SALT Report 2224 – The Indiana Department of Revenue issued two separate rulings regarding “sham transactions” which are designed to help taxpayers avoid paying sales and use tax. The first ruling addresses an Indiana resident’s purchase of a recreational vehicle in Florida through a Montana LLC. The second ruling addresses an Indiana resident’s purchase of an airplane in Nevada through a Montana LLC.
The Taxpayer purchased a recreational vehicle in Florida and was later found to be using the RV in Indiana. When the Taxpayer purchased the RV he did so without paying sales tax to any jurisdiction. As a result, the Department issued an assessment for Indiana use tax, plus a 10% negligence penalty, and interest. The Taxpayer argued that the RV was purchased and titled by a Montana LLC, of which the Taxpayer was the sole member, and that the RV was purchased, used, and stored in Florida, therefore no Indiana sales or use tax is due.
The Taxpayers purchased an airplane from a Nevada dealership. At the time of purchase, no sales tax was paid to Nevada. The Taxpayer then arranged for a Montana attorney to establish a Montana LLC to hold title to the airplane. The only members of the LLC are a husband and wife, who reside in Indiana. Because the Taxpayers did not pay sales tax the Department issued an assessment for Indiana use tax. The Taxpayers disagreed with the assessment claiming that the LLC had a legitimate purpose which was to “invest in real and personal property in Montana and in any other lawful business…” Further, the Taxpayers claim that the airplane was only used in Indiana while one of the LLC’s members was getting its pilot license.
In their decision, the Department stated that when tangible personal property is acquired in a retail transaction and is stored, used, or consumed in the state, Indiana use tax is due if sales tax has not been paid at the time of purchase. The Department had already established that neither Taxpayer paid sales tax on their purchases and therefore, issued use tax assessments. It then became the Taxpayers’ responsibility to prove that purchases made through the LLC were valid and non-taxable.
However, other than the airplane and RV purchases, neither Taxpayer was able to provide any documentation establishing that the LLC had any business or non-business activity in any state. This led the Department to believe that these were “sham transactions.” The Department notes that when determining whether a transaction is a sham transaction, two factors must be considered:
- Did the transaction have a reasonable prospect for economic gain, and
- Was the transaction undertaken for a business purpose other than the tax benefits
In both cases, the Department determined that neither Taxpayer intended for their individual LLC’s to have any function beyond avoiding the payment of sales and use tax for various purchases. The LLC’s were simply created to purchase and title both the RV and the airplane in Montana, a state without sales tax, thereby eliminating their sales tax liabilities. Based on those findings, the Department determined that these were in fact sham transactions and upheld the use tax assessments plus the 10% penalty and interest.
For Further Information