In Lowe’s Home Centers, LLC v. Indiana Dep’t of State Revenue, Cause No. 49T10-1201-TA-6 (Ind. Tax Ct., Dec. 19, 2014), the Indiana Tax Court held that Lowe’s Home Centers (“Lowes”), a national home improvement retail chain, properly self-assessed use tax on construction materials it incorporated into its customers’ real property and did not need to collect the tax from its customers and remit it to the Indiana Department of State Revenue (“Department”).

Lowes sells tangible personal property in its stores. In general, Lowes does not pay sales tax on the tangible personal property it purchases for resale in its stores under Indiana’s purchase for resale exemption. However, when Lowes sells the tangible personal property, it collects sales tax from its customers and then remits the appropriate amount to the Department. The amount of sales tax was based on the retail price of the goods sold.

Lowes also acted as a general contractor during the years at issue, meaning it would perform real property improvement services for its customers. Lowes would have an installation contract with its customers which generally provided that Lowes would supply both the construction material from its stores and the labor to complete the project. Lowes would self-assess and remit use tax for the construction material it pulled from its inventory and used in the projects. The amount of use tax was based on the cost to Lowes to acquire the goods,i.e., the wholesale cost. After an audit, the Department determined that Lowes should have been collecting sales tax from its customers based on the retail price of the materials, not self-assessing based on the wholesale cost. Lowes protested the assessment, which the Department denied. Both parties filed cross-motions for summary judgment with the Indiana Tax Court.

Indiana imposes a sales tax on retail transactions taking place within the state. The purchaser of the tangible personal property is liable for the tax. Indiana also imposes a use tax on storage, use, or consumption of tangible personal property acquired in a retail transaction, regardless of the location of the transaction. The person who stores, uses, or consumes the property is liable for the use tax. Use tax is also imposed on tangible personal property that is added to a structure or facility and becomes a part of that real property. Therefore, contractors who may not have paid sales tax on construction materials do pay use tax when they incorporate the material into a building or structure.

The court initially noted that both parties stipulated that Lowes was a contractor under the installation contracts. The Department also agreed that Lowes was taking tangible personal property and attaching it to customers’ real property. Therefore, Lowes would be required to self-assess and remit use tax under Indiana law. However, the Department made two alternative arguments for why Lowes should be required to collect the sales tax based on the retail transactions.

First, the Department argued that Lowes was a retail merchant, not just a contractor. The Department pointed to administrative regulations that mandate that a retail merchant that also acts as a contractor must collect sales tax from its customers on construction materials. However, the court pointed out that the regulation at issue separates Lowes’ installation contracts into two events: the retail sale of the construction materials, which is subject to Indiana sales tax, followed by the non-taxable service of installing the materials. The court held that for Lowes to collect sales tax from its customers, Lowes would have needed to acquire the tangible personal property for resale and then sell that property to its customers. If an act remained to be done before the sale was complete (for example, the execution of a term in the sales contract), the title would remain with the seller. Lowes argued that its customers were not purchasing the materials to build an addition to their homes; rather, they were purchasing the completed project, be it a roof or a floor. The court held that Lowes never transferred tangible personal property to its customers. Instead, the tangible personal property had been converted into real property.

The Department next argued that the installation contracts were time and material contracts, not lump sum contracts. Pointing again to its own regulations, the Department argued that contractors who enter into time and money contracts do not owe use tax on the materials because the customer is responsible for the sales tax on the construction materials. The regulations also provide that under a lump sum contract, the contractor must self-assess and remit use tax on the construction materials. The Department argued that Lowes’ installation contracts were time and material contracts given that they identified a materials price separate from a labor price. However, upon review, the court found that the installation contracts were understood to be lump sum contracts by both Lowes and their customers. The court also held that the Department’s regulations on this point were inconsistent with Indiana’s sales and use tax statutes and that the Department had created an “artificial distinction” between the two types of contracts. Therefore, it invalidated the distinction and held that Lowes properly self-assessed and remitted use tax