Schilli Leasing, Inc. v. Ind. Dep't of State Revenue

• Citation: 82 N.E.3d 934
• Decision Date: 31 August 2017
• Docket Number: Cause No. 49T10-1306-TA-00054.
• Parties: SCHILLI LEASING, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Tax Court of Indiana

82 N.E.3d 934

SCHILLI LEASING, INC., Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 49T10-1306-TA-00054.

Tax Court of Indiana.

August 31, 2017

ATTORNEYS FOR PETITIONER: JEROME L. WITHERED,

ZACHARY T. WILLIAMS, WITHERED BURNS LLP, Lafayette, IN

ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., ATTORNEY GENERAL OF INDIANA, WINSTON LIN, DEPUTY ATTORNEY GENERAL, Indianapolis, IN

FISHER, Senior Judge

Schilli Leasing, Inc. has appealed the Indiana Department of State Revenue's final determination assessing it with unpaid sales and use tax liabilities for the 2008, 2009, and 2010 tax years (the years at issue). Schilli Leasing's appeal presents one issue for the Court to decide: whether the retail transactions giving rise to those unpaid liabilities were exempt from sales and use taxes under Indiana Code § 6-2.5-5-27, Indiana's public transportation exemption. Upon review, the Court finds that they were not exempt.

FACTS AND PROCEDURAL HISTORY

Schilli Leasing, located in Remington, Indiana, is a full-service truck leasing company owned by Thomas R. Schilli. (Jt. Stip. Facts ¶¶ 2-4; Pet'r Trial Ex. 1 at 3¹ .) Schilli Leasing is in the business of acquiring vehicles that it then leases to third-parties, including four other companies owned by Mr. Schilli: Wabash Valley Transportation, Inc. ("WVT"); Schilli Specialized, Inc. ("SSI"); Schilli Specialized of Texas, Inc. ("SST"); and Midwest Shuttle Services, Inc. ("MSS"). (Jt. Stip. Facts ¶ 3; Trial Tr. at 21, 31, 41 - 42, 60 ; Pet'r Trial Ex. 4 at 2.) WVT, SSI, and SST "are companies [that] haul freight for hire." (Jt. Stip. Facts ¶ 6; Trial Tr. at 10 - 11.) MSS is a "freight preparation" company: common carriers hire MSS to load, tarp, and secure their customers' freight onto trailers and then move those trailers a short-distance for pick-up by the motor carriers. (See Jt. Stip. Facts ¶ 7; Trial Tr. at 12 - 13, 33 - 34.)

In conjunction with its leasing program, Schilli Leasing operates numerous garage facilities throughout the country where it provides maintenance and repair services for its vehicles. (See Trial Tr. at 11, 39 - 40, Pet'r Trial Ex. 1 at 3.) Schilli Leasing also provides WVT, SSI, and SST, and MSS with several services not available to its other lessees. For instance, it purchases all their fuel and it provides them with temporary freight storage services.² (See Trial Tr. at 17 - 18, 23 - 25, 55, 58.) Schilli Leasing also operates a "bunkhouse" at each of its garage facilities that provides overnight accommodations, showers, laundry facilities, and use of a "courtesy car" to the drivers of WVT, SSI, SST, and MSS while their vehicles are being serviced, while they are on federally-mandated rest periods, or while they are attending employment orientation/training. (Jt. Stip. Facts ¶ 4; Trial Tr. at 12, 22, 45 - 46, 55, 61.) While Schilli Leasing charges WVT, SSI, SST, and MSS for these services and accommodations, it appears that they do not involve an exchange of money per se but are reflected as "accounting allocations" in each company's respective financial records. (See Trial Tr. at 17 - 18, 21, 23 - 24, 33, 41 - 42, 58, 60 - 61.)

Although Schilli Leasing, WVT, SSI, SST, and MSS are all owned by the same individual, they are separate corporate entities.³ (Trial Tr. at 29 - 30.) Mr. Schilli set up his companies in this fashion—as opposed to a singular corporation or a group of companies controlled by a holding company—so that each company could take advantage of the best insurance rates available to it as well as to put its management closer to its work force and finances. (Trial Tr. at 16 - 17.)

In 2012, after completing an audit, the Department determined that Schilli Leasing had been deficient in remitting sales and use taxes during the years at issue. (See Pet'r Trial Ex. 1 at 1-2.) Specifically, it found that Schilli Leasing failed to:

collect sales tax on its charges to MSS for vehicle lease payments, fuel, and repair parts;

collect sales tax on its charges to WVT, SSI, and SST⁴ for vehicle lease payments, temporary freight storage, and bunkrooms;

remit use tax on its purchases of "bunkhouse improvements," including a water softener, as well as a forklift and a laser jet printer that were used in one of its repair shops;

remit use tax on its purchases of items used in its repair shops, such as uniforms, gloves, towels, toilet tissue, and sidewalk salt.

(Compare Pet'r Trial Ex. 1 with Pet'r Trial Exs. 4 at 5-9, 5 at 5-13 and Pet'r V. Pet. Set Aside Final Determination Indiana Dep't Revenue at ¶ 9.) As a result of these findings, the Department issued Proposed Assessments to Schilli Leasing totaling $223,041.48 for the years at issue. (See Pet'r Trial Ex. 2.)

