Klink Trucking, Inc. v. Ind. Dep't of State Revenue, Cause No. 49T10-1307-TA-00064

79 N.E.3d 1029

KLINK TRUCKING, INC., Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 49T10-1307-TA-00064

Tax Court of Indiana.

July 19, 2017

ATTORNEYS FOR PETITIONER: RANDAL J. KALTENMARK, ZIAADDIN MOLLABASHY, BARNES & THORNBURG LLP, Indianapolis, IN

ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., ATTORNEY GENERAL OF INDIANA, EVAN W. BARTEL, DEPUTY ATTORNEY GENERAL, Indianapolis, IN

WENTWORTH, J.

Klink Trucking, Inc. appeals the Indiana Department of State Revenue's assessments of use tax for the 2008, 2009, and 2010 tax years (the "years at issue"). The Court restates the dispositive issue as whether Klink's trucks and related expense items were predominately used in providing public transportation during the years at issue and, thus, exempt from use tax. Upon review, the Court finds in favor of Klink.

FACTS AND PROCEDURAL HISTORY

Klink, an Indiana corporation, is a motor carrier that provides landscaping, construction, and hauling services from its landscaping yard in Fort Wayne, Indiana and from its two aggregate distribution centers in Ashley and South Bend, Indiana. (See Stipulation of Facts ("Stip.") ¶¶ 1, 25-27, Ex. 18-J at 3.) Klink's landscaping and construction divisions sell several industry-related products and provide a variety of other services, including road grinding, road sealing and surfacing, excavating, demolition, and pug-mill operations. (See Stip. ¶¶ 28-31.) The issues in this case do not involve the operations of the landscaping and construction divisions, but solely concern Klink's hauling business.

Klink's hauling division provides "straight and trailer dump operations, liquid and powder transportation, and equipment and commodity hauling" to its affiliates, governmental agencies, and other third parties. (See Stip. ¶¶ 26, 32-36, Ex. 22-J at 2-4.) Specifically, Klink used its fleet of over 80 trucks to haul an assortment of materials for third parties during the years at issue, including "stone, aggregates, agricultural lime and gypsum, cold-patch asphalt road mixes, landscaping materials, paving grade and emulsified liquid asphalt products, [and] road salt and de-icers[.]" (See Stip. ¶ 26, Ex. 18-J at 53-55.) In addition, Klink used its trucks to haul its own property in instances when it purchased materials from pits, quarries, or other suppliers to resell them to its customers. (See Stip. ¶¶ 26, 38.)

During the years at issue, Klink used several standardized forms to record certain aspects of its hauling activities and to facilitate its billing process. (See, e.g. , Trial Tr. at 100-03.) For instance, Klink provided "Klink Tickets" for its drivers to complete for each hauling trip. (See Trial Tr. at 103-05; Stip., Ex. 23-J, Tab 6 at 5.) Each Klink Ticket contained a unique, sequential pre-printed number, and when complete, it identified 1) the date; 2) the purchaser's name and address; 3) the number of the truck that sold the materials; 4) the type and quantity of materials sold; and 5) the pit, quarry, or supplier from where the materials were originally picked-up. (See Trial Tr. at 103; Stip., Ex. 23-J, Tab 6 at 5.) Klink's drivers also completed or acquired three other forms:

1) "Trip Sheets" that summarized a truck's daily hauling activities by providing, among other things, a) the date; b) the truck's beginning and finishing mileage; c) the Klink Ticket numbers for each hauling trip; d) descriptions of the materials hauled; and e) the loading/unloading times for each hauling trip;

2) "Demurrage Sheets" that documented the "excessive" travel time for each hauling trip; and

3) "Pit Tickets" (a/k/a bills of lading) that were prepared by the pit, quarry, or supplier from which the materials were originally picked-up and stated, for example, the type and quantity of materials sold as well as the purchaser's name.

(See Trial Tr. at 102-10; Stip., Ex. 23-J, Tab 6 at 4, 6 and Tab 11 at 6.)

At the end of a shift, the drivers would place their completed Klink Tickets, Trip Sheets, Demurrage Sheets, and Pit Tickets into an envelope for Klink to use in its billing process. (See Trial Tr. at 101-03, 110.) Typically, the contents of the envelopes were sorted and coded on the following business day. (See, e.g. , Trial Tr. at 110; Stip., Ex. 14-J, Tab Vol. 1 of 2 at 2-17.) At that time, each Klink Ticket was sorted by customer, product, and job; and it was given a product code to indicate whether Klink was hauling its own property or that of a third party. (See Trial Tr. 110-13 (explaining that a product code that ended in an asterisk or contained the words "haul only" in the description was used when Klink hauled another's property, not its own).) Then, Klink entered the newly coded information from the Klink Tickets, Trip Sheets, Demurrage Sheets, and Pit Tickets into its computerized accounting system to prepare its monthly customer invoices and to reconcile its sales of materials and services. (See Trial Tr. at 110-11, 115, 121.)

