On July 27, 2012, the Indiana Department of Revenue ruled on the application of the industrial sales tax exemption to equipment intended to be used within or incorporated into a Solar Energy Plant.  The Taxpayer (Solar Farm) proposed to develop, construct and install a solar plant to be used to generate electricity and asked the Department to decide whether certain items were exempt from sales tax as equipment directly used in the direct production of electricity (the “double direct” test).  Solar Farm explained:  

An electricity generating solar energy plant generally entails the solar generating facility itself (which consists of foundations, posts, racks, modules, inverters, transformers, wires and related component parts), an electrical interconnection system that connects the electricity generating solar energy plant from the inverter to the electrical public utility’s distribution system, and an access road used during construction and during power production for maintenance and repair activities, and fencing. . . .  The plant consists of foundations, posts, racks, modules, inverters, transformers, wires and related components.

The industrial production exemption statute provides, “[T]ransactions involving manufacturing machinery, tools, and equipment are exempt from the state gross retail [sales] tax if the person acquiring that property acquired it for direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing of other tangible personal property.” Ind. Code § 6-2.5-5-3(b). To be exempt, the Department’s regulation requires that the machinery, tools and equipment must be “an essential and integral part of an integrated process which produces” the electricity.  45 IAC 2.2-5-8(c). But this exemption “does not apply to transactions involving distribution equipment or transmission equipment acquired by a public utility engaged in generating electricity.” Ind. Code § 6-2.5-5-3(c) (emphasis added).  (The same standard applies to the corresponding use tax.)

The Department observed:

Generally, electric utilities recognize three stages in providing electricity to customers: (1) production, (2) transmission, and (3) distribution. “Production” refers to the generation of electricity. “Transmission” involves the transfer of electricity from generating sources to local distribution systems. “Distribution” involves the transfer of electricity from local distribution systems to the customer.

The Department ruled that the following items were an “essential and integral part of an integrated process which produces (or will produce) the electricity sold by [Solar Farm]”:  foundations, posts, racks, modules, and inverters, wires and related component parts.  However, the Department concluded,  “[T]he purpose of [Solar Farm's] use of transformers, and an electrical interconnection system, including wires and related components, involves the economics of transmission and distribution, not production.”  Accordingly, the Department found:

[Solar Farm's] acquisition, storage, use and/or consumption of transformers, an electrical interconnection system, including wires and related components, an access road and fencing does not fall within the ambit of the industrial production and use tax exemption statutes and is not exempt, on that basis, from Indiana sales and use tax.

The Department’s ruling can be viewed at http://1.usa.gov/SZYV7K.

My colleague Fenton D. Strickland, see http://www.faegrebd.com/fenton-strickland, prepared this post.

In separate letters of findings handed down by the Indiana Department of Revenue in September, the Department rejected one taxpayer’s claim that purchases of equipment were exempt from sales and use tax under the manufacturing exemption and granted the exemption to the other.

Indiana Code § 6-2.5-5-3(b) provides an exemption from sales and use tax for manufacturing machinery, tools, and equipment that are acquired for the “direct use in the direct production, manufacture, fabrication, assembly, extraction, mining, processing, refining, or finishing  of other tangible personal property.”  The regulations explain that items acquired are directly used in a production process if they have “an immediate effect on the article being produced,” meaning they are “essential and integral” to an integrated production process.  45 IAC 2.2-5-8.  In addition to manufacturers, industrial processors—defined as those who acquire property owned by another person, provide industrial processing or services (e.g. enameling or plating), and then transfer the property back to the owner—are eligible for the manufacturing exemption.  45 IAC 2.2-5-10.  See also Ind. Code § 6-2.5-4-2. 

In Letter of Findings 04-20010432 (“LOF #432″), a taxpayer that contracts with mining operations and other businesses to pump concrete into mine infrastructure, other construction, and preset molds claimed that its purchase of a concrete pumping truck and line pump were exempt from tax under Indiana’s manufacturing exemption. 

The Department rejected the taxpayer’s argument that because its truck was not licensed for highway use, it was eligible for the exemption. (LOF #432, page 2.)  That fact alone does not qualify the truck for exemption.  The Department also rejected the taxpayer’s argument that it used the truck and pump in a continuous mining operation and therefore qualified for the exemption, observing that the taxpayer’s activities were not part of mining operations, but rather the construction of the infrastructure that would be used in mining operations.  (Id. at 3.)  Finally, the Department turned aside the taxpayer’s claim that it was an industrial processor eligible for exemption.  (Id.)  The taxpayer performed its work by purchasing pre-mixed concrete, which the seller poured into the taxpayer’s pump line, and then pumping the concrete to the designated location.  The taxpayer failed to satisfy the definition of an industrial processor.  (Id.)

Having determined that the taxpayer was neither a miner nor an industrial processor, the Department determined that taxpayer was a “contractor.”  (Id.)  The Department’s regulation provides:  “Utilities, machinery, tools, forms, supplies, equipment or any other items used by or consumed by the contractor and which do not become a part of the improvement to real estate are not exempt regardless of the exempt status of the person for whom the contract is performed.”  45 IAC 2.2-4-26(e).  Taxpayer’s equipment was taxable.  (Id.)

LOF #432 may be accessed on the Indiana Register under DIN 20120926-IR-045120530NRA, which is found at http://www.in.gov/legislative/iac/20120926-IR-045120530NRA.xml.html.

In Letter of Findings 04-20120050 (“LOF #50″), a corporation in the business of designing, manufacturing, and selling modular homes protested an assessment of use tax on the purchase of modular home platforms (“MHPs”).  In the taxpayer’s modular home construction process, home parts are attached to the MHPs, which are large platforms on wheels, and the partially built homes are moved from station to station on the MHPs. 

The Department’s regulations at 45 IAC 2.2-5-8(f)(3) say that transportation equipment used to transport work-in-process or semi-finished material is exempt from tax as long as the transportation occurs within the production process.  With the exception of their use in delivering the finished modular home product to its final destination, which accounted for about 10% of the use of the MHPs, the equipment was used only to transport work-in-process.  (LOF # 50, page 1.)  Therefore, 90% of the cost of the MHPs was exempt from tax. 

LOF #50 may be accessed on the Indiana Register under DIN 20120926-IR-045120533NRA, which is found at http://www.in.gov/legislative/iac/20120926-IR-045120533NRA.xml.html.

On October 30th, the Indiana Tax Court in Wendt LLP v. Indiana Department of State Revenue, Cause No. 02T10-0701-TA-2, held that certain purchases by Wendt, a licensed common carrier headquartered in Wabash, Indiana, qualified for the public transportation exemption (Ind. Code § 6-2.5-5-27) from sales and use tax, thereby partially reversing the Department’s final determinations.

Wendt engaged in the specialized business of relocating oversized factory machinery for its customers.  Wendt offered beginning to end transportation services to its customers in operational “phases,” including phase 1 of project planning (e.g.,price estimates, permit procurement, route planning), phase 2 of pre-transportation preparations (e.g.,disassembly, cleaning, loading), phase 3 of transportation (actual movement of machinery, crews, equipment), and phase 4 of reassembly.  Wendt also offered additional optional services to customers.

