Taxpayer is a plastics manufacturer with facilities in Indiana. Taxpayer sells its products to destinations throughout North America.
A review by the Indiana Department of Revenue ("Department") of Taxpayer's federal and state income tax returns for the years 2008 through 2010 and supporting information revealed several areas of non-compliance relating to the calculation of Taxpayer's Indiana corporate income tax. The Department made several adjustments to the calculation of Taxpayer's Indiana corporate income tax. The Department included the throwback to Indiana of sales destined to several other states, because the Department found that Taxpayer's activities in those states did not exceed the protection of P.L. 86-272.
Taxpayer protested the adjustment made by the Department to Taxpayer's "Indiana receipts factor" as it related to sales destined to Mississippi, Missouri, and Tennessee as well as associated penalties. An administrative hearing was held and a Letter of Findings, 02-20120554.LOF (the "Letter of Findings"), was issued on April 30, 2013, sustaining Taxpayer on its protest of the assessment of penalty, but otherwise denying Taxpayer's protest.
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In its protest letter dated October 9, 2012, and during the hearing, Taxpayer indicated that it was in the process of entering into voluntary disclosure agreements ("VDAs") with the tax collection agencies of Mississippi, Missouri, and Tennessee whereupon Taxpayer would file and pay corporate income or franchise taxes in those states. Subsequent to the hearing, Taxpayer provided – unsigned – copies of these returns. Taxpayer did not provide copies of the VDAs, nor did Taxpayer provide further documentation and explanation of the activities it claimed provided sufficient nexus with Mississippi, Missouri, and Tennessee. Taxpayer stated that several years prior to the audit years, Taxpayer engaged a consultant to do a "nexus review" of its activities. Taxpayer stated it had difficulty finding the underlying data relating to the nexus activities because the employee who handled the "nexus review" was no longer with the company.
Taxpayer argued in its protest letter dated October 9, 2012, that Taxpayer "determined that it likely had nexus in several states, including Mississippi, Missouri, and Tennessee through the activities of its engineers and plant employees responsible for quality control." (Emphasis added). Taxpayer continued, "Such activities could include designing and facilitating product development as well as performing quality control assessments and conducting other quality control activities at the customer location." (Emphasis added). Taxpayer contended that "while the regularity of the travel varies depending upon the year, the frequency of these travel activities in recent years suggests the establishment of substantial nexus with Mississippi, Missouri, and Tennessee for corporate income tax and franchise tax purposes."
The April 30, 2013 Letter of Findings found that absent additional documentation by Taxpayer of its claimed activities in these other states – and especially in light of the voluntary nature of Taxpayer's VDAs with these other states – the Department could not agree with Taxpayer's contention that sales previously thrown back to Indiana by Taxpayer were no longer attributable to Indiana. In order for Taxpayer to meet its burden in protesting this assessment of Indiana tax, more was required than Taxpayer's say-so.
On rehearing Taxpayer continues to maintain that the Department's audit assessment overlooked the nexus and taxation of Taxpayer in states where Taxpayer was "taxable in another state."
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In its request for rehearing, Taxpayer objected to the reference in the Letter of Findings to the MTC's standard as authority for Indiana tax analysis because Indiana is not a member of the MTC compact nor has it adopted the MTC's model regulation. The Department clarifies that while the MTC's standard is not binding on Indiana for the reasons Taxpayer mentions, nonetheless, the referenced model regulation offers guidance on how to approach analysis of the facts relating to these types of "throwback" issues. The reference to the MTC standard is merely to point out that more is required of Taxpayer when it voluntarily steps forward with a claim for tax nexus when it had previously thrown back its sales to Indiana. The MTC model throwback regulation underlines the purpose to which the throwback rules are directed.
