An Indiana LLC, which operates a restaurant, argued they were entitled to a refund for sales tax paid on purchases of the aprons and chef’s linens used by chefs at the restaurant. The taxpayer’s primary argument was that the linens and aprons were essential to the production process and that similar to lab coats worn in a factory kitchen setting, aprons and other linens should be considered safety equipment when used by cooks while cooking in the restaurant as referenced in 45 IAC 2.2-5-8(c)(2)(F). To provide support for this claim, the taxpayer pointed to the fact that chef’s linens and aprons are not worn before the workers arrive at the restaurant, highlighting they are only meant to be worn while working in the kitchen.
When considering whether an exemption applies, Indiana requires a statute to be interpreted strictly against the taxpayer seeking exemptions and places the responsibility of paying sales tax on all retail transactions on purchasers. Some retail transactions are exempt from sales tax, including when the purchaser is buying tangible personal property which will be “consumed in the direct production of other tangible personal property” and when the purchaser is buying safety clothing which allows a worker to participate in production without injury or to prevent contamination during production.
After hearing arguments in this case, the Department of Revenue found the taxpayer’s opinions lacking. The Department held the aprons and chef’s linens were not “essential and integral” to the production process, which is the requirement to claim this exemption under Indiana law. The taxpayer was unable to claim the aprons and linens were safety equipment because the taxpayer did not point out any way the aprons and linens protected food from contamination. Rather, the Department found, the aprons seem more likely to keep the linens clean, and rather than safety equipment, the chef’s linens were “merely the outfit that Taxpayer’s cooks are expected to wear on the job”. Since neither the outfit nor the outfit protecting aprons was found to be “essential and integral” to cooking the food, the Department held the taxpayer was not entitled to any sales tax refund on the purchases.
Taxpayers need to be aware of situations like this and how individual states handle different types of exemptions and refunds. Indiana requires taxpayers to prove they are entitled to the exemptions and has specific requirements for the definition of safety gear. If taxpayers would like to claim exemptions they may be entitled to, it is equally important to know what kind of proof is accepted and how the state will view claims. If taxpayers find they are not entitled to some exemptions they are expecting, they may need to make adjustments in final processing or in their accounting processes to correctly collect, pay, and remit sales taxes. (Indiana Department of State Revenue Final Order Denying Refund : 04-20242121; 02-20242122 Sales Tax For the Tax Year 2020, dated January 14,2025, Posted March 26,2025 by Legislative Services Agency)