During an audit by the Department, Wendt filed two sales and use tax refund claims for 2001 through 2004, claiming that a refund was due under the public transportation exemption.  The Department issued proposed assessments against Wendt.  Following a protest by Wendt, the Department denied Wendt’s protest of its refund claim denials in full and partially denied Wendt’s protest of the proposed assessments. 

Before the Tax Court, the Department argued that Wendt’s property was not exempt because it was not directly used to furnish public transportation, was not part of an integrated public transportation process, and should be taxable because Wendt’s competitors (which provide similar services on stand-alone basis) are not exempt under the public transportation exemption.  Wendt argued that its property was predominantly used within its integrated public transportation operation and was thus exempt.

The Tax Court analyzed whether Wendt’s property was necessary and integral to the integrated public transportation process.  The Court noted that the “single directness standard” for public transportation gives rise to a broader exemption as compared to the “double direct” standard (e.g. Indiana’s manufacturing sales tax exemption).  Slip. Op. at 6.  The Court further observed that the public transportation exemption was an “all-or-nothing exemption that does not permit the grant of partial exemptions.”  Slip Op. at 7 (citation omitted).  The Tax Court’s analysis and findings were broken down by phase.

Phase 1 – Project Planning.  Property used to prepare sales estimates and other non-operational activities, which are not guaranteed to result in a customer, was not necessary and integral to the integrated public transportation process and was therefore not exempt.  However, property used for obtaining permits and planning routes was exempt because Wendt could not legally operate without a permit for its intended route.  Slip Op. at 9-10.

Phase 2 – Pre-Transportation Preparation.  Property used for pre-transportation preparations was exempt because these pre-transportation activities were necessary and integral to successful loading of the machinery and compliance with the law.  Further, loading and unloading activities are exempt under 45 I.A.C. 2.2-5-61(f).  Slip. Op. at 11. 

Phase 3 – Transportation.  The Tax Court explained that phase 3 “embodies the very essence of public transportation: the movement of another’s property for consideration.”  Slip Op. at 11-12 (citing 45 IAC 2.2-5-61 and -62).  Necessary haul escort services, as well as property related to the unloading of customers’ machinery, were exempt.  Slip Op. at 12.  Also, property used for additional in-transit services such as temporary warehouse storage was considered integral and necessary and thus within the scope of the public transportation exemption.  Slip Op. at 13.

Phase 4 – Reassembly.  Post-transportation assembly did not receive favorable treatment from the Tax Court.  The Tax Court reasoned that services performed after delivery to customers were not required, but were simply “incidental” to, the provision of public transportation and were beyond the reach of the public transportation exemption.  Slip Op. at 12 (citation omitted).

The Tax Court then considered whether Wendt had proven that the property at issue was predominantly used in providing public transportation.  The trial evidence regarding the use of the property – along with the uncontroverted testimony of a founding partner (which was corroborated by the Department’s audit findings) – served as sufficient proof for the Tax Court to conclude that the property was predominantly used in public transportation.  Slip Op. at 14-15.

Ultimately, the Tax Court affirmed the Department’s determination that property used for sales estimates, post-delivery reassembly, and lawn care was not exempt under Ind. Code § 6-2.5-5-27.  The Tax Court reversed the Department’s other determinations, remanding the matter to the Department for necessary changes.  Slip Op. at 15. 

The Indiana Tax Court’s opinion can be viewed in full at http://www.in.gov/judiciary/opinions/pdf/10301201mbw.pdf.

In Miller Pipeline Company v. Indiana Department of Revenue, Cause No. 49T10-1012-TA-64 (December 7, 2012), the Tax Court rejected another attempt by the Department to cut short a taxpayer’s day in court.  Miller Pipeline is a contractor engaged in the installation, removal, and repair of underground gas, water, and sewer pipelines.  The sequence of events is important to the Court’s decision. 

June – July, 2008:  Miller Pipeline files three sales/use tax refund claims for 2005, 2006 and 2007 regarding certain “shipping and service purchases” and safety equipment.

Fall, 2008:  Department conducts an audit for the 2006/2007 tax years, resulting in an audit report denying each of the three refund claims in part.  The Department also found that Miller Pipeline owed additional sales/use tax for purchases of tools, parts and other items.  

September, 2009:  The Department issues notices of assessments totaling $84,647.96 for the 2006/2007 tax years. 

October, 2009:  Miller Pipeline pays the assessments in full.  

November 30, 2009:  Miller Pipeline files an original tax appeal (Appeal #1) challenging the Department’s denial of the portion of its 2007 refund claim relating to the purchases of safety equipment.

March, 2010:  Miller Pipeline files a fourth refund claim with the Department.  The Court observed: “[The claim] appears to reflect the additional tax the Department found [Miller Pipeline] owed for the 2006 and 2007 tax years plus the portion of the 2006 and 2007 refund claims the Department used to reduce [Miller Pipeline’s] overall tax liability.”  Slip op. at 3 n.7.

July, 2010:  The Tax Court dismisses Appeal #1 with prejudice pursuant to a signed settlement agreement between Miller Pipeline and the Department.

September, 2010:  The Department denies the fourth refund claim, and Miller Pipeline files an appeal to the Tax Court (Appeal #2).  In this appeal, Miller Pipeline challenged the statistical sample used by the Department to generate the proposed assessments.

The Department sought to dismiss Appeal #2 on grounds there was no claim upon which relief can be granted (a Trial Rule 12(B)(6) motion).  The Department argued that its affirmative defenses of res judicata and accord and satisfaction prevented the Court from hearing the case.  (Because the parties designated evidence outside the pleadings, the Court treated the Department’s motion to dismiss as one for summary judgment.) 

“The doctrine of res judicata prevents the repetitious litigation of disputes that are essentially the same.” Slip op. at 5 (citation omitted).  Res judicata, the Court explained, is divided into two branches – issue preclusion and claim preclusion.  Id.  The Department asserted that both compelled dismissal of the second appeal.       

Claim preclusion did not apply.   “Claim preclusion applies where a final judgment on the merits has been rendered and acts as a complete bar to a subsequent action on the same issue or claim between those parties and their privies.”  Slip op. at 6. (citation omitted).  According to the Department, Appeal #2 involved the same issues for the same tax years at issue in Appeal #1.  For claim preclusion to apply, the Department must show (among other factors) that the matter now in issue was, or could have been, determined in the prior action.  Id.  The Court held that the issue before it in Appeal #2, the propriety of the statistical sample used by the Department to calculate the proposed assessments, could not have been litigated in Appeal #1 because at the time Appeal #1 was dismissed in July, 2010, the Court lacked subject matter jurisdiction over that claim.  Slip op. at 7-9.  The Court lacked jurisdiction because at that time the Department had not yet issued a final determination of Miller Pipeline’s fourth refund claim and the requisite 180-day period for Miller Pipeline to file a direct appeal of the refund claim to the Court had not elapsed.  Slip op. at 9.

