May 21, 2014
Author: Teresa L. Worthington, JD, LLM
Organization: BKD, LLP
Indiana Sales Tax
Indiana imposes an excise tax, known as the state gross retail tax on retail transactions made in Indiana. The seller, called a retail merchant, is a person who engages in selling at retail. “Selling at retail” is when an individual acquires tangible personal property for the purpose of resale and transfers that property to a third person for consideration in the ordinary course of his or her business. (Ind. Code § 6-2.5-4-1(a); Ind. Code § 6-2.5-4- 1(b)). Use is the exercise of any right or power of ownership over tangible personal property. (Ind. Code § 6-2.5-3-1(a)). Storage is the keeping or retention of tangible personal property in Indiana for any purpose except the subsequent use of the property solely outside of Indiana. (Ind. Code § 6-2.5-3-1(b))
The seller is responsible for collecting and remitting the tax on behalf of the State. Unless specifically designated exempt, sales of tangible personal property for storage, use, or consumption by a retail merchant for delivery in Indiana are generally presumed taxable. (Ind. Code § 6-2.5-3-7). However, sales of services are generally exempt unless specifically designated taxable. The current sales tax rate in Indiana is 7%.
Use tax is a compensatory tax because it compensates for the sales tax. Use tax is imposed on tangible personal property which is used, stored, or consumed in Indiana. If Indiana sales tax has already been paid, then Indiana use tax is not due. Items Generally Subject to Sales and Use Tax Examples of items generally subject to sales and use tax are:
- Office supplies
- Cable/Satellite Television Services
- Public utilities;
- Construction materials;
- Rental of rooms, lodging and accommodations;
- Computer equipment;
- Motor vehicles;
- Tobacco products;
- Software license or subscriptions
As a general rule, services are exempt from sales/use tax unless specifically taxed. Indiana taxes telecommunications, cable television services, public utilities, lawn care services, and room or accommodations rentals for less than 30 days.
Items Generally Not Subject to Sales and Use Tax
- Professional services;
- Credit and Collection services;
- Employment and temporary employee supply services;
- Furniture moving;
- Investment counseling services;
- Management consulting;
- Market research services;
- Payroll Services;
- Safe deposit services;
- Security services;
- Janitorial cleaning;
- Parking/Car storage
- Locksmith services
- Mini Warehouse and self-storage rental
- Waste removal services
A Unitary transaction is defined as all items of property and/or services for which a total combined selling price is computed for payment. In a unitary transaction services that would be exempt if separately stated are otherwise taxable because the services are included in a single charge of selling price.
Original manufacturer or dealer warranties are included in the selling price of the product sold. Sales tax is collected on the entire selling price of the product. Any parts transferred to a buyer under the terms of the original warranty are not subject to sales tax since sales tax was collected on the retail transaction.
Optional Maintenance Contracts are subject to tax. Maintenance contracts generally meet the definition of a unitary transaction. A contract that explicitly guarantees that tangible personal property will be provided under the contract is not require. If there is a reasonable expectation that consumable items will be provided under the contract, the contract is subject to sales/use tax.
Optional Warranty Contract means a contract that acts like insurance against future potential repair costs, including extended service contracts. Optional warranty contracts are not subject to sales/use tax as long as there is no substantive provision or certainty that tangible personal property will be provided under the contract.
Custom software specifically designed for purchasers is not subject to sales/use tax. However prewritten programs, developed by the seller for sale, lease, license, subscription on the general market are subject to sales/use tax. Prewritten software delivered electronically through the Internet is subject to sales/use tax. Prewritten computer software accessed electronically via the Internet for use in Indiana is subject to sales/use tax as well.
Currently, the sale digital audio works (e.g. songs, recordings, ringtones, etc.), digital audiovisual works (e.g. movies, television shows, etc.), or digital books (e.g. books, magazines, ect.) are subject to sales/use tax.
The lease or rental of tangible personal property is subject to sales/use tax. This includes equipment, vehicles, linens, towels, uniforms, or floor mats.
Indiana does not impose sales and use at the local level. However, a number of counties levy a lodging tax, several counties and towns impose a local food and beverage tax, and two counties have a tax on admissions.
If an item/service is not specifically enumerated as taxable or included with the statutory definition of a retail sale, it is an exclusion from tax. Separately stated labor and installation charges are not subject to sales/use tax since they are not included in the definition of price or other bona fide charges under IC 6-2.5-4-1. Likewise, occasional/casual sales are not subject to sales tax. See, IC 6-2.5-3-2(b)(1) and 45 IAC 2.2-1-1(d) IC 6-2.5-5 contains many exemptions from sales tax. The sales or rental of tangible personal property can be classified as exempt from tax in three main ways:
- The way in which the tangible personal property is to be used may make the transaction exempt.
