FISHER, J.
AWHR America's Water Heater Rentals, LLC (AWHR) challenges the Department of State Revenue's (Department) assessment of Indiana gross retail tax (sales tax) for the years ending December 31, 2003, December 31, 2004, and December 31, 2005 (the years at issue). The matter is currently before the Court on the parties' cross-motions for summary judgment.
The following facts are undisputed. AWHR advertises that it is in the business of providing "worry-free and economical hot water." (See Pet'r Des'g Evid. Ex. 1A at 2.) More specifically, AWHR states that through its "Lifetime Water Heater Plan" (hereinafter, "Plan") it provides:
(Pet'r Des'g Evid. Ex. 1A at 3.)
During the years at issue, customers in Indiana contracted with AWHR for its Plan. Pursuant to the terms of the written agreements, AWHR provided the customer a new or reconditioned water heater "at no charge."
In return, the customer agreed to pay a monthly fee to AWHR. (See Pet'r Des'g Evid. Ex. 1B at 1.) The customer acknowledged that AWHR retained ownership and title to the water heater at all times. (See Pet'r Des'g Evid. Ex. 1B at 4.) Accordingly, the customer agreed "not to remove, transfer, tamper with, adjust or repair [the water heater] or remove the tag attached to [it] evidencing [AWHR's] ownership[.]" (Pet'r Des'g Evid. Ex. 1B at 2.) Furthermore, the customer agreed to provide AWHR with "access to the [water heater] at all reasonable times for the purpose of examining[ ] and repairing [it]." (Pet'r Des'g Evid. Ex. 1B at 2.) The agreements also provided that upon their expiration (including by reason of customer default), AWHR was permitted to enter the premises to disconnect and remove the water heater. (See Pet'r Des'g Evid. Ex. 1B at 2, 4.)
In 2006, after completing an audit, the Department determined that AWHR should have collected sales tax from its Indiana customers during the years at issue. More specifically, the Department found that through its Plan, AWHR was leasing tangible personal property to its customers, thereby making the transactions subject to sales tax pursuant to Indiana Code § 6-2.5-4-10. Consequently, the Department assessed AWHR with a sales tax liability, a 10% negligence penalty, and interest, totaling $557,625.19.
On October 9, 2007, AWHR filed an original tax appeal. On September 19, 2008, AWHR filed a motion for summary judgment. On December 2, 2008, the Department filed a cross-motion for summary judgment. The Court conducted a hearing on the parties' motions on February 2, 2009. Additional facts will be provided as necessary.
Summary judgment is appropriate only when the designated evidence demonstrates that no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). Cross-motions for summary judgment do not alter this standard. Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct.2007), review denied.
Sales tax "is imposed on retail transactions made in Indiana." IND.CODE ANN. § 6-2.5-2-1 (West 2003). "A person . . . is a retail merchant making a retail transaction when he rents or leases tangible personal property to another person[.]" IND. CODE ANN. § 6-2.5-4-10(a) (West 2003). For purposes of Indiana's sales tax, a "`[l]ease' or `rental' means any transfer of possession or control of tangible personal property for a fixed or indeterminate term for consideration and may include future options to purchase or extend."
On appeal, AWHR argues that the Department's assessment of sales tax against it is erroneous for two reasons. First, AWHR asserts that because it never transferred possession and control of the water heaters to its customers, it did not "lease" them. In the alternative, AWHR claims that the water heaters were real property, not tangible personal property. The Court will address each of these arguments in turn.
AWHR maintains that because it was obligated to provide repair service during the term of the agreements, it could not, and did not, relinquish its possession and control over the water heaters to its customers. (See Pet'r Br. Supp. Mot. Summ. J. (hereinafter, "Pet'r Br.") at 18, 20.) (See also Pet'r Des'g Evid. Ex. 1B at 1 (stating that customer "ha[s] no option to purchase the [water heater] at any time").) In other words, AWHR explains that its customers did not possess or control the water heaters because AWHR "retained incidents of ownership . . . and the obligation to pay for and arrange for repairs and replacements, and [it] expressly prohibited the customer[s] from `removing, transferring, tampering with, or repairing' the water heaters." (Pet'r Resp. Resp't Cross[-]Mot. Summ. J. (hereinafter, "Pet'r Resp. Br.") at 2.)