Issue preclusion did not apply.  “Issue preclusion, also referred to as collateral estoppel, bars the subsequent re-litigation of a fact or issue that was necessarily adjudicated in a former lawsuit if the same fact or issue is presented in the subsequent lawsuit.”  Slip op. at 9 (citation omitted).  It applies only to matters actually litigated, not to issues that could have been decided.  Id.  The Court will consider whether the party who will be precluded had a “full and fair” opportunity to litigate the issue.  Id.  Issue preclusion did not apply, the Court concluded, because Appeal #1 and Appeal #2 raised “entirely separate and distinct issues.”  Slip op. at 10.  Appeal #1 concerned the denial of the refund claim for safety equipment; Appeal #2 concerned whether the Department’s statistical sample was proper.  Thus, the issue in Appeal #2 was not actually litigated in Appeal #1.  Id.  And Miller Pipeline did not have a “full and fair” opportunity to litigate the sampling issue because the Court lacked subject matter jurisdiction over the issue in July, 2010.  Id.

Accord and satisfaction did not apply.   The Department also argued that the parties’ settlement agreement for Appeal #1 and the Department’s full compliance with that agreement defeats Miller Pipeline’s claim in Appeal #2.  “Accord and satisfaction is a method of discharging a contract, or settling a cause of action by substituting for such contract or dispute an agreement for satisfaction.” Slip op. at 11 (citation omitted).  To successfully apply accord and satisfaction as an affirmative defense, the Department must prove that it had a “meeting of the minds” with Miller Pipeline that settlement of Appeal #1 controlled the disputed issue in Appeal #2.  Id.  The settlement agreement for Appeal #1 unambiguously applied to the 2007 tax year only.  By its terms, it applied to purchases of certain items and did not bind either party for any other tax year.  The agreement was limited to the issue of the sales tax refund for safety equipment, nothing more.  Slip op. at 7.  “The Department has failed to demonstrate a meeting of the minds regarding the settlement’s applicability to the issues contained in [Appeal #2], and accord and satisfaction will not bar the current action from being litigated.”

The Department’s motion for summary judgment was denied.

The Court’s opinion can be viewed in full at http://www.in.gov/judiciary/opinions/pdf/12071201tgf.pdf.

An aircraft owner avoided Indiana use tax by arguing that its aircraft had never been used in Indiana because the aircraft had crashed outside the state, was never repaired, and had not been flown into the state. The use tax is “imposed on the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction,” see Ind. Code § 6-2.5-3-2.  The use tax is the compliment of the sales tax.  (The Tax Court has explained that the use tax “bites” where the sales tax does not.)  Owner was an out-of-state corporation with Indiana operations.  The Department of Revenue checked its records against the Federal Aviation Administration’s and discovered that Owner had acquired the aircraft but paid no sales tax to Indiana. The Department assessed use tax.  Owner protested, explaining that the prior owner had crash-landed when en route from its home base in Arizona to California. Owner intended to either repair the aircraft or sell it for parts.  But the aircraft had not left California since the crash, which Owner was able to document.  “Since the aircraft never entered Indiana, [Owner] never used the aircraft here.”  Because the aircraft was never used in Indiana, the Department agreed that Owner did not owe use tax.  

The Department’s Letter of Findings (posted 12/26/2012) can be viewed at http://bit.ly/WOMGcq.

Letter of Findings 04-20110564 and 04-20120271, released Wednesday by the Indiana Department of Revenue, involved a taxpayer (“Auto”) engaged in the business of leasing vehicles.  Auto would contract with a customer (“Customer”) to lease a vehicle for a set period of time, after which Auto would typically sell the vehicle either to the Customer under an option to buy clause or on the wholesale market.  Auto received revenue in the form of down payments, lease payments, “gap” insurance, late fees, termination fees, and end-of-term fees from its Customers.  Auto, as a retail merchant, also collected and remitted sales tax on payments from its Customers.

As was bound to happen, Customers occasionally grew tired of their leased vehicles before the expiration of their contracts with Auto and sought to acquire new vehicles elsewhere.  A Customer could pursue what Auto called an “early termination” which involved, in short, the Customer finding a new vehicle for lease or purchase from another dealer (“Dealer”) and negotiating with the Dealer for its buyout of the Customer’s contract with Auto.  Auto would inform the Dealer of the price of the original vehicle and the price of ending the contract at an early date, ultimately selling the vehicle to Dealer and concluding the contract with the Customer.  The Dealer would then treat the original vehicle as a “trade-in” from the Customer.

The Department’s audit found that the buyout amount paid by Dealer to Auto, attributable primarily to lease payments and termination fees owed by the Customer, was subject to sales tax because the payments were “part of the lease consideration in the lease agreement.”  The Dealer’s payments were effectively substitute lease payments, said the Department, relieving the Customer from its liability under the contract.  (The audit did not tax the portion of a Dealer’s payment that equaled the residual value of the vehicle.)  The Letter of Findings thus characterized the issue to be whether Auto was required to collect sales tax on the payment received from the Dealer when a Customer arranged for the Dealer to acquire the original vehicle and to pay remaining amounts owed to Auto under the contract.    

Auto argued, among other things, that: (1) the Dealer’s payment was not made by the Customer, on behalf of the Customer, or to satisfy the Customer’s obligations to Auto, but was an entirely independent transaction strictly between Auto and Dealer; (2) its sale of the leased vehicle to Dealer was an exempt sale for resale; (3) the Dealer’s purchase of a vehicle from Auto was equivalent to a termination, whereby the contract between Customer and Auto ends and no further taxable payments are due; and (4) as an intervening party, the Dealer is distinguishable from someone like a “rich uncle” agreeing to pay off the lease because the Customer loses its right to use and enjoy the vehicle after the Dealer’s payment to Auto ends the contract, whereas the Customer would retain such rights in a “rich uncle” situation.

The Department first examined the contract between Auto and the Customer.  The contract did not address the situation at hand, leading the Department to consider additional supporting documentation and circumstances, including Auto’s accounting system and the Dealer’s payment documentation.  Auto’s accounting system characterized the Dealer’s payments as “payoffs,” allocating them to various charges due to Auto from the Customer.  Additionally, Dealer’s payments were typically connected to a specific Customer, stating the Customer’s name and lease number for Auto’s reference.  The Department explained that these circumstances looked like a valid contract acceleration or exercise of the “wind down” option, even though the Dealer, and not the Customer, made the actual payment.

The Department ultimately denied Auto’s protest, disagreeing with Auto’s argument that it engaged in an exempt and independent transaction with the Dealer.  The Department also stated that it did agree with Auto that the contracts were indeed terminated – and the Department was not attempting to tax “future lease payments” for a terminated contract.  It wrote, “[T]he agreement clearly states that unpaid monthly payments and termination charges are due upon the [Customer's] decision to terminate the agreement and either acquire the vehicle or simply extricate himself or herself from the obligations under the [Contract]. . . .  [T]hese amounts are taxable as provisions of the rental contract for the use of tangible personal property under IC § 6-2.5-2-1.”  The Department also observed that the tax consequences of the buyout payment would not vary depending upon the identity of the payer – whether paid by the Dealer or a “rich uncle,” the payment would be subject to sales tax. 