- The item itself may make the transaction exempt.
- The type of “person” making the purchase may make the transaction exempt.
Exemptions based on Use
1. Resale Exemption
Sales intended for resale in the regular course of a purchaser’s business in the same form as acquired are exempt from sales/use tax if the purchaser is occupationally engaged in reselling, renting or leasing. See IC6-2.5-5-8(b)
2. Interstate Commerce
The United State Constitution prohibits taxation of sales made in interstate commerce. IC 6-2.5-5-24(b)(2)
3. Agricultural Exemptions
Machinery, tools, and equipment are exempt from sales/use tax if acquired for use directly in the production, extraction, harvesting, or processing of agricultural commodities. IC 6-2.5-5-2 Additionally animals, feed, see, and other farm products acquired by a farmer who is occupationally engaged to produce food or commodities sold for human or animal consumption. IC 6-2.5-5-1
4. Manufacturing Exemptions
Machinery and equipment used in the direct production, manufacturing, fabrication, assembly, extraction, mining, process, refining or finishing of other tangible personal property is exempt from sales/use tax. IC 6-2.5-5-3 Property incorporated as a material component of an item being produced is exempt from sales/use tax. IC 6-2.5-5-6
5. Research and Development
Laboratory equipment, computers, software, telecommunication equipment and testing equipment that is used in Indiana for the first time and is acquired for the purpose of research and development is exempt from sales/use. IC 6-2.5-40
6. Pollution Control Exemption
Machinery, equipment, and devices used to comply with governmental environmental quality laws, regulations or standards by manufacturers, processors, refiners, miners, farmers are exempt from sales/use tax. IC 6-2.5-5-30
7. Packaging Exemption
Non-returnable material and containers are exempt if the materials are used to sell the contents that the person sales. IC 6-2.5-5-9
8. Public Transportation Exemption
Tangible personal property used in providing public transportation for persons or property is exempt from sales/use tax. IC 6-2.5-5-27 Indiana’s public transportation exemption will exempt trucks, trailers, communication equipment; replacement parts, tools and equipment used to repair rolling stock; machine shop, and items used for production of financial matters, routes and rates.
Exemptions based on Item
Sales of newspapers are exempt from sales/use tax. IC 6-2.5-5-17 In order to be considered a newspaper it must meet the following five requirements:
i. Commonly understood to be a newspaper;
ii. Circulated among the general public;
iii. Published at stated short intervals;
iv. Entered or are qualified to be admitted and entered as second class mail; and
v. Printed for resale and are sold. 45 IAC 2.2-5-2
2. Medical Equipment
Sales or rentals of durable medical equipment, mobility enhancing equipment, prosthetic devices, artificial limbs, orthopedic devices, dental prosthetic devices, eyeglasses, and contact lenses are exempt from sales/use tax if prescribed and dispensed by licensed practitioners. IC 6-5.5-5-18
Sales of drugs, insulin, oxygen, blood, and blood plasma are exempt from sales/use tax if prescribe and dispensed by licensed practitioners. IC6-2.5-5-19
Food and food ingredients sold for human consumption are exempt from sales/use tax. IC6-2.5-5-20 The exemption does not include candy, alcoholic beverages, soft drinks, food sold through vending machines, prepared food, tobacco or dietary supplements.
5. Lottery Tickets
Sales of lottery tickets authorized by IC 4-30 are exempt from sales/use tax. IC 6- 2.5-5-34
6. Manufactured Home
The sale of a preowned mobile home is exempt from sales/use tax. IC 6-2.5-5-29 Thirty-five percent of the income derived from the sale of a mobile home or industrialized residential structure is not subject to sales/use tax. 45 IAC 2.2-5-67
Exemptions based on Person Classification
Under the Supremacy Clause of the United States Constitution and Indiana law, sales to the federal government are exempt. IC 6-2.5-5-24 Generally purchases made by Indiana state and local governments and their agencies of tangible personal property, utilities, and taxable services are exempt from sales tax provided that the items/services are used by the government to perform its governmental functions. IC 6-2.5-5-16
- Nonprofit Organizations
Purchases of tangible personal property or taxable services are exempt from sales/use tax if the entity is organized and operated exclusively for religious, charitable, scientific, literary, educational, or civic purposes if no part of its income is used for the private benefit or gain to any member or associate, the property is used to carry on or to raise money to carry on the organization’s not for profit purpose, the transaction is invoiced directly to the organization and paid directly by the organization’s funds and is not an organization operated predominantly for social purposes. IC 6-2.5-5-25
- Professional Racing Team
Purchases by a racing team that comprises any part of a professional motor racing vehicle except tires and accessories are exempt from sales/use tax. IC 6-2.5-5-37