Wendt LLP v. Ind. Dep't of State Revenue

• Decision Date: 30 October 2012
• Docket Number: No. 02T10–0701–TA–2.,02T10–0701–TA–2.
• Citation: 977 N.E.2d 480
• Parties: WENDT LLP, Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

977 N.E.2d 480

WENDT LLP, Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 02T10–0701–TA–2.

Tax Court of Indiana.

Oct. 30, 2012.

Robert L. Nicholson, Carson Boxberger, Mark E. Witmer, Adam L. Hand, Beckman Lawson, LLP, Fort Wayne, IN, Attorneys for Petitioner.

Gregory F. Zoeller, Attorney General of Indiana, Jessica E. Reagan, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

ON APPEAL FROM A FINAL DETERMINATION OF THE INDIANA DEPARTMENT OF STATE REVENUE

WENTWORTH, J.

This case concerns the applicability of Indiana's public transportation sales and use tax exemption to purchases of a licensed common carrier. The Indiana Department of State Revenue determined that just a portion of Wendt LLP's 2001 through 2004 purchases of tangible personal property were entitled to the public transportation exemption. The Court affirms in part and reverses in part.

FACTS

Wendt, a licensed common carrier headquartered in Wabash, Indiana, is in the business of intrastate, interstate, and international relocation of oversized factory machinery. ( See Jt. Stip. at ¶ 1; Resp't Des'g Evid. Vol. 2, Ex. 20 at 4–8, 12–13.) Wendt provides its relocation services within a public transportation process that includes several component services that the Court describes generally in four operational phases.

1. Project Planning. Wendt begins planning relocation by preparing estimates for potential customers, considering, among other things, the costs of labor, machinery disassembly, fuel consumption, and equipment requirements. ( See Resp't Des'g Evid. Vol. 2, Ex. 20 at 15–18, 27–28.) Once hired, Wendt plans the most expeditious route, taking into account the overall size of the loads as well as certain state and federal highway regulations, and also procures travel permits from federal and state authorities. ( See Trial Tr. at 44–45; Resp't Des'g Evid. Vol. 2, Ex. 20 at 14–15, 152–58.)

2. Pre-transport Preparations. Next, Wendt's moving crews travel to the customer's factory to prepare the machinery for transport. First, the crews lay steel plates down to protect the factory floors and facilitate the machinery's movement. ( See Resp't Stip. Pet'r Contentions (hereinafter “Resp't Stip.”) at 2.) Next, the crews disassemble the machinery to make it suitable for transport based on state and federal size mandates, fork-lift capacities, and entryway and shipping container dimensions; label the pieces for reassembly; disconnect electrical components; drain certain liquids; and clean dirty parts. ( See Trial Tr. at 46–48; Resp't Stip. at 2.) Once the machinery is in a transportable size, the crews use fork trucks with hydraulic booms to lift it, rig ¹ it to semi-trailers, and then cover it with tarps. ( See Resp't Stip. at 2 (footnote added).)

3. Transportation. During the actual transportation of machinery on public highways, both state and federal regulations require Wendt to escort the load, which Wendt does using its own pick-up trucks or by hiring escort vehicles to accompany the machinery throughout all or a portion of the transport. ( See Trial Tr. at 47, 64–65.) Wendt also uses its pick-up trucks to transport its crews, their tools, and other equipment to the relocation site so they can unload the machinery upon arrival.

4. Reassembly. This fourth phase of Wendt's public transportation process begins after its crews unload the machinery at the relocation site. During this phase, Wendt provides machinery installation services, which mainly include the reassembly and setting/leveling of the machinery. ( See Oral Argument Tr. at 19–20; Trial Tr. at 58; Resp't Des'g Evid. Vol. 2, Ex. 20 at 13, 124–26.)

In addition to its general public transportation process, Wendt also provided several optional services such as warehouse storage and transport-for-repair services during the years at issue.² Wendt offers these services in association with one or more of the phases of its general public transportation process or on a stand-alone basis.

Additional facts will be supplied as necessary.

PROCEDURAL HISTORY

In October 2004, the Department conducted a sales tax audit of Wendt for the 2002 through 2004 tax years. During the course of the audit, Wendt filed two refund claims seeking to recover the sales and use tax remitted on purchases made during the 2001 through 2004 tax years (the years at issue),claiming they were exempt. The audit concluded that some of Wendt's purchases were completely exempt, but others were either partially or fully taxable. As a result, the Department denied Wendt's claims for refund and issued proposed assessments.

In late June 2006, Wendt protested the proposed assessments and the refund claim denials. On September 11, 2006, the Department denied Wendt's protest of the proposed assessments in part and its refund claims in their entirety.

Wendt filed this original tax appeal on January 5, 2007. The Court conducted a trial on October 15, 2009, and heard oral arguments on June 4, 2010.