A full copy of Letter of Findings Numbers 04-20110564 and 04-20120271 is available at http://www.in.gov/legislative/iac/20130130-IR-045130016NRA.xml.html.

Producer of dry milled corn products claimed it used magnets in its production process

The Indiana Department of Revenue assessed use tax against a producer of dry milled corn products for its purchases of industrial magnets.  Producer claimed the magnets were exempt from sales and use tax because they were used in its corn mill production process.  (The Department notes:  “In effect and practice, the use tax is functionally equivalent to the sales tax.”)  The general rule is that all purchases of tangible personal property by a manufacturer are taxable.  But machinery, tools, and equipment directly used in direct production (the “double direct” test) are exempt.  See 45 IAC 2.2-5-8(a).  The machine, tool or equipment must have an “immediate effect” on the item being produced.  45 IAC 2.2-5-8(c). It must be an essential and integral part of an integrated production process.  See id.

Producer’s protest has one negative, three positive results

To be exempt, the property cannot be used in pre- or post-production.  Identification of the completion point of the manufacturing process was the determining factor, i.e. “when is the [Producer's] milled corn in its final, marketable form?” Three of the magnets checked the milled corn for metal pieces before it was placed in storage.  The Department explained:  “These magnets are components of tubes through which different milled corn products flow on the way to conveyors that transport the product to storage. If metal pieces are found in the milled corn, that batch is returned for further processing.”  These magnets, the Department concluded, were directly used in direct production and therefore exempt. 

Producer used the fourth magnet when stored milled corn was taken from storage for loading into trucks for transport. Taxpayer asserted that the trucks constituted “packaging” and that manufacturing ends at the point where “production has altered the item to its completed form, including packaging, if required.” (citing 45 IAC 2.2-5-8(d) (emphasis added).  Producer reasoned that its “customers pay for this packaging just as they would 50 pound bags.”  Producer’s argument failed.  Customers did not keep the trucks, which were merely a “means of transporting [Producer's] bulk product.”  Because it was used in post-production, the fourth magnet was taxable.

The Department’s ruling (posted 2/27/2013) can be viewed here.

(Photo used under Creative Commons from Michael Moore)

Last month, the Texas Supreme Court in Combs v. Roark Amusement & Vending, L.P. was faced with a “fun” question – whether Roark, an owner of “claw” machines located in malls, grocery stores, and restaurants, was entitled to a sales tax refund for tax paid on stuffed animals used to stock the taxpayer’s machines?  Roark argued that it was exempt, and thus deserving of a refund, under the sale-for-resale exemption.  The Court found that Roark purchased the toys “for the purpose of transferring” them “as an integral part of a taxable service.”  Slip op. at 4.  The toys, in fact, are “more than integral to the machines’ amusement service—they are indispensable” because “[t]here would be no point (or profit) to the game—and thus no game—if customers had no chance of winning a toy.” Id.  Roark’s purchases of the toys qualified for exemption. Id.

The Court rejected two un-amusing arguments raised by the Comptroller.  First, the Court dismissed the contention that the sale-for-resale argument must fail because Roark was not providing a “taxable service.”  Texas exempts amusement services provided through coin-operated machines operated by the consumer.  That the Code establishes this exemption “does not alter the fact that the machines provide a taxable service.”  Slip op. at 5.  Roark provided a taxable service – that was then exempted.  Slip op. at 6.  The Court read and interpreted the statutes as a cohesive, integrated whole in accepting Roark’s position.  Id.

Second, the Court rejected the argument that a stuffed animal must be conveyed to a player each and every time the game is played in order to qualify for the sale-for-resale exemption, reasoning that no such requirement existed under the economic realities of the tax at issue.  Slip op. at 7.  All stuffed animals eventually became the player-customer’s property, except those that were lost, damaged, or stolen.  Further, the economic reality of the facts was such that no-one would spend money and play the game without the chance of winning an animal.  This meant that the animals were integral to the amusement service.  Slip op. at 7-8.

The Court ruled for Roark, finding that it was entitled to the claimed sales tax refund under the language of the applicable statutes.  The case was remanded to the trial court for further proceedings.  Slip op. at 9.

(Photo used under Creative Commons from Anna Lee)

The Indiana General Assembly passed two exemptions in its recently concluded session that will advance the State’s aviation industry.  The legislature passed a new exemption for aircraft repair parts.  The exemption, which is codified at Ind. Code 6-2.5-5-46, takes effect July 1, 2013, and provides:

(a) Transactions involving tangible personal property (including materials, parts, equipment, and engines) are exempt from the state gross retail tax, if the property is:

        (1) used;

        (2) consumed; or

        (3) installed;

in furtherance of, or in, the repair, maintenance, refurbishment, remodeling, or remanufacturing of an aircraft or an avionics system of an aircraft.

(b) The exemption provided by this section applies to a transaction only if the retail merchant, at the time of the transaction, possesses a valid repair station certificate issued by the Federal Aviation Administration under 14 CFR 145 et seq. or other applicable law or regulation.

See Public Law 288, Sec. 30. Previously, the exemption was limited to aircraft registered outside the United States.  The exemption only applies where the retail merchant is a certified FAA repair station.

In addition, lawmakers added a new exemption for aviation fuel, also effective July 1st.  Ind. Code § 6-2.5-5-49.  The new statute provides:

  (a) As used in this section, “aviation fuel” refers to:

        (1) gasoline used to power an aircraft;

        (2) jet fuel; or

        (3) a synthetic fuel or fuel derived from any organic matter used as a substitute for a fuel described in subdivision (1) or (2).

  (b) A transaction involving aviation fuel is exempt from the state gross retail tax.

See Public Law 288, Sec. 31. 

But along with these two new exemptions, the General Assembly created a new aviation fuel excise tax (effective July 1st) at Ind. Code § 6-6-13-1 to -15.  See Public Law 288, Sec. 67.  The tax of ten cents ($0.10) per gallon is imposed on the “gross retail income received by a retailer on each gallon of aviation fuel purchased in Indiana.”  Ind. Code § 6-6-13-6(a).  The law further provides that a retailer “shall add the per gallon amount of tax to the selling price of each gallon of aviation fuel sold by the retailer so that the ultimate consumer bears the burden of the tax.”  Id.  “Gross retail income” excludes “the amount of any excise tax imposed upon the sale under federal law.”  Ind. Code § 6-6-13-6(b).  And the sale of aviation fuel is exempt if it is placed into the fuel supply tank of an aircraft owned by:

       (1) the United States or an agency or instrumentality of the United States;

       (2) the state of Indiana;

       (3) the Indiana Air National Guard; or

       (4) a common carrier of passengers or freight.

Ind. Code § 6-6-13-7.  The new exemptions and excise tax are included in House Enrolled Act 1545 and can be viewed here.

(Image credit:  FreeFoto.com)

This is a guest post by my former colleague Scott Novak, SALT Senior Manager with CliftonLarsonAllen, LLP in Indianapolis.  Scott can be reached at scott.novak@cliftonlarsonallen.com.

