Taxpayer is an out-of-state holding company which owns a 100 percent membership interest in several limited liability companies. The LLCs are included as disregarded (pass-through) entities on the Taxpayer's tax returns.
Together with Taxpayer, the disregarded entities operate food and food related businesses in various states including Indiana.
Taxpayer has out-of-state "W-2" employees. For purposes of calculating its corporate income tax, these out-of-state employees create a "payroll factor." The audit found that Taxpayer's remaining Indiana and out-of-state employees were "leased employees."
The audit noted that, "Since there are no W-2 employees in Indiana, the reported payroll factor is zero" because Taxpayer did not include the leased employees in the payroll factor on its Indiana corporate tax returns. In effect, Taxpayer reported no Indiana employees on its Indiana corporate tax return.
Because Taxpayer did not include the leased employees on its Indiana corporate tax return, the audit report concluded that:
This leads to an unfair representation of the activity necessary to earn income in Indiana, while diluting the overall apportionment percentage by including only W-2 employees in the denominator.
The audit report stated that the failure to include the leased employees in its apportionment formula "leads to an unfair representation of the activity necessary to earn income in Indiana while diluting the overall apportionment percentage by including only W-2 employees in the denominator." As a result, the audit concluded that, "[T]he payroll factor is being adjusted based on the [T]axpayer having both W-2 employees and also leased employees."
Taxpayer cites to
45 IAC 3.1-1-63 which states in part:
Where in the computation of the property, payroll or sales factors, the taxpayer has not assigned part of its property, payroll, or sales to any state, the Department may require the exclusion of the unassigned property, payroll or sales from the denominator of the appropriate factor in order to prevent distortion of the apportionment.
The audit included the leased employees in the payroll factor based on IC § 6-3-2-2(l), (m). However, given that Taxpayer is not the immediate employer of the employees and that the leased employees' compensation is accounted for in Food Services' Indiana tax returns, it is unnecessary to take additional steps to "effectuate an equitable allocation and apportionment of the [T]axpayer's income" by including those same amounts in Taxpayer's own apportionment formula. Under these particular circumstances, Taxpayer has met its burden under IC § 6-8.1-5-1(c) of establishing that its original return fairly reflects and reports the income derived from sources within Indiana and that these are not the "limited and unusual circumstances" which justify departing from the standard apportionment model.