ISSUE

The issue before the Court is whether Wendt's purchases of tangible personal property were predominantly used in providing public transportation and thus exempt under the public transportation exemption for the years at issue. ³

STANDARD OF REVIEW

The Court reviews final determinations of the Department de novo.Ind.Code § 6–8.1–5–1(i) (West 2012). Accordingly, the Court is not bound by the evidence or the issues presented at the administrative level. Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct.2007) (citation omitted), review denied.

Transactions subject to Indiana's sales or use tax may be relieved of tax liabilities if they qualify for a statutory exemption. See generallyInd.Code 6–2.5–5–1 et seq. (2012). “It is well-settled that tax exemptions are to be strictly construed against the taxpayer, and the taxpayer bears the burden of proving entitlement to the exemption.” Grand Victoria Casino & Resort, LP v. Indiana Dep't of State Revenue, 789 N.E.2d 1041, 1044 (Ind. Tax Ct.2003) (citation omitted). Nonetheless, a court may not apply an exemption so narrowly that it fails to give effect to the Legislature's purpose for enacting the exemption. Indiana Dep't of Revenue v. Kitchin Hospitality, LLC, 907 N.E.2d 997, 1001 (Ind.2009) (citation omitted).

LAW

Direct Use

The Legislature enacted the public transportation exemption to encourage the development, maintenance, and efficient provision of public transportation.⁴Indianapolis Pub. Transp. Corp. v. Indiana Dep't of State Revenue, 512 N.E.2d 906, 908 (Ind. Tax Ct.1987), aff'd by550 N.E.2d 1277 (Ind.1990) (footnote added). The exemption states:

Transactions involving tangible personal property and services are exempt from the state gross retail [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 (2001) (emphasis added).⁵ Cases construing the words emphasized in the above statute, commonly referred to as the “single directness standard,” require property to be a “necessary and integral” part of the transportation service to qualify for exemption. See Indiana Dep't of State Revenue v. Indiana Harbor Belt R.R. Co., 460 N.E.2d 170, 177 (Ind.Ct.App.1984); see also USAir, Inc. v. Indiana Dep't of State Revenue, 623 N.E.2d 466, 471–72 (Ind. Tax Ct.1993); USAir, Inc. v. Indiana Dep't of State Revenue, 542 N.E.2d 1033, 1036 (Ind. Tax Ct.1989), aff'd by582 N.E.2d 777 (Ind.1991). The public transportation exemption, therefore, applies more broadly than exemptions measured by the double directness standard, e.g., manufacturing exemptions. See, e.g., Indianapolis Pub. Transp., 512 N.E.2d at 908–09;Harbor Belt, 460 N.E.2d at 172;Indiana Dep't of State Revenue v. Indianapolis Transit Sys., Inc., 171 Ind.App. 299, 356 N.E.2d 1204, 1208 (1976). Moreover, the exemption extends to property used within a taxpayer's continuous process of furnishing public transportation because providing effective public transportation may involve a system in which all the elements of the system must be furnished:

An item need not be in direct contact with the rails to be directly used or consumed in the rendering of public transportation. A railroad is a system and, in order for the railroad to provide effective transportation, all elements of that system must be furnished including, but not limited to, maintaining railroad lines, transporting workers, and maintaining supply and repair facilities.

Harbor Belt, 460 N.E.2d at 175.See also Indiana Dep't of State Revenue v. Cave Stone, Inc., 457 N.E.2d 520, 522–26 (Ind.1983); Guardian Auto. Trim, Inc. v. Indiana Dep't of State Revenue, 811 N.E.2d 979, 982–85 (Ind. Tax Ct.2004), review denied; General Motors Corp. v. Indiana Dep't of State Revenue, 578 N.E.2d 399, 401–04 (Ind. Tax Ct.1991), aff'd by599 N.E.2d 588 (Ind.1992) (all discussing taxpayers' integrated production processes).⁶

Predominant Use

The public transportation exemption is an all-or-nothing exemption that does not permit the grant of partial exemptions. Panhandle E. Pipeline Co. v. Indiana Dep't of State Revenue, 741 N.E.2d 816, 819 (Ind. Tax Ct.2001), review denied. Furthermore, the exemption statute has been construed to require an item to be predominantly used, not exclusively used, in public transportation to be exempt. See Carnahan Grain, Inc. v. Indiana Dep't of State Revenue, 828 N.E.2d 465, 468–69 (Ind. Tax Ct.2005); Panhandle, 741 N.E.2d at 818–19;Indiana Dep't of State Revenue v. Calcar Quarries, Inc., 182 Ind.App. 84, 394 N.E.2d 939, 941 n. 1 (1979).

ANALYSIS

The parties agree about how Wendt uses the property at issue, and they agree that Wendt is generally in the business of providing public transportation. ( See Oral Argument Tr. at 4–5, 25–26.) The essence of the parties' dispute focuses on the proper way to determine whether Wendt's purchases of tangible personal property are entitled to the...