During the recently ended legislative session, the Indiana General Assembly significantly expanded the state’s sales tax exemption for property purchased for use in R&D activities.  Although certainly well-intentioned, the R&D exemption has been the source of much consternation for taxpayers since it became law in 2005.  The exemption historically contained challenging language that led to difficult audits and uneven application of the exemption.

The Indiana General Assembly has sought to remedy these problems with its new amendments to the R&D exemption.  Effective for purchases made after June 30, 2013, all purchases of “research and development property” devoted to experimental or laboratory research and development activities are exempt from tax.   See P.L. 288.   This is a significant, and welcome, departure from the existing statutory language that provides an exemption for “research and development equipment” that was “devoted directly” to experimental or laboratory research and development activities.  See IC 6-2.5-5-40 (a)-(b).  (emphasis added).

The General Assembly has also clarified that the revised exemption applies “regardless of whether the person that acquires the research and development property is a manufacturer or seller of the new or existing products,” meaning that third party or contract researchers are eligible for the expanded benefit.

With the amendments, the General Assembly has made two very taxpayer favorable changes to the exemption:  changing from R&D “equipment” to the much broader R&D “property” and requiring only that the property be “devoted” to R&D activities instead of “devoted directly” to R&D activities.

The statutory language limiting the exemption to R&D equipment has always been problematic.  Although R&D equipment is defined in the statute as laboratory equipment, computers, computer software, telecommunications equipment, and testing equipment, Indiana has no other formal guidance on what constitutes equipment and what does not.  The Indiana Department of Revenue chose to go the informal route, issuing only a non-binding information bulletin with its interpretations.  See Sales Tax Info. Bulletin No. 75 (Oct. 2008).  The new language does away with the equipment issue by broadening the exemption to include all research and development property.

For example, the Department’s existing information bulletin provides that research and development equipment does not include “hand powered tools or property with a useful life of less than one year.”  Id.   With the statutory change to research and development property, one might expect that these types of purchases are no longer at issue.

The second change, from “devoted directly” to simply “devoted,” is more subtle but equally important.  By comparison, consider Indiana’s manufacturing exemption which provides an exemption for purchases acquired for “direct” use in “direct” production of other tangible personal property, a so-called “double direct” test.  See IC 6-2.5-5-3(b).  The original R&D exemption required a qualifying purchase to be “devoted directly” to R&D activities, a single “direct” test.   It seems then the legislature has now implemented “a zero direct” test by striking the word “direct” from the statute entirely.  By omission the new language suggests that purchases used both directly and indirectly in R&D activities might qualify for the exemption.   It certainly follows that a “zero direct” test must include a broader range of exempt purchases.

For example, might electricity used to light R&D labs or power testing equipment now qualify for the exemption?  It is after all tangible personal property seemingly devoted to R&D activities.   See IC 6-2.5-1-27.  It’s an unanswered question, but it is one worth exploring.

Of course, all statutory language is open to interpretation and taxpayers will have to wait to see the Department’s view of the revised language.   The Department is expected to issue an updated Sales Tax Information Bulletin No. 75 in the coming weeks.  In the meantime, businesses should consider a review to determine if previously taxable purchases might now qualify for the expanded exemption.

(Image credit:  FreeFoto.com)

State tax audits often come in waves. When a revenue department notices one business that has been overlooked, the business’s competitors often find auditors knocking at the barn door.  In Indiana, one of the areas of recent focus has been so-called claiming races.

Claiming races are a method of determining the price of a horse, with the successful buyer (claimant) taking title to the horse when it leaves the starting gate.  Claiming races also allow racetracks to offer more pari-mutuel races (filling the schedule with top-quality races is near impossible) and allow horse owners to prove the mettle of horses that might not otherwise be competitive.  If the horse wins the race, the original owner takes the purse, not the claimant.

Several months ago, the Indiana Department of Revenue began issuing letters of finding in cases where claimants had failed to pay the tax on the claiming transactions.  As improbable as it sounds, the issue became significant enough that the Indiana General Assembly included an “Amnesty Program for Unpaid Use Tax on Claimed Race Horses” in this session’s biennial budget.  Taxpayers with unpaid tax liability for claiming transactions occurring before June 1, 2012, can have interest, penalties, and costs abated in return for paying the unpaid taxes.  It should be noted that the Department’s first letters of finding came in September 2012.

Over time, the arguments against imposition of the tax became more developed and more interesting, though taxpayers have yet to have a protest sustained.  In May, taxpayers put forth two novel arguments that attempted to stir up the Department’s thinking.

A Horse is a Horse, of Course… Unless it’s a Farm Implement

In earlier cases, taxpayers had unsuccessfully argued that the agricultural exemption applied to the purchases.  The taxpayer in Letter of Findings 04-20130076, however, tried to make hay of a different argument for the exemption.

The taxpayer did not contest that he acquired horses in claiming transactions, and did not contest that such transactions are generally taxable.  Instead, the taxpayer argued that he acquired the claimed horses as part of his corn and soybean farming operations, and that they were, in fact, integral and essential parts of those operations.  The horses produced a “profuse amount of manure,” which the taxpayer used to fertilize his crops.  The fertilizer had to be “harvested several times a week to spread on the land.”  The horses were not primarily used for racing, in the taxpayer’s opinion, because they were stabled at his farm most of the time, and only left the farm to be raced.

The Department did not share the taxpayer’s opinion.  The horses’ biological byproduct, while important to the taxpayer’s agricultural production process, did not make the horses directly used in direct production of food or food ingredients.  The property in question (the horses, not their byproduct) must have an immediate effect on the food being produced.  Because the horses could not meet that test, the Department rejected the taxpayer’s argument.

The Department Beats a Dead Horse

Sales tax is imposed on the transfer of tangible personal property.  The taxpayer in Letter of Findings 04-20120541, who purchased a horse in a claiming transaction, argued that the nature of claiming transactions mean that there is no tangible personal property, and therefore no tax.

The taxpayer rested his case on Racing Commission regulations which explained that in claiming races, the successful claimant “become[s] the owner of the horse whether it be alive or dead, sound or unsound, or injured at any time during the race or after.”  The taxpayer emphasized that this means that he is responsible for the purchase price even if the horse dies.  Therefore, the horse was not tangible personal property, but nontaxable intangible personal property.

Although the regulations did provide that claiming races have a level of uncertainty, the Department disagreed that the (presumably still living) horse was intangible property.  “[E]ven a dead horse is capable of being ‘seen, weighed, measured, felt, or touched’ and thus is still tangible personal property as defined under Ind. Code § 6-2.5-1-27.”  Sales tax was therefore owed, and the Department put the taxpayer’s argument out to pasture.

(Image credit:  FreeFoto.com)

On June 27, 2013, the Washington Department of Revenue ruled that several medical devices used to deliver saline were subject to sales and use tax.  Hospitals purchased the medical devices and other items from vendors that did not charge sales tax.  And Hospitals did not remit use tax on the devices and did not charge their patients sales tax for the items.

