Taxpayer is a manufacturer that does business in Indiana and outside of Indiana. Taxpayer contracts with various third-party suppliers ("Suppliers") to design and manufacture component parts for Taxpayer. Before the Suppliers begin their manufacturing processes, Taxpayer inspects, accepts, and subsequently pays the Suppliers for the cost of tooling equipment Suppliers use to manufacture Taxpayer's component parts. The Suppliers then deliver the manufactured component parts to Taxpayer's designated facilities where those parts are assembled to make Taxpayer's finished products for sale. Taxpayer files its Indiana corporate income tax returns which includes the tooling equipment in the property factor (numerator and denominator) of the Indiana apportionment formula to calculate its Indiana income tax.
In 2012, pursuant to a federal audit, Taxpayer amended its 2003 (period ending March 31, 2004) and 2004 (period ending March 31, 2005) Indiana corporate income tax returns to report RAR adjustments. In its amended returns, Taxpayer also included a reduction of the property factor for apportionment purposes. Taxpayer explained that (1) it mistakenly included the tooling equipment in the property factor when the original returns were filed; (2) the amended returns removed the tooling equipment from both the numerator and the denominator of the property factor; and (3) the adjustments resulted in overpayments for both tax years, but the refunds were "barred by Statute of Limitations."
Upon receiving Taxpayer's filings, the Department processed the amended returns to reflect the federal RAR adjustments. However, the Department denied the reduction of the "property factor" stated in Taxpayer's amended returns, which resulted in additional proposed assessments for both years.
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When Taxpayer amended its 2003 and 2004 Indiana income tax returns, Taxpayer claimed that when it filed the original returns, it mistakenly included the tooling equipment in the property factor for apportionment purposes, which resulted in an overpayment of income tax paid to Indiana. The Department disagreed and determined that "the tooling equipment in question is business property" because it is used to produce business income. Thus, the Department concluded that the tooling equipment "should remain in both the numerator and denominator of the property factor."
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"Indiana imposes a tax on every corporation's adjusted gross income derived from sources within Indiana. [IC § 6-3-2-1(b).] In cases where a corporation derives business income from sources both within and without Indiana, the 'adjusted gross income derived from sources within the state of Indiana' is determined by an apportionment formula." Sherwin-Williams Co. v. Indiana Dep't. of State Revenue, 673 N.E.2d 849, 851 (Ind. Tax Ct. 1996). That formula operates by multiplying taxpayer's total business income by a fraction composed of a property factor, a payroll factor, and a sales factor.
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In this instance, Taxpayer claimed that it "receives no income from the tooling property" because "[t]he tooling property is merely provided by Taxpayer to be used by [its Suppliers] to insure the parts are manufactured to [its] specifications." Taxpayer further asserted that it did not use the tooling equipment to generate income;rather, its Suppliers used the tooling equipment to manufacture the parts for Taxpayer and received income from Taxpayer. Thus, Taxpayer maintained that the tooling property should not be included in the property factor for apportionment purposes. To support it protests, Taxpayer provided additional documentation, including sample copies of contracts with its Suppliers, purchase orders, invoices, and tooling acceptance documents.
The documentation presented by Taxpayer demonstrated that upon inspection and approval of the tooling equipment, Taxpayer paid the Suppliers for the costs of the tooling equipment and the Suppliers used the tooling to manufacture the component parts to be sold to Taxpayer. Since Taxpayer did not use the tooling equipment, the tooling equipment was not required to be included in the numerator and the denominator of the property factor for apportionment purposes pursuant to IC § 6-3-2-2(c) and the ruling of Enterprise Leasing Co. Therefore, Taxpayer is correct to amend its 2003 and 2004 returns to exclude the tooling equipment from the numerator and the denominator of the property factor.
However, Taxpayer's documentation also demonstrated that its amended returns resulted in overpayments for both tax years. Pursuant to IC § 6-8.1-9-1(a), its overpayments were subject to the three-year statute of limitations.
IC § 6-8.1-9-1(a), in relevant part, provides:
If a person has paid more tax than the person determines is legally due for a particular taxable period, the person may file a claim for a refund with the department. Except as provided in subsections (f) and (g), in order to obtain the refund, the person must file the claim with the department within three (3) years after the latter of the following:
(1) The due date of the return.
(2) The date of payment.
In this instance, Taxpayer's original returns were filed in 2005 and 2006. However, not until 2012 did Taxpayer file the amended 2003 and 2004 returns pursuant to the RAR adjustments of the federal audit. Taxpayer's documentation failed to show that the federal audit adjustments addressed the very same issue of this protest. Thus, Taxpayer's refund claims for 2003 and 2004, if any, were barred by the three-year statute of limitations. Nonetheless, Taxpayer's 2003 overpayment should be applied to offset the proposed assessment, if any, for the same tax year. Similarly, Taxpayer's 2004 overpayment should be applied to offset the proposed assessment, if any, for the same tax year.