Whether a lease arrangement in fact exists depends on the purported lessee's possession and control over the property involved. Mason Metals Co., Inc. v. Indiana Dep't of State Revenue, 590 N.E.2d 672, 674 (Ind. Tax Ct.1992) (citation
Given the facts of this case, AWHR's customers possessed and controlled the water heaters. Indeed, the water heaters were installed in the customers' homes and businesses. (See Pet'r Br. at 4 (explaining that the water heaters were "physically integrated into . . . the plumbing systems and electrical systems of [the] customers' buildings").) To the extent AWHR claims that it had access to the water heaters "at all reasonable times," that access was ultimately controlled by the customer.
(See Pet'r Br. at 10-14, 16 (citations omitted) (footnote added).) As further support for its position, AWHR cites to the Department's own informational bulletins that explain that water heaters, once installed, become real property.
Assuming AWHR was leasing real property and therefore not required to collect sales tax from its customers on the transactions, it owes sales tax to the Department for a different, although somewhat related, reason. Indeed, as the Department's aforementioned informational bulletins explain, water heaters, prior to their installation, are tangible personal property. (See Pet'r Des'g Evid. Ex. 3 at 2.) "The general rule . . . that all sales of tangible personal property are taxable . . . is not changed when a construction contractor converts tangible personal property into real property by attachment. [Thus, a]ll construction materials purchased by a construction contractor are taxable." (Pet'r Des'g Evid. Ex. 3 at 1.) See also IND.CODE ANN. § 6-2.5-4-9 (West 2003) (explaining that a retail transaction occurs when a person sells tangible personal property which "is to be added to a structure or facility by the purchaser[] and [] after its addition to the structure or facility, [it] become[s] a part of the real estate on which the structure or facility is located"). Accordingly, AWHR should have paid sales tax on its purchase of the water heaters from AEP. See, e.g., 45 IND. ADMIN. CODE 2.2-3-8(a) (2003) (explaining that the conversion of the water heaters into real property would not have relieved AWHR from its sales tax liability related to its acquisition of the water heaters when
For the foregoing reasons, the Department's assessment of sales tax liability against AWHR is AFFIRMED.
SO ORDERED.
Respondent, Indiana Department of State Revenue, by counsel, files its Motion for Publication of Memorandum Decision. The Court, being duly advised in the premises, now finds that the motion should be GRANTED.
IT IS THEREFORE ORDERED as follows:
The Department provides advice to individual taxpayers in many different forms and based upon very specific factual situations. See 45 IND. ADMIN. CODE 15-3-2(d)(1) (2003). Consequently, taxpayer rulings are very limited in their application: only the taxpayer to whom the ruling was issued is entitled to rely on it, and, even then, only with respect to the particular fact situation provided in the taxpayer's written application for the ruling. See id. at (d)(3). In the letter of findings upon which AWHR relies, the Department explained that the propane tanks were not being leased because they were not the "object" of the transaction between the sellers and their customers. In other words, the sellers were not leasing the propane tanks to the customers because their "interest lies in selling [liquid propane] . . . and receiving compensation for the cost of [delivering it to them]. The customers' [only] interest is in obtaining that fuel. . . . The fact that the sale of propane necessarily involves the use of a storage container located on the customers' property does not alter the nature of th[at] transaction." (Pet'r Des'g Evid. Ex. 5 at 4.) (See also Pet'r Des'g Evid. Ex. 6 at 1-2.) In this case, however, it is quite clear that the "object" of the transaction between AWHR and its customers is not for the use of a storage container; rather, it is for an appliance that performs a mechanical function. Accordingly, the Court finds that these letters of finding lend little support to AWHR's position.
During oral argument, AWHR claimed that its purchase of water heaters from AEP was exempt. (See Oral Argument Tr. at 15-16 (stating that "when you have a lump sum improvement to realty, that is not a taxable transaction for sales tax purposes" and that the transaction was "an isolated or occasional sale").) AWHR did not, however, present a fully-developed argument supported by legal authority to demonstrate that its transaction with AEP was exempt from taxation for these reasons.
The Department's administrative regulation states:
45 IND. ADMIN. CODE 15-11-2(b), (c) (2003). AWHR misinterpreted the significance of the Department's position in the letters of finding regarding the propane tanks; such misinterpretation clearly constitutes negligence under the Department's regulation. Furthermore, it was AWHR who bore the burden of showing that it had reasonable cause to believe that it did not owe sales tax. See id. See also IND. CODE ANN. § 6-8.1-10-2.1(d) (West 2003). The Department's imposition of a 10% penalty is affirmed.