“I’ll believe in anything, no matter how wild and ridiculous, if there is evidence for it.” -Isaac Asimov, Legendary Science Fiction Writer
I went in search of Isaac Asimov’s quote after reading a couple of recent tax decisions in which the taxpayers, each seeking exemptions, failed perhaps the simplest requirement of any case: presenting proof. In both matters, one out of Pennsylvania, the other from Texas, it seems the taxpayers may have mistaken the mere offering of documents in support of their claims, for the presentation of genuine evidence.
In the Pennsylvania case, the operator of a ski and water park resort, claimed that its labor costs for having a roller coaster installed qualified as “nontaxable construction activities.” If the roller coaster is permanently affixed to real property (and thereby becomes real property), the installation labor is not taxable. But, if the roller coaster remains tangible personal property after being installed, the labor is subject to tax.
The operator of the park offered pictures to support its claim. The case doesn’t tell us what the pictures represent, nor is there any indication that the taxpayer submitted evidence other than the photographs. Pennsylvania’s Board of Tax Appeals concluded that the documentation presented (i.e., the photos) failed to demonstrate that the roller coaster became a permanent part of the real estate. The roller coaster retained its identity as tangible personal property, the Board decided, and the installation labor was subject to tax. Apparently, simply providing pictures, without additional documentation to show the manner in which the roller coaster was installed constituted insufficient evidence to meet the burden of proof.
In the decision from the Texas Office of Administrative Hearings, the volume of documents submitted by the taxpayer far exceeded that offered by the ski/water park operator in the Pennsylvania case. Nevertheless, the invoices, order forms, product descriptions and photographs provided by the Texas restaurant seeking a variety of exemptions were equally insufficient.
One of the restaurant’s exemption claims was for heated cabinets that, the restaurant argued, were used exclusively to process food by melting the cheese in its enchiladas. (Before you laugh too hard, in Texas, restaurants that prepare food for consumption are considered manufacturers and may be entitled to a sales and use tax exemption for goods directly used or consumed in the actual processing of tangible personal property to be sold.) Although the taxpayer submitted evidence showing the heated cabinets were used to warm food items, the evidence failed to demonstrate that the cabinets were indeed used in the processing of food, that is, to melt cheese. With adequate evidence, it seems, the administrative law judge (or perhaps even the auditor) might have granted the exemption for the cheese-melting cabinets.
The restaurant also claimed that items like paper towels, gloves, waxed paper, thermometers and skillets should be exempt because they were used in food processing. It seems that fajita skillets, as an example, would be exempt if used for cooking, but taxable if used for serving. Gloves used for serving are taxable, but gloves used to prepare food are exempt. Unfortunately for the restaurant, the invoices, product descriptions and pictures it submitted failed to show precisely how the items were actually used--in an exempt manner or not. The decision noted that, “pleadings and argument are not evidence and do not establish the factual elements necessary to support an exemption claim.” The decision doesn’t reveal what was in the pictures presented by the taxpayer. But, I like to think at least a partial exemption would have been in order had the photographs shown the restaurant’s chefs sautéing veggie fajitas on skillets, while wearing gloves, of course.
Certainly state tax tribunals are not expected to believe anything —as Asimov might—just because there’s evidence for it. However, his quote should serve as a reminder that if you’re looking for an exemption, actual evidence will go a long way.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Were the courts in these cases correct in deciding there was insufficient evidence for the taxpayers to claim the exemptions sought? How might you have presented the cases differently?
Take a free trial to Premier State Tax Library , a comprehensive research service that delivers deep, unique analysis, and time-saving practice tools to help practitioners make well-informed decisions
By René Y. Blocker
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)