Sales Tax Slice: Want An Exemption for Melting Cheese or Installing Roller Coasters? You’d Better Have Proof


“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?

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By René Y. Blocker