Excerpts of Revenue's Determination follow:
Taxpayer is a plastics manufacturer with plants in Indiana. Taxpayer sells its products to destinations throughout North America.
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Taxpayer is a plastics manufacturer with plants in Indiana. Taxpayer sells its products to destinations throughout North America.
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The issue in this protest is whether income from Taxpayer's sales to customers located in various foreign states and jurisdictions should have been "thrown back" to Indiana and included in the Indiana sales factor of the formulary apportionment calculation of Indiana corporate income tax due.
"Throwback" sales are sales of a taxpayer the receipts of which are attributed to Indiana because the sales originating in Indiana went to purchasers in other states and the taxpayer is not subject to tax in those other states. The receipts that are not subject to tax in the other states get "thrown back" to Indiana, because the sales related to those receipts originated in Indiana.
Taxpayer filed an amended return for fiscal year ending September 30, 2008, to adjust throwback sales that were first reported to Indiana on the original return. The amended return included an explanation that Taxpayer performed activities in other states that exceeded the protection of P.L. 86-272. Taxpayer claimed it had nexus in those states with the result that the sales Taxpayer had originally thrown back to Indiana should now be reversed thus reducing "Indiana receipts factor."
During the course of reviewing Taxpayer's returns, the Department made several adjustments to Taxpayer's property and sales factors. Taxpayer protested one of the adjustments to its sales factor. Specifically, the Department attributed to Indiana certain of Taxpayer's sales made to locations in other states. The Department concluded that there was no basis for the exclusion of the throwback sales from the "Indiana receipts factor" since Taxpayer provided minimal documentation relating to Taxpayer's activities in the various other states with which Taxpayer now claimed it had nexus. The Department, therefore, treated these sales as "throwback" sales attributed to Indiana. IC § 6-3-2-2(e), (n). The decision resulted in an increase in Taxpayer's corporate adjusted gross income tax. Taxpayer maintains that the throw-back rule is not warranted for sales to Mississippi, Missouri, and Tennessee.
Indiana imposes a tax on each corporation's adjusted gross income attributable to "sources within Indiana." IC § 6-3-2-1(b). Where a corporation receives income from both Indiana and out-of-state sources, the amount of tax is determined by a three-factor apportionment formula established by IC § 6-3-2-2(b). For the years at issue, that formula operated by multiplying Taxpayer's total business income by a fraction composed of a property factor, a payroll factor, and a sales factor.
The "sales factor" consists of a fraction, "the numerator of which is the total sales of the taxpayer in [Indiana] during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year." IC § 6-3-2-2(e).
The Department determined that, for purposes of calculating Taxpayer's Indiana tax liability, the receipts from sales to out-of-state customers should be thrown back to Indiana because the sales were made within jurisdictions where Taxpayer did not have nexus with the state. The audit based its decision on 45 IAC 3.1-1-50 and instructions included on the state return that attribute those sales to Indiana if the taxpayer is not taxable in the state of the purchaser and the sale is attributed to Indiana if the property is shipped from Indiana. Such sales are designated as "throw-back" sales. Id.
The basic rule is found at IC § 6-3-2-2. IC § 6-3-2-2(e) provides that "[s]ales of tangible personal property are in this state if... (2) the property is shipped from an office, a store, a warehouse, a factory, or other place of storage in this state and... (B) the taxpayer is not taxable in the state of the purchaser." IC § 6-3-2-2(n) provides that "[f]or purposes of allocation and apportionment of income under this article, a taxpayer is taxable in another state if: (1) in that state the taxpayer is subject to a net income tax, a franchise tax measured by net income, a franchise tax for the privilege of doing business, or a corporate stock tax; or (2) that state has jurisdiction to subject the taxpayer to a net income tax regardless of whether, in fact, the state does or does not." Therefore, in order to properly attribute income to a foreign state, taxpayer must show that one of the taxes listed in IC § 6-3-2-2(n)(1) has been levied against him or that the state has the jurisdiction to impose a net income tax regardless of "whether, in fact, the state does or does not." Id.
Again, it is the taxpayer's responsibility to establish that the existing tax assessment is incorrect. As stated in IC § 6-8.1-5-1(c), "The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made."
