The Indiana Department of Revenue ("Department") recently issued a letter ruling holding that a taxpayer's sales of pumpkins and purchases of drying crates were exempt.
The taxpayer was a farm market retailer. The taxpayer sold pumpkins to customers. When sold, the pumpkins were in exactly the same state as they were when they were first picked. A Department audit found that the taxpayer should collect tax on these sales. The taxpayer disagreed. The taxpayer also purchased drying crates. The taxpayer used these crates to dry corn used for animal feed. The crates were open on all sides to allow air flow, provided by drying fans. If the corn did not dry thoroughly before packaging, it would rot in the package. The audit found that the taxpayer owed tax on purchases of the crates. Again, the taxpayer disagreed.
Indiana exempts sales and purchases of food for human consumption. Indiana also exempts sales and purchases of property used directly to produce tangible personal property. To be exempt, the property must be an essential and integral part of an integrated process that produces tangible personal property. The production process includes steps up to and including the packaging process.
The letter ruling held that the taxpayer's pumpkin sales were exempt. Although the Department argued that the pumpkins were decorative items rather than food items, the pumpkins were food. The taxpayer sold the pumpkins just as they were when picked. The taxpayer did nothing to change the pumpkins from food into decorative items. The drying crates were also exempt. Because the corn needed to be dry before being packaged, the crates were necessary and integral to the production process.