Taxpayer is a corporation headquartered in Indiana. Taxpayer manufactures computer numerical control ("CNC") routers. The Indiana Department of Revenue conducted an audit of the tax years 2010 and 2011. Pursuant to the audit, the Department found that Taxpayer had income derived from sales of items shipped to various foreign countries and Alaska during the audit years at issue. Taxpayer lacked sufficient nexus in those jurisdictions in order to subject Taxpayer to taxes on the income earned from those sales to those jurisdictions. As a result, the Department's audit determined that the Indiana "throwback" rule applied to Taxpayer. This adjustment to the sales factor increased the reported net operating loss ("NOL") for 2010, but increased the income reported for 2011. The net effect was additional income tax due for 2011, but no actual additional tax was due because Taxpayer had available Indiana Research Expense Credit amounts from prior years.
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Taxpayer protests the Department's decision to subject Taxpayer's income from sales to customers in Alaska and foreign countries to the "throwback" rule. The Department's audit 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 the foreign countries and Alaska. As a result, the Department's audit determined that the Indiana throwback rule applied to Taxpayer, denied Taxpayer's refund claim, and also imposed additional assessments for the Audit Years at issue.
Taxpayer asserted that it had nexus with Alaska and those foreign countries because its business activities in those jurisdictions went beyond the P.L. 86-272's protection. Thus, Taxpayer maintained that the Indiana throwback rule was not applicable.
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As explained in the audit report, Taxpayer did not provide sufficient documentation to establish that its activities in the foreign countries and Alaska rose above a de minimis level. In fact, the audit concluded that Taxpayer performed no activities in the foreign countries that would establish a taxable nexus and subject them to tax in those countries. As a result of the protest process, Taxpayer submitted additional documentation to support its protest, which included copies of Taxpayer's "Sales Representative Agreement," its foreign warranty certificate, its terms and conditions of sales, and a few examples of price quotes made to its clients. Taxpayer maintains that it has independent sales representatives (in other words, dealers of the CNCs) in foreign countries and Alaska who, according to Taxpayer, "not only solicit product sales but . . . provide training to customers of the machines functions, supervise installation and initial set-up, [and ]handle warranty and service repairs." Taxpayer points to the "Duties of Representative" section of the "Sales Representative Agreement" that was submitted with Taxpayer's protest. It provides that:
For the duration of this agreement, [the independent sales] Representative shall:. . .e) attend to the installation and startup of Products at customers' facilities in the Territory, f) service warranty claims related to the Products installed in the Territory, g) facilitate generally the sale, installation, startup and servicing of Products in the Territory, h) maintain such facilities, staff and organization as may be required to facilitate the sale, and attend to the installation, startup and servicing of Products in the Territory . . . .
Taxpayer's argument is that the sales representatives are performing services on behalf of Taxpayer in the foreign countries and Alaska, and therefore these activities establish a taxable nexus and would subject Taxpayer to tax in the foreign countries and Alaska. Taxpayer thus asserts that its activities in those foreign jurisdictions exceeded P.L. 86-272's protection and the Indiana throwback rule was not applicable.
Taxpayer's documentation demonstrates that its independent sales representatives either were located in, or visited, several countries and Alaska, and that they were responsible for potentially performing activities that rose above the mere solicitation of sales. It follows that if the activities described in the Sales Representative Agreement were performed, the activities exceeded the P.L. 86-272's protection. However, the Department will need to see further documentation showing that those activities were performed. The Department will allow thirty days for Taxpayer to provide tax returns from the other jurisdictions, sample invoices relating to the performance of those activities that were performed, or any other source documentation that demonstrates that these activities occurred in these jurisdictions. If this information is received, the file will be returned to the audit division where they are requested to review the submitted documentation and make whatever adjustments it deems appropriate.