In the course of its request for rehearing, Taxpayer presented signed tax returns for each of the contested states and the VDAs with those states. These tax returns are for income and/or franchise taxes for each of the states. Taxpayer also presented a report that shows that Taxpayer's parent reported tax to Mississippi and withheld state tax on wages of an employee. Taxpayer also presented lists of its employees' hotel stays and car rentals in each of the three states. These lists consist of the names of the employees, the hotels or car rental agencies where the stays or rentals took place, and the dates of the stays or rentals (typically one or two days). Taxpayer did not present documentation that shows what these employees were doing in the states. What the employees were doing is important; if they were only soliciting sales (and attendant activities) and the tax that the Taxpayer says it is subject to in those states is one based on income, then those activities fall under P.L. 86-272 and do not subject Taxpayer to nexus. Taxpayer would not be "subject to tax in another state." If Taxpayer does not have nexus with a state for income tax purposes, then the receipts related to its sales in those states from Indiana get "thrown back" to Indiana. On the other hand, if Taxpayer's activities in those states go beyond the protection of P.L. 86-272, then Taxpayer would indeed have nexus with those states for income tax purposes or for purposes of a franchise tax based on net income, and the receipts relating to its sales in those states from Indiana would be reported as income to Taxpayer from that state and not "thrown back" on Taxpayer's Indiana income tax returns.
What follows is a review of the documentation Taxpayer presented for each of the states in support of its protest on rehearing:
Tennessee
Taxpayer presented "Franchise/Excise Tax" returns ("FAE 170") for Tennessee for purposes of the VDA with Tennessee for periods that cover Indiana's audit periods. The FAE 170 return form is for both Tennessee franchise and excise taxes. There was no property or payroll reported in Tennessee for these periods. The returns report income from sales in Tennessee because Tennessee was the destination of these sales. In all but one of the years at issue, Taxpayer reported, and according to the signed VDAs, paid both franchise and excise tax to Tennessee.
The Tennessee excise tax is imposed on the privilege of doing business in Tennessee and is based on net earnings or income (general partnerships and sole proprietorships are not subject to the tax). Tenn. Code Ann. § 67-4-2007.
The Tennessee franchise tax is levied upon the privilege of doing business in Tennessee and is based on the greater of net worth or the book value of real or tangible personal property owned or used in Tennessee. Tenn. Code Ann. § 67-4-2104.
As discussed previously, under IC § 6-3-2-2(n)(1) "a taxpayer is taxable in another state if . . . in that state the taxpayer is subject to . . . a franchise tax for the privilege of doing business." Thus, to claim that it is taxable in another state because it is "subject to a franchise tax for the privilege of doing business" in that state, a taxpayer must demonstrate the statutory requirements are satisfied: (1) the taxpayer is actually doing business in that state; (2) the taxpayer is subject to a franchise tax in that state, which is imposed for the privilege of doing business in that state; namely, the tax is imposed in connection with the taxpayer's business enterprise or activities in that state. IC § 6-3-2-2(n).
"For apportionment purposes, a taxpayer is doing business in a state if it operates a business enterprise or activity in such state." 45 IAC 3.1-1-38 . Specifically, 45 IAC 3.1-1-38 provides seven (7) categories illustrating what is considered as "doing business in a state." However, when a tax is not classified as "net income tax" or is not based upon or measured by "net income," then P.L. 86-272 does not apply.
Taxpayer's documentation demonstrated that Taxpayer conducted business activity in Tennessee and the FAE 170s show that franchise taxes were filed and that the taxes imposed connected to Taxpayer's business activities in Tennessee. Accordingly, Taxpayer's protest to the imposition of tax resulting from Taxpayer sales to Tennessee for the periods beginning October 1, 2008 through the period ending September 30, 2011, being thrown back to Indiana is sustained. These are the periods for which Taxpayer presented FAE 170s.
This Supplemental Letter of Findings does not reach the Indiana throwback of Taxpayer's Tennessee sales as it relates to Tennessee excise tax nexus. This Supplemental does not need to reach that issue given Taxpayer's nexus with Tennessee for franchise tax purposes.
