Department of Revenue nets partial victory in R&D tax dispute

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The Indiana Tax Court has affirmed the Indiana Department of State Revenue’s decisions about the amount of sales tax that a pharmaceutical research firm owes on its research-and-development-related utility purchases — but the court is allowing a similar dispute over the firm’s manufacturing-related utility use to move forward.

The Tax Court’s order in Covance Central Laboratory Services LP v. the Indiana Department of State Revenue, 20T-TA-13, addresses motions for summary judgment filed by both parties.

Covance operates multiple pharmaceutical research and development facilities in central Indiana, and the legal dispute involves utility purchases that the company made between Jan. 1, 2011, and Dec. 31, 2018. Between 2014 and 2019, Covance filed multiple claims with the Department of Revenue for refunds of the sales tax it had paid on the purchase of those utilities.

The Department of Revenue denied Covance’s claims for utility purchases made between Jan. 1, 2011, and June 30, 2013, because the state’s exemption for utilities used in research and development did not go into effect until July 1, 2013.

Covance protested that decision, citing a state law providing for sales tax exemptions for research and development equipment purchased between July 1, 2007, and June 30, 2013. Covance had argued that, because Indiana’s sales tax laws consider electricity, water and gas to be tangible personal property, those utilities should also be included in the research and development sales tax exemption.

The Tax Court disagreed with Covance’s argument and affirmed that the Department of Revenue had not erred in denying Covance’s refund request for the 2011-2013 utility purchases. Accordingly, the Tax Court granted summary judgment in favor of the Department of Revenue on that issue.

Another issue concerned utilities that Covance purchased between July 1, 2013, and Dec. 31, 2018.

The Department of Revenue granted partial refunds of between 58% and 85% of Covance’s initial claims. The department said those percentages aligned with the percentage of purchased utilities that were actually consumed by research and development activities.

Covance had argued that it was entitled to a 100% refund for these utility purchases. The Tax Court disagreed, saying in its order that the law “unambiguously instructs how to apply the exemption to R&D Property,” and that activities incidental to research and development do not qualify for the exemption. The Tax Court granted summary judgment in favor of the Department of Revenue on that issue.

But the Tax Court denied the Department of Revenue’s request for summary judgment related to  whether Covance’s utility purchases qualify for manufacturing exemptions.

State law provides for sales-tax exemptions for the purchase of property used in manufacturing activities.

The Department of Revenue argued that Covance had not referenced manufacturing exemptions in its refund requests or appeals, so therefore the Tax Court did not have jurisdiction on that matter.

The Tax Court said that two of Covance’s refund claims “did raise the Manufacturing Exemption claims, albeit tersely, at the administrative level,” so it does have jurisdiction over the matter.

“There are genuine issues of material fact concerning whether the Manufacturing Exemptions apply to Covance’s utility purchases that cannot be resolved by summary judgment but may be litigated at trial if the parties so choose,” the Tax Court added in a footnote.

In its four tax appeal petitions, Covance had also alleged that its constitutional rights to equal protection and due process were being violated because the Department of Revenue had failed to accurately apply the law. For its part, the Department of Revenue asked for summary judgment in its favor, asserting that Covance’s petitions “do not allege a single fact in support [there]of.”

The Tax Court denied both sides’ requests for summary judgment on that issue, noting that the issue over Covance’s manufacturing exemption claims “are still viable and may be resolved at trial.”

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