Monday, March 3, 2014

Revenue Finds Taxpayer with Two Nonresident Shareholders Required to File Composite Tax Returns

Excerpts of Revenue's Determination follow:

Taxpayer, an Indiana company, operates a gas station/convenience store in Indiana. Taxpayer elects to file as an S Corporation for income tax purposes. Taxpayer has two nonresident shareholders who live outside of Indiana.

In 2012, the Indiana Department of Revenue ("Department") audited Taxpayer's business records for the 2009, 2010, and 2011 tax years ("Tax Years at Issue"). Pursuant to the audit, based on the best information available at the time of the audit, the Department determined that Taxpayer had additional sales, which resulted in additional income for the Tax Years at Issue. The Department determined that Taxpayer, as an S Corporation having two nonresident shareholders, is required to file Indiana composite returns and withhold the income on behalf of its nonresident shareholders. Taxpayer failed to do so. The Department's audit imposed additional composite return withholding tax, interest, a ten-percent penalty, and an annual $500 penalty under IC § 6-8.1-10-2.1(h) for each year of the Tax Years at Issue.
At the hearing, Taxpayer argued that it was not responsible for the additional tax because it is an S Corporation and its nonresident shareholders filed their own Indiana individual income tax returns. To support its protest, Taxpayer submitted a copy of the first page of 1120S for the 2011 tax year.
Upon review, however, the Department is not able to agree. Taxpayer's records demonstrate that it has two nonresident shareholders. Therefore, pursuant to the above mentioned statute, Taxpayer is required to file the Indiana composite tax returns and is required to withhold tax on the distributive share of the income it pays or credits its nonresident shareholders. In this instance, the Department's audit found that Taxpayer received income from the additional sales for the Tax Years at Issue. Taxpayer thus is required to withhold on that income pursuant to the above mentioned statute. Since Taxpayer did not do so, the Department properly assessed Taxpayer the composite return withholding tax as result of the additional sales.
Notably, Taxpayer protests the Department's sales tax assessment on its additional sales. Taxpayer provides additional documentation to support its protest and Letter of Findings 04-20130258 sustains Taxpayer's protest in part on one issue pertaining to exempt "food stamp sales." As a result, the Department may adjust Taxpayer's additional sales pending a supplemental audit review performed by the Department's Audit Division. Thus, Taxpayer's protest of the additional composite return withholding tax is sustained to the extent the Department adjusts Taxpayer's additional sales pursuant to Letter of Findings 04-20130258.
Taxpayer's protest regarding the imposition of interest is respectfully denied.
In this instance, Taxpayer did not provide sufficient documentation to support its protest of the $500 penalty. Thus, the Department is not able to agree that Taxpayer met its burden of proof for penalty waiver.