Accordingly, Taxpayer's protest of the Department's imposition of tax resulting from the throwback to Indiana of sales to Tennessee is sustained.
Mississippi
Taxpayer presented "Corporate Income and Franchise Tax" returns for Mississippi for purposes of the VDA with Mississippi for periods that cover Indiana's audit periods. The tax form is for both the Mississippi income and franchise taxes. There was no property or payroll reported in Mississippi for these periods. The returns report income from sales in Mississippi; i.e., Mississippi was the destination of these sales. In all the years at issue, Taxpayer reported, and according to the signed VDAs, paid both income and franchise tax to Mississppi [sic].
Mississippi income tax is imposed as follows: Miss. Code Ann. § 27-7-5 imposes a state income tax based on net income as defined under Miss. Code Ann. § 27-7-15.
Mississippi also imposes a franchise tax for the privilege of doing business in that state. Miss. Code Ann. § 27-13-7(1), which states:
(1) Franchise tax levy. Except as otherwise provided in subsections (3), (4), (5) and (7) of this section, there is hereby imposed, levied and assessed upon every corporation, association or joint-stock company, or partnership treated as a corporation under the Income Tax Laws or regulations as hereinbefore defined, organized and existing under and by virtue of the laws of some other state, territory or country, or organized and existing without any specific statutory authority, now or hereafter doing business or exercising any power, privilege or right within this state, as hereinbefore defined, a franchise or excise tax equal to Two Dollars and Fifty Cents ($ 2.50) of each One Thousand Dollars ($ 1,000.00), or fraction thereof, of the value of capital used, invested or employed within this state, except as hereinafter provided. In no case shall the franchise tax due for the accounting period be less than Twenty-five Dollars ($ 25.00). It is the purpose of this section to require the payment of a tax by all organizations not organized under the laws of this state, measured by the amount of capital or its equivalent, for which such organization receives the benefit and protection of the government and laws of the state.
Therefore, the Mississippi franchise tax is computed based on the value of the capital employed or the assessed property values in Mississippi, whichever is greater.
Taxpayer also presented a report that shows that Taxpayer's parent reported to Mississippi and withheld state tax on wages of an employee. This document, however, does not on its face relate to Taxpayer, but to Taxpayer's parent. No additional information regarding the nature of this employee's employment affiliation and activities in Mississippi was presented.
As discussed previously, under IC § 6-3-2-2(n)(1) "a taxpayer is taxable in another state if . . . in that state the taxpayer is subject to . . . a franchise tax for the privilege of doing business." Thus, to claim that it is taxable in another state because it is "subject to a franchise tax for the privilege of doing business" in that state, a taxpayer must demonstrate the statutory requirements are satisfied: (1) the taxpayer is actually doing business in that state; (2) the taxpayer is subject to a franchise tax in that state, which is imposed on the taxpayer for the privilege of doing business in that state; namely, the tax is imposed in connection with the taxpayer's business enterprise or activities in that state. IC § 6-3-2-2(n).
"For apportionment purposes, a taxpayer is doing business in a state if it operates a business enterprise or activity in such state." 45 IAC 3.1-1-38 . Specifically, 45 IAC 3.1-1-38 provides seven (7) categories illustrating what is considered as "doing business in a state." However, when a tax is not classified as "net income tax" or is not based upon or measured by "net income," then P.L. 86-272 does not apply.
Taxpayer's documentation demonstrated that Taxpayer conducted business in Mississippi and the returns show that franchise taxes "for the privilege of doing business" in Mississippi were filed and that the taxes imposed were in connection to Taxpayer's business activities in Mississippi. Accordingly, Taxpayer's protest to the imposition of tax resulting from Taxpayer sales to Mississippi for the periods beginning October 1, 2008, through the period ending September 30, 2011, being thrown back to Indiana is sustained. These are the periods for which Taxpayer presented Mississippi income tax and franchise returns.
