Public transportation exemption for sales and use tax did not apply to all “transportation-related transactions”
In Schilli Leasing, Inc. v. Indiana Dep’t of State Rev., Cause No. 49T10-1306-TA-00054 (Aug. 31, 2017), the Indiana Tax Court denied the public transportation exemption from sales and use tax for purchases of a truck leasing company. The Leasing Company acquired vehicles which it then leased to third-parties, including four related companies – including three that hauled freight for hire and one that was a freight preparation company. The Related Companies were owned by the same individual but were separate corporate entities. In addition, the Leasing Company operated numerous garage facilities to provide repair and maintenance services for its vehicles. It provided additional services to the Related Companies, such as offering overnight accommodations (a “bunkhouse”) to their drivers while vehicles were serviced. Leasing Company made “accounting allocations” on the related companies’ financial records to note the “charges” for these additional services.
After completing an audit for the 2008 to 2010 tax years, the Department of Revenue found that Leasing Company failed to collect sales tax for charges to Related Companies for vehicle lease payments, fuel, repair parts, temporary freight storage and bunkrooms. The Department also concluded that Leasing Company failed to remit use tax on its purchases of “bunkhouse improvements” (e.g. a water softener) and purchases of items used in its repair shops (e.g. uniforms, gloves).
Leasing Company argued the purchases were exempt under Indiana’s public transportation exemption for sales and use tax. That exemption, Indiana Code § 6-2.5-5-27, states: “Transactions involving tangible personal property and services are exempt from the [sales] tax, if the person acquiring the property or service directly uses or consumes it in providing public transportation for persons or property.” The Department by rule has defined “public transportation” as “the movement, transportation, or carrying of persons and/or property for consideration by a common carrier, contract carrier, household goods carrier, carriers of exempt commodities, and other specialized carriers performing public transportation service for compensation by highway, rail, air, or water[.]” Slip op. at 6 (quoting 45 IND. ADMIN. CODE 2.2-5-61(b)).
Leasing Company stipulated that it did not “transport property owned by third-parties for consideration.” And it offered only general claims that the Related Entities were themselves engaged in public transportation.
Leasing Company claimed that the public transportation exemption applied to all “transportation-related transactions,” so the contested transactions were all exempt because everything it did related to the transportation industry. Leasing Company argued that the Department’s rule “impermissibly narrows” the exemption. The Court rejected this argument, explaining that the “plain language of the public transportation exemption necessarily links the person who acquired property to the use or consumption of it in his provision of public transportation.” Slip op. at 8. The rule was consistent with the statute.
Leasing Company next asked the Court to disregard the separate corporate existence of each Related Company and to treat them “as a single diverse ground transportation company” whose “inter-company transactions” qualify for the public transportation exemption. Slip op. at 9. It relied upon the “unitary business principle” to support its position. But that is a “concept that has no application in the sales and use tax arena.” Slip op. at 9. The principle is the “linchpin of apportionability” for state income tax purposes but “does not play a role in the imposition and collection of sales and use taxes.” Id. (citations omitted).
The Court concluded that the underlying transactions did not qualify for the public transportation exemption.
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