SALT Report 2952 – The Indiana Department of Revenue issued a letter of finding regarding the application of sales and use tax to non-returnable packaging materials. The Taxpayer in this case, programs air bag control modules and braking systems for the automotive and electronics industry. Generally, these items are very sensitive to electrostatic discharge and moisture. Because of this, the Taxpayer must maintain a static-free temperature controlled environment at all times.
When the Taxpayer receives the devices from its customers they are in a type of packaging that is designed to prevent electrostatic and moisture damage. However, once the packaging is opened, it cannot be reused. Therefore, when the work is completed, the devices must be repackaged using the same type of packaging materials in which they were received. After repackaging, the devices are sent back to the customer where they are stored until the customer uses them.
In 2012, the Department audited the Taxpayer for sales and use tax compliance. Upon completion of the audit, the Taxpayer was issued an assessment for use tax and interest on its purchases of packaging supplies and materials because the Taxpayer did not pay sales tax at the time of purchase, or remit use tax to the Department.
The Taxpayer appealed the assessment claiming that the packaging materials were exempt non-returnable wrapping materials as provided in 45 IAC 2.2-5-16. However, the auditor argued that the exemption requires that a retail merchant sell the non-returnable containers in a retail transaction.
Based on the Taxpayer’s description of its services, the Department noted that the Taxpayer is simply providing industrial processing, or programming services, on the devices owned by other businesses and therefore, the Taxpayer is an industrial processor not a retail merchant making a retail transaction. Consequently, the Taxpayer’s purchases of the packaging items did not qualify for the non-returnable wrapping materials exemption.
However, the Department stated that the exemption found in IC § 6-2.5-5-9 was amended, and effective July 1, 2012 sales of wrapping material and empty containers that are used as non-returnable packaging for property that is owned by another person and is processed or serviced for that owner may be purchased exempt.
As a result, prior to July 1, 2012 the Taxpayer’s purchases of the packaging materials in dispute are subject to sales and use tax. After that date the Taxpayer may purchase these items exempt under the amended IC § 6-2.5-5-9(d).
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