Washington exempts from sales and use tax “disposable devices used or to be used to deliver drugs for human use, pursuant to a prescription.”  Exempt devices are “single use items such as syringes, tubing, or catheters” or, as the Department reasoned, items “similar to” or “of the same general class” as these items.   Because the statute did not define “syringes, tubing, or catheters,” the Department applied the “ordinary dictionary meaning” of the terms.  Looking to Webster’s Third New International Dictionary, the Department concluded that the “essential characteristic of syringes and catheters [for purposes of the sales tax exemption is] that they facilitate the injection of fluids into the human body via insertion into the human body, and that is what they are designed to do.”

The Department first had to determine whether the saline delivered by the devices constituted a prescribed drug as used by the Hospitals.  It did.  The Department explained:  “Although saline may seem to be a common solution used in numerous procedures, saline in the specific procedures requiring the use of the devices at issue, may only be dispensed at the [Hospitals’] facilities pursuant to a prescription by a licensed individual.  The saline as used in the [Hospitals'] procedures . . . meets the definition of drug.”

With the above understandings, the Department analyzed each device and ruled that each was taxable.

1.  The Hydro Thermablator Kit “includes a control unit, rolling cart, a pole, and a fluid heater canister used to heat, monitor, and circulate temperature-controlled saline solution through the uterine cavity to perform endometrial ablation.”  Although the device as used in the procedure injects heated saline into the uterus, its function was not that of a syringe.

2. The Bipolar Tissue Sealer is used to cauterize or seal ruptured blood vessels during surgery.  Saline promotes healing in the area; however, “[i]ntroducing saline to prevent burning is not similar in nature to a syringe, catheter or tubing, which facilitate the injection of fluids into the human body via insertion into the human body.”

3.  The Hook Sealing Endoscopy seals blood vessels and bile ducts to reduce blood loss and bile leaks.  But the “injection of saline is not similar in nature to that of a syringe, catheter or tubing, because the purpose of the device is to seal blood vessels and bile ducts.”

4.  The Cath EP Thermocool allows “for efficient fluid delivery within the catheter itself and . . . allow[s] heat to dissipate across the catheter tip.”  Because the saline is being used to regulate the temperature of the catheter itself and isn’t designed to inject fluids into the human body, it is not exempt.

5.  The Clearview Mister Blower enhances visualization at the surgical site by keeping the area clear of blood during coronary suturing.  Because the saline’s purpose was to blow blood away from area, the Department found that the device did not deliver a prescribed drug for human use.  And the device was not similar to a syringe, catheter or tubing designed to facilitate the injection of fluids into the human body via insertion into the human body.

In a non-saline ruling, the Department found that suction canisters were not exempt prosthetic devices because they were not worn on the body.

The Department’s ruling can be viewed in full here.

(Image Credit: Robert Linder)

In Reichenbach v. Testa (Jun. 28, 2013), the Ohio Board of Tax Appeals considered the appeal of a Farmer who was assessed use tax relating to his purchase of a tractor and backhoe in March 2007.  Upon purchasing the equipment, the Farmer provided an exemption certificate to the vendor on grounds the equipment would be used in farming.  The Department of Taxation, however, found that Farmer was not engaged in farming at the time of the purchase.  In affirming the assessment, the Tax Commissioner primarily looked to the Farmer’s 2007 I.R.S. Federal 1040 Schedule F (Profit or Loss from Farming).  This form listed no farm income and only limited farm expenses.

Farmer explained that he moved to Ohio from New Jersey in August 2007, after his home in New Jersey had sold.  At that time, it was too late to cut hay “because the quality was bad.”  Slip op. at 3.  But he did mow his fields twice in preparation for hay farming in 2008.  Thus, he didn’t generate any profits from hay farming in 2007.

The Board found that Farmer did, in fact, engage in farming as a business.  Even though he couldn’t immediately produce hay, “his preparation and maintenance of the fields that would produce the hay in 2008 constituted the business of farming in 2007.”  Slip op. at 4.  In reaching its decision, the Board was persuaded in part by the Farmer’s “credible testimony.”  Slip op. at 4.

(Image credit: Gölin Doorneweerd)

On July 16th, the Supreme Court of Missouri in PF Golf, LLC v. Director of Revenue ruled that a Golf Club owed no sales tax on golf cart rentals.  The Golf Club paid sales tax on the golf carts when it purchased them.  It required customers to pay for and use a golf cart, except those customers who elected to walk or participated in competitions prohibiting use of carts.  Golfers received a receipt separately itemizing the greens fees and cart rentals, but Golf Club collected and remitted sales tax only for the greens fees.  The Director assessed sales tax of approximately $122,000 plus interest, arguing the rentals were mandatory and therefore taxable.   The state’s Administrative Hearing Commission reversed the Director, who then appealed to the Supreme Court.

Taxpayer’s argument is par for the course.  On appeal, the Director argued that sales tax applies to fees paid to a “place of amusement” and that a golf course is a “place of amusement.”  Slip op. at 3 (citations omitted).  Accordingly, Golf Club should have collected and remitted sales tax on the fees paid for cart rentals.  Golf Club countered that that the tax does not apply where property was purchased under “sale at retail” conditions or where sales taxes were previously paid by the renter on the original purchase of the property.  Slip op. at 4.   Looking to its decision in Westwood Country Club v. Director of Revenue, which involved  a “similar situation in which the director assessed sales taxes against a private golf club’s rental of golf carts to its members,” the Supreme Court agreed with Golf Club and held:  “The fact that [Golf Club] paid sales tax on its initial acquisition of the golf carts means that it is not required to collect sales tax on the subsequent rental of those carts to its customers.”  Id.

Director’s arguments hit the sand trap.  The Director also argued that Golf Club really sold rounds of golf that included the use of a cart, which made the statute relied upon by the Court “inapplicable.”  Slip op. at 5.  The Court, however, observed that “substantial evidence in the record,” including the itemization of cart rentals on golfers’ receipts, supported the Commission’s finding that Golf Club rented carts.  Id.  Further, even if most golfers were compelled to rent carts, a “mandatory rental is still a rental.”  Id.  The Director misfired on two other arguments as well.

Dissent misses the cut.  The lone dissent in the case opined that the cart rentals were not exempt because the carts had not been acquired by Golf Club in a “sale at retail,” which occurs when a purchaser takes ownership of tangible personal property for the purchaser’s own use or consumption.  Dissent op. at 3.  When the purchased property is held for leasing, as in the present case, there is no “sale at retail.”  Id.

