Taxpayer is a corporation incorporated and headquartered in a state other than Indiana. Taxpayer is a wholesaler of various wireless communications equipment and accessories ("products") with a distribution center in Illinois. Taxpayer also provides third party fulfillment and logistics services for certain customers from its Illinois distribution center. Taxpayer filed its first Indiana sales tax returns in 2005. Since 2005, Taxpayer filed sales tax returns reporting several millions of dollars of Indiana sales each year. Taxpayer filed its first payroll withholding tax return in Indiana in 2005. For the 2005 tax year, Taxpayer filed two W-2s for two different employees. One employee worked the first part of the year and the second employee replaced him. For the 2006 through 2008 tax years, Taxpayer filed one W-2 for an Indiana employee in each year. Taxpayer filed its first Indiana adjusted gross income tax return in 2009.
In 2012, the Indiana Department of Revenue ("Department") conducted an adjusted gross income tax audit for Taxpayer for the 2005 through 2008 tax years. As a result of the audit, the Department determined that, based on the best information available at the time of the audit, Taxpayer had taxable nexus with Indiana for adjusted gross income tax starting in 2005. The Department issued proposed assessments for adjusted gross income tax and interest for the tax years 2005 through 2008.
The Department's audit determined that, based upon the activities that Taxpayer reported on its sales tax returns and payroll withholding tax returns, Taxpayer had nexus with Indiana for adjusted gross income tax purposes for the tax years 2005 through 2008. The Department attempted to get additional information from Taxpayer during the audit, but the attempts were unsuccessful. Thus, using the best information available, the Department made adjusted gross income tax assessments for the 2005 through 2008 tax years.
Taxpayer protests the imposition of adjusted gross income tax for the 2005 through 2008 tax years. Taxpayer asserts that it did not have taxable nexus with Indiana for these years. Taxpayer maintains that its business activities in Indiana were protected by 15 U.S.C. 381 ("Public Law 86-272") until the 2009 tax year when it began filing returns in Indiana.
During the course of the protest, Taxpayer submitted information about Taxpayer's sales activity. Taxpayer, in its March 14, 2013, protest letter, described its sales activity as follows:
Taxpayer was incorporated [in a state other than Indiana] and is commercially domiciled in Illinois where its distribution center is located. Taxpayer markets and sells its products to existing and potential clients in the United States and Canada primarily through its direct sales force. To a lesser extent, Taxpayer also derived revenue from fulfillment services ("Services") rendered at its Illinois distribution center. The Services entail receiving, packaging, shipping, and triage returns for Taxpayer's third party [fulfillment and logistics customers]. From its [Illinois distribution center], [T]axpayer ships products to retail vendors and other distributors throughout the United States and Canada, including Indiana. All shipments are made via common carrier. Services were rendered solely in state of [Illinois]. Furthermore, Services were a minor part of Taxpayer's business during the audit period. For example, during 2005-2008, Taxpayer had approximately seven customers for which it provided Services and none of which were in the State of Indiana. Services were only solicited for a select group of customers that met specific criteria.
During the hearing, Taxpayer asserted that it only provided its Services to a small number of specific selected customers because the space it had available to perform its Services was limited to a small section of its Illinois distribution center for the years at issue.
During the course of the protest, Taxpayer submitted information about Taxpayer's sales personnel activities. Taxpayer, in its March 14, 2013, protest letter, described its sales personnel activities as follows:
During the audit period, Taxpayer had less than ten sales personnel located at its Illinois headquarters location. These sales personnel did not travel outside of Illinois and they solicited sales of mobile phones and accessories as well as Services. The Illinois based sales personnel performed their solicitation activities via telephone and computer.