Schilli Leasing protested the Proposed Assessments, claiming that the retail transactions identified by the Department in its audit and upon which the Proposed Assessments were based were exempt from taxation under the public transportation exemption. (Jt. Stip. Facts ¶¶ 12-13; Pet'r Trial Exs. 3, 4.) The Department conducted a hearing and, on May 15, 2013, issued a Letter of Findings denying the protest.⁵ (See Jt. Stip. Facts ¶ 14; Pet'r Trial Ex. 5.)

Schilli Leasing initiated an original tax appeal on June 4, 2013. The appeal proceeded to trial in November of 2016. The Court heard oral argument on January 25, 2017. Additional facts will be supplied when necessary.

STANDARD OF REVIEW

This Court reviews final determinations of the Department de novo. See IND. CODE § 6-8.1-5-1(i) (2017). As a result, the Court is not bound by either the evidence or the issues presented to the Department at the administrative level. See Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct. 2007), review denied.

LAW

Indiana imposes both a sales tax and a use tax. The sales tax is imposed on retail transactions that occur in Indiana. See IND. CODE § 6-2.5-2-1(a) (2008). The use tax is imposed on the storage, use, or consumption of tangible personal property in Indiana if that property was acquired in a retail transaction, regardless of where that transaction occurred. IND. CODE § 6-2.5-3-2(a) (2008). The use tax is complementary to the sales tax because it is primarily designed to reach out-of-state sales of tangible personal property that are subsequently used in Indiana. Horseshoe Hammond, 865 N.E.2d at 727 ; Morton Bldgs., Inc. v. Indiana Dep't of State Revenue, 819 N.E.2d 913, 915 (Ind. Tax Ct. 2004), abrogated on other grounds. "This complementary formulation exists to ensure that the Indiana sales tax may not be avoided by purchasing products in states where there is no sales tax or where there is a lower sales tax." Morton, 819 N.E.2d at 915 (citations omitted). "Accordingly, the use tax bites where the sales tax does not." Id. (citation omitted).

The Indiana legislature has enacted numerous statutes, however, that exempt certain retail transactions from taxation. See generally, e.g., IND. CODE § 6-2.5-5 (2008). One of those statutes, Indiana Code § 6-2.5-5-27, is at issue in this case; it states that "[t]ransactions involving tangible personal property and services are exempt from the [sales] tax, if the person acquiring the property or service directly uses or consumes it in providing public transportation for persons or property." IND. CODE § 6-2.5-5-27 (2008) (amended 2013). See also IND. CODE § 6-2.5-3-4(a)(2) (2008) (making the exemption applicable to the use tax). For purposes of this exemption, the Department has defined "public transportation" as "the movement, transportation, or carrying of persons and/or property for consideration by a common carrier, contract carrier, household goods carrier, carriers of exempt commodities, and other specialized carriers performing public transportation service for compensation by highway, rail, air, or water[.]" 45 IND. ADMIN. CODE 2.2-5-61(b) (2008).

ANALYSIS

In litigating its appeal, Schilli Leasing has stipulated to the fact that "[it] does not transport property owned by third-parties for consideration." (Jt. Stip. Facts ¶ 5.) (See also Trial Tr. at 30, 59 - 60.) Thus, because Schilli Leasing does not provide public transportation, the underlying retail transactions at issue do not qualify for the public transportation exemption.⁶ See I.C. § 6-2.5-5-27 ; 45 I.A.C. 2.2-5-61(b). Nonetheless, Schilli Leasing contends that it does not owe any sales or use tax on the transactions identified by the Department's audit because its "business activities fall squarely with[in] the express language of the public transportation exemption statute[.]" (See, e.g., Pet'r Corrected Post-Trial Br. ("Pet'r Br.") at 10 (emphasis omitted).) Schilli Leasing has advanced two arguments in support of its contention.

1.

First, Schilli Leasing argues that Indiana Code § 6-2.5-5-27 simply applies to all "transportation-related transactions" and thus, to the extent it has shown that "everything" it does is related to the transportation industry and the ultimate transport of freight, the transactions at issue are exempt. (See Pet'r Br. at 8-10; Pet'r Reply Br. at 1-2.) (See also Pet'r Br. at 12-19 (maintaining that because its leasing of trucks, its repair of trucks, and its provision of rest accommodations to truck drivers are "directed to the ultimate movement of freight," they are "necessary and integral" parts of the transportation process); Trial Tr. at 27 (stating, for example, that Schilli Leasing's repair services "support the maintenance of the truck, and if you don't maintain the truck, the truck doesn't move, [and] transportation doesn't happen").) Schilli Leasing's argument is premised on its belief that the Department's regulation defining public transportation is invalid because it "impermissibly narrows" the application of the exemption statute by requiring a taxpayer to actually haul freight to be considered "providing public transportation." (See, e.g., Pet'r Br. at 8-10, 19-21; Pet'r Reply Br. at 1-3 (contending that public...