(Image credit:  Randy Rowe)

While I’m not a hunter, I imagine that Wyoming is a hunter’s paradise, attracting not only hunters from near and far but also taxidermist to preserve game trophies.  The Merriam-Webster online dictionary describes “taxidermy” as “the art of preparing, stuffing, and mounting the skins of animals and especially vertebrates.”   Taxidermy services are taxable in Wyoming, and the Wyoming Department of Revenue recently issued updated guidelines to ensure that sales tax is properly paid on those services.  The guidelines provide in part:

1. Taxidermy services performed in Wyoming are subject to sales tax.  According to the Wyoming Supreme Court, taxidermy is an alteration of tangible personal property – not a manufacturing process – and alterations of tangible personal property in Wyoming are subject to sales tax.
2. “The taxidermist’s purchase of all materials and services that become a part of the finished trophy are wholesale purchases and not subject to sales/use tax.”
3. The purchase of certain tools necessary for the taxidermist to perform the services (e.g. scalpels, scalpel handles, cape needles, rasps) is subject to sales tax.
4. Out-of-state hunters must pay sales tax even when their game trophies are shipped outside the state upon completion, because the taxable service occurred in-state.
5. “Transportation and freight charges associated with this retail sale are not subject to sales tax and must be separately stated on the invoice.”

I guess you could say this is an effort by the Department to remind taxidermists that the “buck doesn’t stop” with them – sales tax has to be collected and remitted to the State.

(Image credit:  Jenny Erickson)

Following is a link to a post by Sylvia Dion, CPA, Founder and Managing Member of the tax consulting firm, PrietoDion Consulting Partners LLC and creator of The State and Local Tax “Buzz” blog.  Sylvia examines issues concerning the adoption by the Massachusetts legislature (and passed over the Governor’s veto) of a controversial new tax on computer design and software modification services.

Sylvia explains:

On July 31, 2013, Massachusetts became one of only four states in the country to impose its sales tax on computer design services (Hawaii, New Mexico, and South Dakota are the other three), as well as software modification services.  Not only is this a significant tax provision, but because the provision was effective just seven days after H.B. 3535 was enacted, vendors/providers of computer system design and software modification services will have to quickly assess the new law’s impact on their business and their sales tax registration, collection and remittance requirements.

The post can be viewed at:

Sales Tax on Computer Design, Software Modification Services: Massachusetts Issues Initial Guidance, Yet Questions and Challenges Remain

I knew we would circle back to this issue.   On June 27, 2013, my colleague Ben Blair reported in a blog post:  “Several months ago, the Indiana Department of Revenue began issuing letters of finding in cases where claimants had failed to pay the [sales / use] tax on the claiming transactions.  As improbable as it sounds, the issue became significant enough that the Indiana General Assembly included an ‘Amnesty Program for Unpaid Use Tax on Claimed Race Horses’ in this session’s biennial budget.”  The Department has now issued Commissioner’s Directive #47 (effective July 1, 2013) to provide guidance on the program.  The directive states in part:

QUALIFICATIONS FOR AMNESTY PROGRAM

The amnesty program applies to unpaid use tax liabilities for claiming transactions occurring before June 1, 2012.  Taxpayers in the following situations are eligible to participate in the amnesty program:

• A taxpayer with an outstanding use tax liability that is due and payable to the department for an eligible tax period;

• A taxpayer who properly protests a liability in accordance with IC 6-8.1-5-1;

• A taxpayer who has a departmental hold on a tax liability payment resulting from an audit, a bankruptcy, a taxpayer advocate action, a criminal investigation, or a criminal prosecution;

• A taxpayer who negotiated a payment plan on or prior to June 1, 2013, with the department, a sheriff, a collection attorney, or a collection agency, and who had an unpaid liability during an amnesty-eligible tax period;

• A taxpayer who filed a sales or use tax return for an amnesty-eligible tax period but underreported the tax liability that was actually due; or

• A taxpayer who has not filed a sales or use tax return or paid taxes for an amnesty-eligible tax period and has not been assessed by the department.

The directive emphasizes, “The amnesty program does not apply to a taxpayer’s state gross retail or use tax liability from any other type of transaction.”

THE AMNESTY PERIOD

The amnesty period runs from July 1, 2013, up to and including December 31, 2013.  As to this deadline, photo finishes are not recommended.  The Department declares, ”No extensions of payments are permitted unless the taxpayer has established a payment plan agreement with the department.”

WHAT IS THE “PRIZE”?

A taxpayer who voluntarily, timely, and correctly participates in the program has the Department’s “assurance” that:

• The Department shall abate and not seek to collect any applicable interest, penalties, collection fees, or costs related to those tax liabilities that are paid under amnesty;

• The Department shall release any liens that are imposed after the full amount of the applicable tax liability is paid;

• The Department shall not seek civil or criminal prosecution against any individual or entity that participates in the amnesty program. The provision not to seek any civil or criminal prosecution applies only to use tax liabilities that are included in the amnesty program; and

• The Department shall not issue or, if already issued, shall withdraw an assessment, a demand notice, or a warrant for payment for liabilities paid under the amnesty program.

However, the Department advises that amnesty is a one-time option:  “A taxpayer who participates in this amnesty program is not eligible to participate in any future amnesty programs.  A taxpayer who participated in a prior amnesty program is not eligible to participate in this amnesty program.”

This post (as with all posts) is intended for general information purposes only and is not to be considered legal or tax advice.  The information herein should not be acted upon without appropriate professional advice.

The Indiana Tax Court will not do a party’s work for it.   The party is responsible for walking the Court through its arguments and the evidence supporting those arguments.   In Miller Pipeline Corporation v. Indiana Department of State Revenue, Cause No. 49T10-1012-TA-64 (August 9, 2013), the Court denied Miller Pipeline’s summary judgment motion because it failed to properly designate its evidence and to explain how the evidence supported its claim that the Department erroneously denied a sales tax refund claim.

Miller Pipeline appealed the Department’s denial of its sales and use tax refund claims for the 2005 – 2007 tax years.  In requesting a partial summary judgment, Miller Pipeline raised ten issues and designated 15 documents to show there were no genuine issues of material fact.  (To prevail on a summary judgment motion, the moving party must establish (a) there are no genuine issues of material fact and (b) the party is entitled to judgment as matter of law, see Ind. Trial Rule 56(C).)  To “conserve judicial resources,” the Court addressed only two of Miller Pipeline’s ten issues, noting that the “exhibits specifically designated by Miller Pipeline with respect to those two issues suffer from particular problems that permeate all of Miller Pipeline’s designated evidence.”  Slip op. at 4.

First, Miller Pipeline asserted that it was entitled to a refund of use tax incorrectly remitted on a casual sale transaction.  At the heart of this claim was Miller Pipeline’s self-assessment of use tax on its acquisition of approximately $949,000 of rolling stock, equipment and tools from a company it contended was not engaged in the business of selling such property in the ordinary course of business; because this transaction was a non-taxable casual sale, the Department was wrong to deny the refund claim.  Trial Rule 56(C) requires a party to identify the “parts” of any document upon which it relies for summary judgment, so the party “may not designate various pleadings, discovery material, and affidavits in their entirety.”  Slip op. at 4 (citations omitted).  Specific references to the relevant portions of documents are required, and “a proper designation should also include an explanation as to why those specifically designated facts are material.”  Slip op. at 5 (citations omitted).  And the Court “will only consider properly designated evidence that would be admissible at trial.”  Id.  This means that “unsworn statements or unverified exhibits will not be considered” and “portions of affidavits that merely set forth conclusory facts or conclusions of law will not be considered.”  Id.  Miller Pipeline designated three exhibits to supports this claim, but it didn’t identify the “specific parts of those exhibits that contain the material fact or facts upon which it relies.”  Slip op. at 6 (emphasis in original).  Miller Pipeline’s exhibits had other deficiencies:

• They were between six and eleven pages long but were not paginated.
• The three exhibits contained multiple documents, but Miller Pipeline identified only the first document within each exhibit.
• None of the exhibits (or the documents within each exhibit) had “been sworn to in any way.”

