Jun 29, 2015
From KPMG TaxWatch
Recently, the Indiana Tax Court addressed whether electricity used to power certain types of restaurant equipment was subject to Indiana sales and use tax. The taxpayer operated several fast food Mexican restaurants in Indiana. Restaurant employees prepared items such as salsa, chicken, chorizo, rice, lettuce, and tortilla chips that were used in various entrees served in the restaurant. Food warmers, hot food cabinets, coolers, chip drawers and other types of electrical equipment was used to hold and preserve the prepared food at certain temperatures before the food was combined into entrees sold to customers. The equipment was not used to cook the food. The taxpayer requested a refund of sales and use taxes paid on electricity used to power the electrical equipment on the basis that the electricity was directly consumed in the production of tangible personal property.
Under Indiana law, a sales and use tax exemption applies to purchases of electricity acquired for direct consumption as a material to be consumed in the production of other tangible personal property. In the tax court’s view, to qualify for this exemption, the taxpayer was required to establish that (1) it was engaged in production, (2) it had an integrated production process, and (3) the electricity was essential and integral to the taxpayer’s integrated production process. The tax court first addressed whether the taxpayer was engaged in production when it prepared and combined food items for customers. The Department of Revenue argued that the taxpayer’s activities did not substantially transform the food- ether physically or chemically―and therefore it was not engaged in production. The tax court rejected this argument, holding that the taxpayer’s transformation of individual food items into new and marketable products that have a character and form different from the food as acquired, was production. Furthermore, the court disagreed with the Department’s contention that the taxpayer was providing a service, rather than engaging in an integrated production process. The uncontroverted evidence established that the taxpayer engaged in several steps before an entrée was completed for sale. Finally, the court addressed whether the equipment was “essential and integral” to the taxpayer’s production process. In the court’s view, the use of the electricity to preserve the food at certain temperatures was essential and integral to the taxpayer’s production process because without it the taxpayer could not produce entrees. Please contact Dave Perry at 513-763-2402 with questions on Aztec Partners LLC, v. Indiana Department of State Revenue.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.