Taxpayer filed an amended 2007 income tax return requesting a refund of tax it had previously paid. Taxpayer also submitted an amended 2008 income tax return. Taxpayer explained that the "amended returns are filed 'to correct the sourcing of certain electronic information services revenue for the purposes of the sales factor of the apportionment percentage . . . ."'
The Department of Revenue ("Department") conducted a review of Taxpayer's 2007, 2008, 2009, and 2010 returns. The 2009 and 2010 returns were also reviewed because – according to the Audit Report – "Taxpayer also reported their Indiana sales figures based on [cost of performance] for 2009 and 2010 . . ." and excluded all of these "information services" revenues – received from its Indiana customers – from its Indiana numerator.
The Department disagreed with Taxpayer's method of reporting its Indiana source income, issued an assessment for 2008 through 2010, and denied Taxpayer's refund request attributable to the 2007 and 2008 returns.
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Taxpayer argues that the money earned from its Indiana clients should be sourced to Taxpayer's out-of-state location. As explained by Taxpayer:
A comprehensive review of the direct costs associated with [the] income-producing activity giving rise to these service receipts was performed in order to determine the proportion of the costs performed within and without Indiana. The primary direct costs are (1) staffing which includes editorial, research, analysts, systems and database managers, and (2) Information Technology, which includes computers, servers, software development and maintenance. For the previously referenced information services, the review concluded that the majority of the direct costs are incurred outside the State of Indiana.
The Department's Audit Report disagreed:
Upon audit, we believe that "in [T]axpayer's specialized business, the information [T]axpayer acquires and manages would have no value unless that information was offered to and accepted by an Indiana customer. The money [T]axpayer receives is not received by virtue of the activities which [T]axpayer conducts in [other states]. The money is received because the information is "rendered" to an Indiana customer.
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Taxpayer disputes the Audit's conclusion that Taxpayer's receipts are governed by IC § 6-3-2-2.2(e) because "Taxpayer's receipts clearly were not derived from fiduciary services, and they do not fit with the apparent meaning of 'other services.'"
The audit report pointed out that the rule for determining if "income-producing activity" is performed in Indiana and if the money earned from that activity is included in the numerator of the sales factor is found in 45 IAC 3.1-1-55 . Under that provision, the general rule is that "the income-producing activity" is "deemed performed" and is attributed to "the situs of the real, tangible, and intangible property" or to the place "where the personal services are rendered." However, the term "income producing activity" is defined as "the acts or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit."
The Department concludes that the actual "income producing activity" is performed in Indiana because "the acts or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit" occur in Indiana. 45 IAC 3.1-1-55 . Taxpayer does not earn money from conducting out-of-state financial research; Taxpayer does not earn money because a specific Indiana customer hires Taxpayer to conduct out-of-state financial research on that particular customer's behalf; Taxpayer earns money because it conducts financial research and then sells the results of that research to Indiana customers. The money earned from those Indiana sales transactions constitutes Indiana source income.
In summary, receipts from any "income producing activity" performed in Indiana are always attributed to Indiana under IC § 6-3-2-2(f)(1); all of the receipts or a principal source of business income are attributed to Indiana when, under the cost of performance rules, the greater proportion of the income producing activity is performed in Indiana under IC § 6-3-2-2(f)(2) and 45 IAC 3.1-1-55 .
The "cost of performance" rules apply in two situations: (1) when attributing all of the receipts for a principal source of business income to Indiana because the greater proportion is performed in Indiana; (2) when income is not a "principal source of business income" and the greater proportion of the income producing activity is performed outside of Indiana. While Taxpayer has service income derived from intangible property, the income is a "principal source of business income" for Taxpayer and is from "income-producing activity" that was performed in Indiana under 45 IAC 3.1-1-55 .