Slip op. at 6.   Accordingly, the exhibits were “inadmissible and must be stricken.”  Slip op. at 7.  (In a footnote, the Court explained that six other exhibits had similar issues, see Slip op. at 7 n.7.)

Second, Miller Pipeline argued that it deserved a refund of use tax remitted on a “lump-sum” contract.  In a contract to replace field tile, Miller Pipeline explained that the Farm had paid sales/use tax on the materials used to complete the project; because Farm had paid the tax, the Department erred in denying Miller Pipeline’s refund claim for use tax remitted under the contract.   Miller Pipeline designated a photocopy of a one page form letter directed to the Farm, which has an “X” in the box next to the statement that the “questioned invoice involved a ‘lump-sum’ contract for improvement to reality.”  Slip op. at 7-8.   A material and labor invoice from the Farm to Miller Pipeline for field tile replacement is attached to the letter.  But the letter contained no facts supporting the “legal conclusion that the subject transaction involved a ‘lump-sum’ contract” or showing that the Farm had paid tax on the materials used to complete the project.  Slip op. at 8-9 (emphasis in original).  That “the letter was signed and affirmed does not make it an affidavit.”  Slip op. at 9 (citations omitted).  The letter, signed by the Farm’s President, didn’t show that it was based on the President’s personal knowledge or that that the President was competent to testify.  Consequently, the letter was inadmissible and was also stricken.  Id.

The Court expressed frustration with the evidence in this case, stating that the lack of proper designation “essentially has the effect of placing a stack of paperwork before the Court and leaving [the Court] to figure out for itself the identity of the documents contained in each of the exhibits, what the relevant portions of each document are and why, and whether those documents are reliable and trustworthy.”  Slip op. at 7 n.5.   “This task, however, does not belong with the Court and, as a result, the Court will not do the work that [Miller Pipeline] should have done.”  Id.

In a footnote, the Court also observed that Miller Pipeline supported its tenth issue by designating various pleadings and the Department’s audit report, which was previously submitted by the Department.  Miller Pipeline also cited to – but failed to provide copies of – three documents, including sampling/auditing manuals from California and Texas; it did not explain how the manuals apply in Indiana.  The Court declined to “figure it out” for itself.  Slip op. at 9 n.9.

Finally, the Department requested summary judgment in its favor.  The Department designated as evidence its proposed assessments of tax against Miller Pipeline.  Miller Pipeline had paid the assessments in full and then filed a separate claim for refund.  The Court denied the request, “given that Miller Pipeline is appealing the Department’s denial of a refund claim.”  Slip op. at 10 n.10.

This is the second ruling by the Court in this appeal; in an earlier decision, the Court denied the Department’s motion to dismiss the appeal on grounds of res judicata and accord and satisfaction.  A summary of that decision can be viewed in my post here.

Tax practitioners (and attorneys who may want to learn more about State & Local Tax) - How can you help?   The Indiana State Bar Association is presenting a Continuing Legal Education (CLE) program next Friday August 23d that will provide an overview of Indiana tax appeals (property, income, sales/use).  You will receive 6 hours of CLE credit, and the cost is only $45 if you agree to take two pro bono cases.  The registration form describes the program as follows:

Designed to prepare attorneys to provide pro bono representation to indigent taxpayers, this program addresses both property tax and revenue tax issues from initiation through appeals.  Indiana’s Taxpayer Advocate will advise attendees how low income clients can benet from informal case resolutions and Section Chiefs from the Office of the Attorney General will cover tax issues practitioners need to be aware of relating to collections, bankruptcy and tax crimes.

To review the registration information, click here.   I hope to see you there!

In a blow to opponents of Colorado’s expansive sales and use tax regime, the Tenth Circuit reversed the decision of the district court in Direct Marketing Association v. Huber and dismissed the trade group’s case against Colorado’s reporting and notice requirements for e-commerce vendors outside of Colorado.  In Direct Marketing Association v. Brohl  (August 20, 2013), the Tenth Circuit declined to rule on the merits of the plaintiff’s Commerce Clause claims against Colorado, instead turning its decision on the Tax Injunction Act, which deprives federal courts of jurisdiction in cases seeking to enjoin or restrain the assessment, levy, or collection of state taxes.

Colorado, like almost all states, requires retailers with physical presence in the state to collect sales tax and remit it to the Colorado Department of Revenue.  Similarly, Colorado purchasers who do not pay sales tax are required to pay use tax on purchased goods used within the state.  Colorado, like most states, has struggled to enforce use tax collection from individual residents in the state, particularly with regard to internet purchases.  So, to increase compliance, Colorado passed legislation in 2010 requiring all non-collecting retailers to: 1) provide notice to Colorado customers that use tax is owed on each transaction; 2) provide annual purchase summaries to Colorado customers; and 3) report that same annual customer information to the Colorado Department of Revenue.

The Direct Marketing Association, a trade group of catalog and internet marketers, challenged the constitutionality of the statute under the Commerce Clause, suing in the U.S. District Court for the District of Colorado.  In one of the first victories against these types of statutes nationwide, the Court granted the DMA’s motion for summary judgment and permanently enjoined the state’s enforcement of the law.  The Court ruled that there was “no evidence to show that the legitimate interests advanced by [the Department] cannot be served adequately by reasonable nondiscriminatory alternatives.”  For more on the District Court’s 2012 ruling, see this contemporary article discussing the case.

On appeal, the Tenth Circuit found that before the federal court could address whether the notice and reporting requirements violated the Commerce Clause, it had to determine whether the Tax Injunction Act precluded federal jurisdiction over the claims.  Specifically, the Act’s “broad language prohibits federal courts from interfering with state tax administration through injunctive relief, declaratory relief, or damages awards.”  Because the DMA sought to enjoin Colorado’s notice and reporting requirements – Colorado’s “chosen means of enforcing use tax collection” – the statute was “squarely within the TIA’s protection.”  And because the DMA had a plain, speedy, and efficient remedy in the Colorado courts, the federal court had no jurisdiction.  Accordingly, the Court ordered the district court to dismiss the DMA’s case for lack of jurisdiction and dissolve the permanent injunction.

As a result of the decision, once the district court lifts the injunction, retailers who sell to Colorado customers and who do not collect Colorado sales tax will once again be required to provide the three types of notice required by the statute.  Retailers should be aware of the requirements and ensure that they are in compliance.  Although the federal courts lack jurisdiction to hear a challenge to Colorado’s statute under the Tenth Circuit’s ruling, retailers can still challenge the statute in the Colorado courts.  Either way, this case will probably not be the last word in the ongoing feud between states and online retailers.