Frame Station, Inc. v. Indiana Department of State Revenue
771 N.E.2d 129, 2002 WL 1502157, 2002 Ind. Tax LEXIS 32 (2002)
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Rule of Law:
When services are performed with respect to personal property prior to its transfer to a customer, those services, along with the property, constitute a taxable retail unitary transaction, regardless of whether the charges are separately stated on an invoice.
Facts:
- Framemakers provides custom framing services, building or special ordering frames for customers' art.
- Framemakers' invoices record separate subtotals for the service of framing the art and for the frame itself.
- During the tax years 1993-1995, Framemakers' customers paid no money in advance for custom framing.
- Customers paid a total price for the framing service and frame only when they picked up the completed project.
- Framemakers collected sales tax solely on the price of the frame, not on the price for framing the art.
Procedural Posture:
- The Indiana Department of State Revenue (Department) conducted an audit and determined that Framemakers' custom framing services were subject to sales tax.
- The Department submitted a Demand Notice for Payment to Framemakers for sales and use tax, penalties, and interest.
- Framemakers protested the proposed assessment.
- The Department held a hearing on July 31, 1997, and subsequently denied Framemakers' protest.
- Framemakers paid the assessment and filed a claim for a refund.
- The Department denied Framemakers' refund claim on December 1, 1997.
- Framemakers appealed the denial to the Indiana Tax Court.
- A trial was held in the Indiana Tax Court on September 24, 1998.
- The parties presented oral arguments to the Indiana Tax Court on May 24, 1999.
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Issue:
Does a business's custom-framing service, performed on a customer's art prior to the customer taking ownership and possession of the completed framed art and paying the total price, constitute a taxable "retail unitary transaction" under Indiana sales tax law?
Opinions:
Majority - FISHER, J.
Yes, Framemakers' custom-framing services constitute a taxable retail unitary transaction because the services are performed prior to the transfer of property to the customer. Under Indiana Code Section 6-2.5-4-1(e), sales tax applies to a retail unitary transaction, which includes charges for services performed in respect to property transferred before its transfer, even if separately stated. The court found that a "unitary transaction" encompasses all items of personal property and services furnished under a single order for a combined charge (Ind.Code § 6-2.5-1-1(a)). The critical factor for taxation is whether the services are performed before the transfer of the property to the transferee, as established in precedents like Cowden & Sons Trucking, Inc. v. Indiana Dep't of State Revenue and Indiana Dep't of State Revenue v. Martin Marietta Corp. The court clarified that the "transfer of property" occurs when the buyer (1) agrees to buy, (2) pays the purchase price, and (3) takes ownership and possession of the property, citing Webb v. Clark County. Since Framemakers' customers paid the total price and took possession only after all framing services were completed, the services were performed prior to the transfer of property. Therefore, the services are part of a taxable retail unitary transaction. The court also rejected Framemakers' argument that separate invoicing exempted the services, noting that the legislature did not intend for taxation to depend on methods of computation.
Analysis:
This case clarifies the application of Indiana's sales and use tax to transactions involving both goods and services, particularly when services are preparatory to the transfer of the good. It reinforces that the critical juncture for determining taxability within a "retail unitary transaction" is the timing of service performance relative to the transfer of property. The ruling provides an important interpretation of when "transfer of property" occurs, tying it to the buyer's agreement, payment, and possession. This can impact numerous businesses that offer combined goods-and-service packages, compelling them to assess sales tax on the entire transaction if the services precede the final transfer of ownership and possession, regardless of itemized billing.