This Supplemental Letter of Findings does not reach the Indiana throwback of Taxpayer's Mississippi sales as it relates to Mississippi income tax nexus. This Supplemental does not need to reach that issue given Taxpayer's nexus with Mississippi for franchise tax purposes.
Accordingly, Taxpayer's protest of the Department's imposition of tax resulting from the throwback to Indiana of sales to Mississippi is sustained.
Missouri
Taxpayer presented "Corporate Income and Franchise Tax" (Forms MO-1120) returns for Missouri for purposes of the VDA with Missouri for periods that cover Indiana's audit periods. The return form is for both the Missouri income and franchise taxes. There was no property or payroll reported in Missouri for these periods. The returns report income from sales in Missouri because Missouri was the destination of these sales originating outside Missouri. In all of the years at issue, Taxpayer reported and paid income tax to Missouri, but no franchise tax.
Section Mo. Rev. Stat. § 143.071.2 imposes an income tax on Missouri taxable income, which is Missouri adjusted gross income with certain modifications; Mo. Rev. Stat. § 143.111. Mo. Rev. Stat. § 143.121 defines Missouri adjusted gross income tax and starts with income reported on the federal return with certain Missouri specific adjustments.
The Missouri franchise tax is imposed on a percentage of the par value of a taxpayer's outstanding shares with certain conditions for the "privilege of doing business" in Missouri. Mo. Rev. Stat. §147.010. However, if a corporation has assets or apportioned assets of $10,000,000 or less, it is not subject to Missouri franchise tax and must so indicate on the MO-1120. Taxpayer so indicated on each of the Missouri returns it submitted for the periods at issue; i.e., Taxpayer checked the box on each of the returns to state that its assets apportioned to Missouri did not exceed $10,000,000. Taxpayer was therefore not subject to the franchise tax in Missouri for those periods.
As discussed previously, under IC § 6-3-2-2(n)(1) "a taxpayer is taxable in another state if . . . in that state the taxpayer is subject to . . . a franchise tax for the privilege of doing business." Thus, to claim that it is taxable in another state because it is "subject to a franchise tax for the privilege of doing business" in that state, a taxpayer must demonstrate the statutory requirements are satisfied: (1) the taxpayer is actually doing business in that state; (2) the taxpayer is subject to a franchise tax in that state, which is imposed on the taxpayer for the privilege of doing business in that state; namely, the tax is imposed in connection with the taxpayer's business enterprise or activities in that state. IC § 6-3-2-2(n).
"For apportionment purposes, a taxpayer is doing business in a state if it operates a business enterprise or activity in such state." 45 IAC 3.1-1-38 . Specifically, 45 IAC 3.1-1-38 provides seven (7) categories illustrating what is considered as "doing business in a state." However, when a tax is not classified as "net income tax" or is not based upon or measured by "net income," then P.L. 86-272 does not apply.
Because the only tax that Taxpayer reported to Missouri for the periods at issue was income tax, a closer look at Taxpayer's activities in Missouri is warranted in order to determine if Taxpayer's activities in Missouri exceeded the protection of P.L. 86-272. Again, there was no property or payroll reported in Missouri for these periods. The returns show income from sales in Missouri – Missouri was the destination of these sales originating outside Missouri – based upon which Taxpayer's Missouri apportionment percentage was determined. None of the other documentation Taxpayer presented (the hotel stays and car rental reports) identify the purpose of its employees' temporary stays in Missouri. There is no documentation that asserts that these business trips were for anything other than the solicitation of sales and attendant activities falling under the protections of P.L. 86-272. Indeed, Taxpayer did not, during the audit or protest, substantiate any of the activities in which it claimed it had engaged.
Accordingly, Taxpayer has not met its burden to show that its protest of the Department's imposition of tax resulting from the throwback to Indiana of sales to Missouri is justified. Therefore, Taxpayer's protest of the Department's imposition of tax resulting from the throwback to Indiana of sales to Missouri is denied.
