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their use was an indispensable and inseparable part of the
rendering of services).
This is not such a case. Petitioner primarily sells a
product, the sand and gravel, and incidentally provides a
service, the transportation of the sand and gravel. Because
petitioner can generate profits from solely transporting the sand
and gravel, we do not view the sand and gravel as indispensable
to and inseparable from the provision of a service.8 Further,
because petitioner does not consume, alter, or add to the sand
and gravel, petitioner does not cause the sand and gravel to lose
its separate identity. As the evidence shows that petitioner is
a seller of sand and gravel, we conclude that the sand and gravel
is merchandise.
Petitioner additionally argues that even if we conclude that
the sand and gravel is merchandise, petitioner does not have to
maintain inventories because the sand and gravel is not an
income-producing factor in petitioner’s business. In evaluating
whether merchandise is an income-producing factor in a taxpayer’s
business, we must compare the cost of the merchandise to the
taxpayer’s gross receipts computed under the cash method of
8 With regard to revenues and expenses generated as a
result of customers requesting only transportation services,
petitioner has not argued in the alternative that they should be
placed on a hybrid method of accounting. In any respect,
petitioner has not presented any evidence with regard to those
revenues and expenses, and therefore it cannot meet its burden of
proof.
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Last modified: May 25, 2011