In addition, during the audit period, Taxpayer employed four additional sales personnel that worked out of their home offices [one] in Indiana, [one in] Ohio, and two in Texas. The Indiana sales personnel's responsibility was to solicit Taxpayer's [products] to regional [retailer] accounts. His responsibilities did not include solicitation of Taxpayer's Services. Based on discussion with Taxpayer management, although the Indiana sales personnel resided in Indiana, his target customers/prospects were located solely outside [Indiana]. He spent most of [the] time traveling outside [Indiana] to solicit customers but he also worked from his home office. He was not authorized to accept orders and only performed protected solicitation activities as discussed herein.
The Ohio and Texas sales personnel similarly worked out of their home offices and solicited sales of Taxpayer's [products] . . . Solicitation of Taxpayer's Services was limited to [a] select group of Taxpayer's customers that met certain criteria, and during the audit period this activity was extremely limited. Taxpayer only had seven customers during the audit period for which it provided Services and none of these customers were based or had locations in Indiana. Based on discussions with Taxpayer Management, sales personnel would only solicit Services on specific sales trips to certain customer/prospects, so the activity was not routine. Further, Taxpayer Management had no record of its sales personal making sales trips to Indiana to solicit Services.
Taxpayer, in a memo that it provided at the hearing, asserted that the only employees that traveled away from the Illinois officer were four sales personnel that had home offices in Indiana, Texas, and Ohio. In the memo, Taxpayer maintained that the home office sales personnels' "only responsibilities were to solicit sales." Additionally, Taxpayer stated that the home sales personnel neither "provide[d] any services or technical assistance to customers nor [had] the authority to accept orders."
Taxpayer, in its March 14, 2013, protest letter, summarized its business activities during the audit period, as follows:
1. The Taxpayer's business activities in Indiana during the audit period consisted exclusively of utilizing its direct sales force to solicit orders for [products].
2. Orders for sales of the Taxpayer's [products] were sent outside of Indiana for approval or rejection.
3. If approved, orders for sales of the Taxpayer's [products] were filled by shipment or delivery from its distribution center in Illinois.
4. The Taxpayer's products were shipped exclusively via common carrier.
5. The Taxpayer did not render or solicit Services to any customers in the state of Indiana during the audit period.
6. The Taxpayer did not maintain or make use of any office or place of business in Indiana.
7. The Taxpayer did not own and/or lease, as lessor or lessee, any real or tangible personal property in Indiana.
8. The Taxpayer did not have inventories, including inventories on consignment in Indiana.
9. The Taxpayer did not use its own vehicles to ship its products into Indiana.
10. The Taxpayer did not repair or service any personal or real property within Indiana.
11. The Taxpayer did not install or assemble any products within Indiana.
12. The Taxpayer did not engage in collections activity or credit investigation within Indiana.
13. The Taxpayer did not train personnel within Indiana.
14. The Taxpayer did not bring any equipment or tangible personal property into Indiana in conducting its business activity.
15. The Taxpayer did not engage any third parties to perform the activities described in items 6 through 14 on its behalf.
During the course of the protest, Taxpayer presented a variety of documentation to support its assertions, including the job description for its home office sales personnel, the Indiana sales personnel's customer list that included the customer's locations, the description of the type of customer accounts that Taxpayer' s Indiana sales personal serviced, the customer list for Taxpayer's Services customers that included the customer's locations, copies of the contract(s) and/or billing/invoices for the independent sales representatives services that started after the audit period, Indiana sales reports for the sales occurring during and after the audit period, and documentation demonstrating Taxpayer's sales approval process.
As stated previously, the Indiana Supreme Court stated the emphasis should be placed upon the totality of the business activities of a company within Indiana when interpreting the nexus limitations of Public Law 86-272. Based upon the documentation presented, Taxpayer has provided sufficient documentation to establish that, for the audit period, its activities in Indiana either related to the "solicitation of orders," or were "non-solicitous" activities that did not rise above a de minimis level, and, therefore, Taxpayer Indiana activities are protected by Public Law 86-272. Since, based upon the documentation presented, Taxpayer's Indiana activities during the audit period were protected by Public Law 86-272, Taxpayer did not have taxable nexus for the audit period.