Indiana Dept of Revenue: Purchases Made Directly by Indiana State and Local Government Entities Are Exempt from Sales Tax

The Indiana Department of Revenue (DOR, or department) has issued a tax bulletin to clarify that purchases made directly by Indiana state and local government entities are exempt from sales tax. Sales by Indiana state and local government agencies also are exempt from Indiana sales tax unless the sales involve a proprietary or nontraditional activity (i.e., an activity that traditionally is engaged in by a private or commercial entity and that does not directly serve the public’s general health, welfare, and/or safety).

The DOR added that purchases made directly by the United States government, its agencies, and its instrumentalities are exempt from Indiana sales tax. Sales by these same entities are also exempt from sales tax.

PURCHASES BY STATE AND LOCAL GOVERNMENTS

The DOR explained that the State of Indiana and its local governments are not subject to sales or use tax on any purchases to be used primarily to carry out a governmental function. Any purchases used primarily in connection with a proprietary function of the state or a local government are taxable unless some other specific exemption applies.

IC 6-2.5-5-44 provides that purchases of tangible personal property by a city or town to be used in the operation of a municipal golf course are exempt from the sales and use tax.

Traditional governmental activities such as police and fire protection; street construction and maintenance; and the operation of hospitals, public libraries, cemeteries, and similar activities are considered to be governmental functions.

A person who contracts with a municipality to operate, manage, or control any plant or equipment owned by the municipality for the collection, treatment, or processing of wastewater may purchase tangible personal property exempt from the sales or use tax. The property must be classified as collection plant expenses, treatment and disposal plant expenses, or system pumping plant expenses as defined in IC 6-2.5-5-12.5.

SALES BY THE STATE OF INDIANA OR ITS LOCAL GOVERNMENTS

The DOR further explained that a state agency or local unit of government that sells tangible personal property and collects sales tax on those transactions is required to register as a retail merchant and remit the sales tax collected to the Department. For example, the sale of key chains or license cases by a license branch is taxable.

The state may purchase any property to be resold exempt from tax, but it must collect the tax from the purchaser at the point of sale. The following are other examples of proprietary activities that require the state agency or local unit of government to collect tax from the purchaser:

• Sales of tangible personal property from college bookstores, sales and rentals in state parks, food services, and concessions and similar activities;

• The rental of tangible personal property to the public;

• Sales of the byproducts of sewage disposal plants; or

• Any other activity customarily considered as being competitive with private enterprise.

Some sales may qualify as related to the performance of a governmental function if the sales do not compete with private enterprise, according to the DOR.

For example, if a city in Indiana were to charge a fee for providing copies of its ordinances, the city would not need to collect tax on the sale of the copies because providing the copies of its ordinances could be considered a governmental function of the city.

PURCHASES BY THE UNITED STATES GOVERNMENT AND ITS AGENCIES

In regard to these purchases, the DOR said that the United States Constitution prohibits any state from imposing any tax directly on the U.S. government, its agencies, and its federal instrumentalities, unless Congress consents to such taxation.

Thus, much federal purchasing, leasing, and renting of tangible personal property; the use of utilities; meals consumed in restaurants; and other normally taxable goods or services (including accommodations for fewer than 30 days) are exempt from Indiana sales and other transaction-based taxes. However, the fact that the U.S. government, agency, or federal instrumentality may ultimately reimburse an employee who paid the tax does not exempt such a purchase from tax.

To illustrate, the DOR gave the following example: an employee of a federal credit union (which is organized as a federal instrumentality under an Act of Congress) pays for lodging costs from his own funds. Tax should be collected at the time of payment, since payment is not being made directly by the federal credit union. However, if the same employee pays for the lodging with a federal credit union check or by the use of a credit card that is billed directly to the federal credit union, then this is a direct expenditure by the federal instrumentality. Therefore, this transaction is exempt from sales tax., the DOR concluded.

SALES BY THE UNITED STATES GOVERNMENT OR ITS AGENCIES

Under federal law (4 U.S.C. 107), state and local governments may not levy or collect any type of sales or use tax on transactions in which the U.S. government sells personal property to others. Therefore, the DOR wrote,  federal agencies are not required to register as retail merchants with the Department and will not have a Retail Merchants Certificate number to use on an exemption certificate (Form ST-105 or SSTGB Form F0003).

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