Taxpayer is an Indiana company doing business in Indiana and outside of Indiana. Taxpayer designs, manufactures, and sells precision food cutting equipment. Claiming that it was entitled to refund, Taxpayer amended its Indiana consolidated corporate income tax returns, which excluded its income derived from its sales to certain foreign countries for tax periods ending 2/28/2007 and 2/29/2008. Subsequently, the Indiana Department of Revenue ("Department") conducted an income tax audit and reviewed Taxpayer's business records for tax periods ending 2/28/2007 through and including 2/28/2010 (collectively, the Audit Years at issue).
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Pursuant to the audit, the Department found that Taxpayer had income derived from sales of items shipped to various foreign countries during the Audit Years at issue, but Taxpayer did not pay taxes on the income earned from those sales to those countries. The Department's audit thus concluded that Taxpayer's activities did not exceed the protection of P.L.86-272 (codified as 15 U.S.C. § 381) and was not subject to tax in those countries. As a result, the Department's audit determined that the Indiana throwback rule applied to Taxpayer and denied Taxpayer's refund claim and also imposed additional assessments for the Audit Years at issue.
Taxpayer, to the contrary, asserted that it had nexus with those foreign countries because its business activities in those countries went beyond the P.L. 86-272's protection. Thus, Taxpayer maintained that the Indiana throwback rule was not applicable.
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In this instance, Taxpayer, an Indiana company, has foreign subsidiaries or affiliates in North America, South America, Europe, and Asia. However, Taxpayer's foreign subsidiaries/affiliates were not included in Taxpayer's Indiana consolidated return filings. Taxpayer stated that it "shipped approximately 40 percent of its U.S. production to foreign countries" where its customers are located. Taxpayer also stated that, "to maintain these foreign markets, it dedicated significant resources in the form of senior management involvement, technical support, sales representation, and integrated training programs." Taxpayer thus asserted that its activities in those foreign jurisdictions exceeded P.L. 86-272's protection and the Indiana throwback rule was not applicable. To support its protest, Taxpayer submitted additional documentation which included copies of e-mail correspondence among Taxpayer's employees, travel arrangements, sales invoices, and employee trip summary reports.
Upon reviewing Taxpayer's documentation, the Department agrees that Taxpayer's documentation demonstrated that its activities in Russia, Spain, and Mexico for the tax period ending 2/28/2010 exceeded the P.L. 86-272's protection. Thus, the Indiana throwback rule should not apply to the income derived from Taxpayer's sales to Russia, Spain, and Mexico for the tax year ending 2/28/2010.
As to the remaining countries and remaining Audit Years at issue, Taxpayer's documentation demonstrated that its employees planned, travelled, and visited several countries. However, Taxpayer's documentation showed that those employees' stays in each foreign country were primarily to attend fairs and sales conferences/meetings to promote its products or to test (or replace/repair) its prototypes (or demo equipment). The employee trip summary reports offered the employees' observations or reflections on their trips to those foreign countries; however, the information contained in those reports cannot be verified in the absence of other supporting documentation. Thus, those activities at best were solicitation of orders for sales and fell within the P.L. 86-272's protection.
Finally, Taxpayer claimed that its invoices demonstrated that it had property in those foreign countries. The Department is not able to agree. First, Taxpayer did not own any real property in those foreign countries. Taxpayer's invoices showed that it shipped its demo equipment and/or replacement parts to its foreign subsidiaries/affiliates either with no charges or only the shipping/insurance charges. Those foreign subsidiaries did not file the Indiana consolidated returns for the Tax Years at issue. While the invoices recorded that replacement parts were shipped by Taxpayer to its subsidiaries, those subsidiaries were not included in Taxpayer's Indiana returns. Thus, the sales invoices alone were insufficient to support that Taxpayer owned property in those countries.
In conclusion, the Department agrees that Taxpayer has provided sufficient documentation establishing that its activities in Russia, Spain, and Mexico exceeded the P.L. 86-272's protection, and that it had nexus with Russia, Spain, and Mexico for tax period ending 2/28/2010. Therefore, the Indiana throwback rule does not apply to Taxpayer's income derived from its sales to Russia, Spain, and Mexico for the tax period ending 2/28/2010. However, Taxpayer's documentation failed to show that its activities in the remaining foreign countries for the remaining Audit Years at issue exceeded the P.L. 86-272's protection. Given the totality of the circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayer has met its burden of proof demonstrating that the Department assessments are wrong.
