Indiana – Packaging Activities Did Not Qualify for Manufacturing Exemption

SALT Report 2869 – The Indiana Department of Revenue issued a letter of finding regarding a business’s purchases of packaging materials. The Taxpayer is in the business of repackaging bulk items that it receives from its customers, by transferring them to smaller, customized packages and shipping them to its customers’ clients.

In 2011, the Department completed an audit in which it determined that the Taxpayer had not paid sales tax for items it purchased to repackage the items it received from its customers.  As a result, the Department issued a proposed assessment for use tax and interest.

The Taxpayer protested the assessment claiming that it incorrectly included packaging materials that should be exempt from use tax under IC § 6-2.5-5-6, as they were incorporated into a product that the Taxpayer assembled for sale.  Further, the Taxpayer claimed that the assessment also included non-returnable packaging, which the Taxpayer constructed and used to ship the items to its customer’s clients.  The Taxpayer claims that these items should be exempt from sales and use tax as the containers are a necessary part of shipping the repackaged items and because it adds content to the containers prior to shipment.

Upon review, the Department stated that transactions involving tangible personal property are exempt from the state gross retail tax if the person acquiring the property acquires it for incorporation as a material part of other tangible personal property which the purchaser manufactures, assembles, refines, or processes for sale in its business.

Although the Taxpayer argued that IC § 6-2.5-5-6 applies because it purchased the packaging materials to be incorporated as a material part of its product, which were the repackaged items, the Department determined that the Taxpayer did not in fact sell a product, but instead provided a service.

Additionally, because the Department determined that the Taxpayer was in the business of providing a service, the Department also determined that the Taxpayer should have paid sales tax on its purchases of the items in question.  Further, the Department dismissed the Taxpayer’s claim that it sold a product, because the Taxpayer was unable to provide any documentation to establish that it ever took title to the materials that it repackaged.

Based on the above, the Department ruled that the Taxpayer had not met its burden of proving that the proposed audit assessment was incorrect. Consequently, the Taxpayer’s appeal was denied and the assessment plus interest was upheld.

For Further Information

Indiana Department of Revenue – Letter of Findings No. 04-20120708