Klink prepared separate invoices for its hauling charges and demurrage charges. (See, e.g. , Trial Tr. at 115-16, 119.) Klink's hauling invoices always contained the lowest Klink Ticket numbers for a specific day, product, and job and identified the line item charges for single hauling trips or "batched" hauling trips (i.e., same day jobs involving the same customer, product, and product code). (See Trial Tr. at 115-16.) (See also, e.g. , Stip., Ex. 23-J, Tab 6 at 1, 3, 5, 8.) Klink also generated monthly reconciliation reports that summarized its purchases from the pits, quarries, and suppliers to ensure that the bills it received from those entities corresponded with the charges on its customers' invoices. (See Trial Tr. at 114.)

In June of 2011, the Department notified Klink of its upcoming compliance audit. (See Stip. ¶ 5, Ex. 1-J.) During the audit, the Auditor applied an item-by-item methodology that examined the overall mileage of each truck to determine whether that individual truck was predominately used in providing public transportation during the years at issue. (See Trial Tr. at 90, Trial Ex. 6-P at 2; Stip., Ex. 5-J.) In so doing, the Auditor compared a sample of Klink's Trip Sheets¹ and Klink's self-prepared Income Analysis, which calculated the ratio of income Klink derived from hauling for third parties, to Klink's total hauling income for each of the years at issue. (See Stip. ¶ 14, Exs. 5-J, 8-J, 14-J; Trial Tr. at 99.) More specifically, the Auditor:

1) calculated each truck's total mileage by subtracting the starting and finishing mileage contained on the truck's first and last Trip Sheets for each quarter;

2) estimated the extent to which each hauling trip involved exempt mileage (i.e., the hauling of others' property) by first reviewing the following on the Trip Sheets: customer names, job descriptions (e.g. , hourly work, contaminated waste, on site, salt, or "MSKD"), loading/unloading times, and handwritten Klink Ticket numbers, and then, cross-referencing that information by Klink's Income Analysis if the Trip Sheet information was ambiguous; and, then,

3) calculated each truck's non-exempt mileage (i.e., the hauling of Klink's property) by subtracting the Step 2 exempt mileage figure from the Step 1 total mileage figure.

(See, e.g. , Trial Tr. at 36 - 40, 44 - 46, 52 - 69, 72, Ex. 18-J at 3-4, 53-55.) The Auditor allowed a 100% exemption when a truck's exempt mileage exceeded its non-exempt mileage. (See Trial Tr. at 72.) When Klink's related expense items could not be linked to a specific truck (e.g. , fuel, repair parts, uniforms, or consumable office supplies), the Auditor allowed a partial exemption of 38%. (See Trial Tr. at 72 - 77 ; Stip., Ex. 18-J at 4.) (See also Stip., Ex. 18-J at 55 (indicating that the 38% allowance reflected the ratio of the entire fleets' overall exempt mileage of 1,153,688 and its total mileage of 3,069,209).) After accounting for the trucks that received full exemptions and the expense items that received partial exemptions, the Department issued Proposed Assessments of use tax in the amount of $449,733.09 on May 4, 2012. (See Stip. ¶¶ 22-24, Exs. 19-J to 21-J.)

On June 1, 2012, Klink filed a protest. (Stip. ¶ 19, Ex. 22-J.) On June 10, 2013, after conducting a hearing, the Department issued a Letter of Findings denying Klink's protest. (Stip. ¶ 21, Ex. 24-J.)

On July 25, 2013, Klink filed this original tax appeal. The Court conducted a trial on February 25, 2016, and heard oral arguments on July 21, 2016.

STANDARD OF REVIEW

The Court reviews final determinations of the Department de novo . IND. CODE § 6-8.1-5-1(i) (2017). Accordingly, the Court is not bound by the evidence or the issues presented at the administrative level. Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue , 865 N.E.2d 725, 727 (Ind. Tax Ct. 2007), review denied .

LAW

During the years at issue, Indiana imposed an excise tax, known as the use tax, on "the storage, use, or consumption of tangible personal property in Indiana if the property was acquired in a retail transaction, regardless of the location of that transaction or the retail merchant making the transaction." IND. CODE § 6-2.5-3-2(a) (2008). Indiana's Legislature, however, specifically exempted from use tax those retail transactions where "the person acquiring the property or service directly use[d] or consume[d] it in providing public transportation for persons or property." See IND. CODE § 6-2.5-5-27 (2008) (amended 2013). See also IND. CODE § 6-2.5-3-4(a)(2) (2008). For purposes of this exemption, the Department 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[.]" 45 IND. ADMIN. CODE 2.2-5-61(b) (2008).

ANALYSIS

There is no dispute that Klink used its property to provide exempt public transportation services...