Taxpayer asserts that it has nexus in Mississippi, Missouri, and Tennessee, and, therefore, the throw-back rule is not applicable to the sales that were made to purchasers in those states. Taxpayer maintains that the following activities exceeded the protections of P.L. 86-272:
(1) Designing and facilitating product development
(2) Quality control assessments at the customer location
(3) Resolving quality control issues at the customer locations.
Taxpayer argued in its October 9, 2012 protest letter that the above activities "performed in Mississippi, Missouri, and Tennessee suggests sufficient historic and future contacts requiring corporate income tax or franchise tax reporting obligations."
The Department's audit summary report states that Taxpayer made the same argument during the Department's investigation:
[Taxpayer] filed an amended return in FYE 9/30/08 to adjust the throwback sales that were reported on the original return. This return included an explanation that [Taxpayer] performed one or all of the following activities, which exceeded the protection of P.L. 86-272, in states it was improperly throwing back sales to Indiana:
1) Employee sales representatives addressed and resolved bottle and/or cap quality control issues at customers locations.
2) Indiana plant employees addressed and resolved bottle and/or cap quality control issues at customer locations
3) Consigning goods inventories were located at vendor or customer locations.
During the audit, the Department requested that Taxpayer document its position. The Department's audit summary report documents this request and Taxpayer's response:
The taxpayer was asked to provide documentation for all audit years to support the states where sales were not thrown back. The taxpayer provided minimal documentation (three expense reports) to support that employees were performing activities not protected by P.L. 86-272 in numerous states. These states included Arkansas, Canada On and SK, Iowa, Kentucky, Minnesota, Montana, Missouri and Tennessee. No explanation was included with this documentation explaining the job responsibilities of the employee or what activities were performed in the state. Since the information provided does not prove the taxpayer went beyond mere solicitation in these states, sales from these states will be thrown back [to Indiana]. The taxpayer also provided a workpaper showing consigned inventory.
This information conflicted with previous information provided that agreed with the Federal return balance sheet inventory numbers. The taxpayer did not provide any support for the changes in information. Due to these facts, sales to these states (Florida (FY 10 only), Kansas (FY 10 only), Maryland (FY 10 only) and Mississippi (all tax years) will be thrown back.
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 was Taxpayer willing to 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 states 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 was therefore unwilling to make any additional effort to document its activities.
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 continues, "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 contends 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 unsigned returns Taxpayer presented were for:
(1) Tennessee Franchise/Excise Tax returns for the periods: 10/1/10 to 9/30/11 ($1,046); 6/17/2010 to 9/30/2010 ($409); 10/1/2009 to 10/15/2010 ($2,513); 10/1/2008 to 9/30/2009 ($13,509); 10/1/2007 to 9/30/2008 ($12,492). There was no property or payroll reported in Tennessee for these periods. The total excise tax paid in Tennessee for these periods is just under $30,000.
(2) Mississippi Corporate Income and Franchise Tax returns for the periods: 10/1/2008 to 9/30/2009 ($16,069); 10/1/2009 to 6/16/2010 ($2,013); 6/17/2010 to 9/30/2010 ($1,283); 10/1/2010 to 9/30/2011 ($2,534). Again, no property or payroll reported in Mississippi for these periods. The total corporate income tax and franchise tax paid to Mississippi for these periods is just under $22,000.
(3) Missouri Corporate Income and Franchise Tax returns for the periods: 10/1/2010 to 9/30/2011 ($0); 6/17/2010 to 9/30/2010 ($3,638); 10/1/2009 to 6/16/2010 ($9,517); 10/1/2008 to 9/30/2009 ($15,794); 10/1/2007 to 9/30/2008 ($8,507). Also, no property or payroll for these periods. The total corporate income tax and franchise tax paid to Missouri for these periods is just under $38,000.
The corporate/franchise/excise taxes Taxpayer claims to have paid to these three states represent 38 percent of the Indiana corporate income tax assessed to Taxpayer for those same periods.
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 cannot agree with Taxpayer's contention that sales previously thrown back to Indiana by Taxpayer are now no longer attributable to Indiana. In order for Taxpayer to meet its burden in protesting this assessment of Indiana tax, more is required than its say-so.
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