Taxpayer is a major media corporation engaged in television and motion picture production and distribution, and television broadcasting, among other businesses. Taxpayer filed consolidated adjusted gross income tax returns in Indiana for the tax years. The Indiana Department of Revenue ("Department") conducted an audit of Taxpayer for the years 2006 through 2008. As a result of the audit, the Department made several proposed adjustments which resulted in the assessment of additional income tax as well as interest for 2006 and 2007. For 2008, the Department's audit resulted in an increased net operating loss.
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Taxpayer protested the Department's proposed assessment of additional income tax based on the use of the "audience factor" apportionment methodology in lieu of the "cost of performance" apportionment methodology Taxpayer used, arguing that the "audience factor" method has not been adopted in Indiana either by statute or regulation. Taxpayer argues that IC § 6-3-2-2(f) requires companies with revenue from sales, other than sales of certain intangible property or tangible personal property, to apportion such revenue using a "cost of performance" method. Taxpayer then cites to 45 IAC 3.1-1-62 to argue that the Department did not have the authority to apply its equitable remedial powers under IC § 6-3-2-2(l). Taxpayer states in its protest letter:
The regulation further provides that '[i]t is anticipated that these situations will arise only in limited and unusual circumstances (which ordinarily will be unique and nonrecurring) when the standard apportionment provisions produce incongruous results.
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Taxpayer argued that its services originate primarily in two states outside Indiana, and that, therefore, the income-producing activities related to affiliate and advertising revenue are attributable to those states. However, as the Department's audit points out, both of these states' laws source this revenue to where the programming is delivered and apportion accordingly among the states; i.e., neither state taxes the portion of income that is derived from television viewers in other states. The Department's auditor requested from Taxpayer documentation that would include the 50-state apportionments necessary to explain the nature and types of revenue earned. According to Taxpayer, Taxpayer provided the requested documents. The Department's audit concluded that the "audience factor"–based on "using the Nielsen's audience factor ratio"–more fairly reflects Indiana income since revenues earned by Taxpayer are based on the number of subscribers and is consistent with the use of "audience factor" in other states such as the states where Taxpayer claims these receipts ought to be attributed under Indiana law.
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By using the audience factor, the Department followed the rules outlined in IC § 6-3-2-2(l) and 45 IAC 3.1-1-39 and -62, which govern the interpretation of Indiana's sales factor when uncontemplated apportionment issues are presented.
Taxpayer reads the language of limitation expressed in the regulation too narrowly. Clearly, the regulation strikes a cautionary note against the Department implementing its remedial powers broadly. However, the statute's language of limitation suggests a tolerance for "limited and unusual" circumstances which are only ordinarily unique and non-recurring; i.e., the circumstances may also be non-unique and recurring. The "audience factor" method of apportionment is being applied to a limited situation in the matter before the Department. The Department has the authority to apply IC § 6-3-2-2(l) to effectuate a result that more fairly represents taxpayer's income derived from sources within the state.
The plain language of the law states that "[i]f the allocation and apportionment provisions of this article do not fairly represent the taxpayer's income derived from sources within the state of Indiana... the department may require, in respect to all or any part of the taxpayer's business activity... the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer's income." IC § 6-3-2-2(l). (Emphasis added). The "audience factor" is an appropriate method to effectuate an outcome that more equitably reflects the taxpayer's income from Indiana sources.
Taxpayer also argues that the Department's application of the audience factor violates the state's Administrative Procedure Act ("APA"). IC § 4-22-2-3(b) defines a "rule" as "the whole or any part of an agency statement of general applicability that: (1) has or is designed to have the effect of law; and (2) implements, interprets, or prescribes: (A) law or policy; or (B) the organization, procedure, or practice requirements of an agency." Taxpayer argues that the method applied by the Department on audit constituted a rule under this definition. In further support of this argument, Taxpayer cites to state supreme court cases from Maryland and New Jersey where the courts upheld an argument similar to Taxpayer's (see CBS Inc. v. Comptroller, 575 A.2d 324 (Md. 1990) and Metromedia, Inc. v. Director, Division of Taxation, 478 A.2d 742 (N.J. 1984)). Taxpayer further points out that the reference in the Department's audit to "agency action" under IC § 4-21.5-1 et seq. is not applicable since the Department is not subject to this article. On this latter point, Taxpayer is absolutely correct, the Department is not subject to IC § 4-21.5. IC § 4-21.5-2-4(a)(9). However, Taxpayer's argument that the Department's application of the "audience factor" method violates the APA is not correct, since the Department is applying IC § 6-3-2-2(l) and has been consistent in its application to Taxpayer and other similarly situated taxpayers. Lastly, other states' interpretations of their laws, while instructive, hold no precedential value in Indiana; and Indiana courts have not considered whether the use of the "audience factor" apportionment methodology constitutes a rulemaking action.
Pursuant to IC § 6-8.1-5-1(c), Taxpayer has not met its burden to show why the "audience factor" method of apportionment does not fairly reflect Taxpayer's corporate income from Indiana sources and why the "cost of performance" method would more fairly reflect Taxpayer's income.
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The Department found that Taxpayer did not include one subsidiary cable network in its Indiana consolidated tax returns during the 2006, 2007, and 2008 tax years and, for the 2007 and 2008 tax years, did not include a network affiliate. The Department determined, under the authority of IC § 6-3-2-2(a), that Taxpayer had not properly reported income from licensing films and television shows to broadcast and cable networks which were then viewed on those networks by Indiana residents in their homes.
The Department's audit describes the first entity ("E1") as a cable programming provider that provides 24-hour per day network programming services to Indiana residents principally through third-party cable operators. The programming services include the production, creation, editing, and packaging of the cable television programs. E1 is described as a company that operates "three premium subscription television programming services" offering a variety of programming and also the "development, production, acquisition and, in many cases, distribution" of original productions. E1 was originally included in Taxpayer's Indiana consolidated group; however, according to its protest, Taxpayer did not have Indiana employees or property for the years at issue.
E2 is a corporation that "engaged in the production and broadcasting of television programs" and, similar to E1, also the "development, production, acquisition and, in many cases, distribution" of original productions. E2 also owned and operated television stations, but none of the television stations were in Indiana.
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Taxpayer claims that, because these subsidiaries had neither a physical location nor personnel in Indiana, the income earned by these subsidiaries should not have been included in the affiliated group's income.
At the hearing Taxpayer argued that the "cost of performance" of E1 and E2's relevant activities all occurred outside Indiana. The effect of Taxpayer's argument is that E1 and E2 had no Indiana receipts pursuant to IC § 6-3-2-2(f) and 45 IAC 3.1-1-55 . Coupled with the lack of Indiana property and payroll, Taxpayer's argument is that E1 and E2 did not have Indiana-source income for the specific years protested. Because E1 and E2 did not have Indiana-source income, they could not have been part of Taxpayer's consolidated return for the specific years protested.
In this case, as provided in Issue I above, E1 and E2 had Indiana receipts for the years in question in this protest. Thus, Taxpayer's protest is denied. However, even if Taxpayer's argument regarding the "cost of performance" as the legally required attribution method is accepted, Taxpayer has not provided the Department's hearing officer with sufficient factual grounds to conclude that the Department's audit was incorrect.
