § 6-8.1-5-1; 45 IAC 2.2-4-2; 45 IAC 2.2-5-8; 45 IAC 2.2-5-10; Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); North Cent. Industries, Inc., Co. v. Indiana Dep't of State Revenue, 790 N.E.2d 198 (Ind. Tax Ct. 2003); General Motors Corp. v. Indiana Dept. of State Revenue, 578 N.E.2d 399 (Ind. Tax Ct. 1991) aff'd 599 N.E.2d 588 (Ind. 1992); Indiana Dep't of State Revenue v. Kimball Int'l Inc., 520 N.E.2d 454 (Ind. Ct. App. 1988); Letter of Findings 04-20000017 (May 13, 2004).
Taxpayer operates two facilities in Indiana. Taxpayer sells cell phone accessories and performs logistic and fulfillment services. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer owed additional use tax for the tax years 2007, 2008, and 2009. The Department found that Taxpayer had made a variety of purchases on which sales tax was not paid at the time of purchase nor was use tax remitted to the Department. Taxpayer disagreed with some of the audit results and protested. An administrative hearing was held, and this Letter of Findings results. Further facts will be supplied as required.
As of the publication of Letter of Findings 04-20050438 (August 11, 2006), the Department fulfilled its obligation to give notice of its "change of interpretation" concerning the taxability of software maintenance agreements. As summarized in the Letter of Findings, "The taxpayer's protest is sustained as to the maintenance agreements and optional warranties in this assessment. The taxpayer is advised that in the future, there will be a rebuttable presumption that all software maintenance agreements and optional warranties will be subject to the sales and use taxes."
In the case of the software maintenance agreements, the interpretations set out in the Sales Tax Information Bulletins are irrelevant. Instead, the interpretation set out in the August 2006 Letter of Findings governs the issue. The publication of that Letter of Findings met the requirements set out in IC § 6-8.1-3-3. See Carroll County Rural Elec. Membership Coop. v. Dep't of State Revenue, 733 N.E.2d 44, 49 n.5 (Ind. Tax Ct.) ("The publication of the Letter of Findings is a prerequisite for the Department before it can change its position as to the interpretation of a tax, where the change would increase the taxpayer's liability.")
However, the Department must disagree. As discussed previously, the Department has consistently found that software maintenance agreements were subject to sales and use tax for several years prior to the enactment of this legislation. Therefore, even when Taxpayer's argument–that this legislation changed the law–is presumed correct, a change from the current law would be changing the law from software maintenance agreements being subject to tax with a rebuttable presumption to software maintenance agreements always being subject to tax without the availability of a rebuttable presumption.
Taxpayer makes the general assertion that certain of its purchases that are used in its "kitting" activities are not subject to use tax because the purchases would qualify for the manufacturing equipment exemption under IC § 6-2.5-5-3. Taxpayer further maintains in the situations where it does not purchase the cell phones and accessories it uses in the "kitting" activities, Taxpayer qualifies for the manufacturing exemption as an industrial processor as found in 45 IAC 2.2-5-10. In regards to the factual basis of Taxpayer's protest, Taxpayer's protest letter states:
Taxpayer also refers to AOL, LLC. v. Indiana Dep't of State Revenue, 49T10-0903-TA-7 (Ind. Tax Ct. Dec 29, 2010) as supporting its position. While the Department does not agree that AOL, a case about the use tax consequences on AOL's purchase of "formatted CDs" and "promotional materials," is relevant to Taxpayer's situation of its purchases of equipment it used as a retailer and provider of logistic and fulfillment services, the Department declines the invitation to discuss the case in more detail. Not only is the AOL case an unpublished decision that cannot be cited for precedent as found at Ind. R. App. P. 65(D), it is also not a final decision as the Indiana Supreme Court has granted the Department's petition for review and has yet to issue its decision on the matter.
Notwithstanding that Taxpayer failed to present sufficient documentation explaining the items at issue and how specifically Taxpayer uses those items, Taxpayer's purchases would not qualify for the manufacturing exemptions found at IC § 6-2.5-5-3. Taxpayer is a not a manufacturer of goods for sale. The Department notes that it has addressed this issue of Taxpayer's "kitting" activities for Taxpayer's parent corporation and issued Letter of Findings 04-20000017 (May 13, 2004), 27 Ind. Reg. 3779 (August 1, 2004), in which the Department denied the Taxpayer's protest finding that Taxpayer's "kitting" activities did not qualify as manufacturing.
Based upon the documentation submitted, Taxpayer does not perform operations on the property that cause a "substantial change" in "form, composition, or character" to the component materials it used. Taxpayer is a retailer and/or service provider. Taxpayer obtains large quantities of packaged goods–i.e., cell phone, cell phone accessories, and instruction manuals–that are produced by someone else, repackages the goods for sales to consumers, and ships them to other retailers/businesses or directly to the consumer. The cell phones, cell phone accessories, and instruction manuals that have been packaged by Taxpayer have not undergone a "substantial change" in "form, composition, or character" and are not substantially different than the cell phones, cell phone accessories, and instruction manuals that Taxpayer obtains from the manufactures. Thus, Taxpayer's "kitting" activities constitute the performance of a service where Taxpayer repackages goods that are manufactured by others.
The Tax Court addressed the issue of repacking in North Cent. Industries, Inc., Co. v. Indiana Dep't of State Revenue, 790 N.E.2d 198 (Ind. Tax Ct. 2003), where the taxpayer bought fireworks in bulk and sold packages containing a variety of fireworks. In that case, the court explained:
North Central does not create a new, marketable product; it merely packages existing fireworks into boxes, then labels and shrink-wraps them. This is not the sort of substantial change or transformation that places the fireworks "in a form, composition, or character different from that in which [they were] acquired." 45 IAC 2.2-5-8(k). See also Indianapolis Fruit, 691 N.E.2d at 1386; Mechanics Laundry & Supplies, Inc. v. Indiana Dep't of State Revenue, 650 N.E.2d 1223, 1229 (Ind. Tax Ct. 1995) (holding that producing a good is not merely perpetuating already existing goods); Harlan Sprague Dawley, 605 N.E.2d at 1229; Faris Mailing, 512 N.E.2d at 483. Nor does North Central's process increase the number of "scarce economic goods," see Harlan Sprague Dawley, 605 N.E.2d at 1225, because the same number of fireworks are sold regardless of the way they are packaged. Consequently, North Central's activities do not constitute the direct production or manufacture of other tangible personal property.
Id. at 201-2.
Since Taxpayer is not the manufacturer of the goods and merely provides a service repackaging goods produced by another, Taxpayer is not entitled to the manufacturing exemptions. Therefore, Taxpayer's protest to the imposition of use tax on its purchases involved in its "kitting" activities is denied.
Composed: Jan 21,2017 10:17:51AM EST