Taxpayer, a corporation, is in the business of manufacturing, distributing, and selling various paints and coatings. The Department of Revenue ("Department") conducted an audit review of Taxpayer's business records and tax returns. The audit resulted in the assessment of additional income tax and interest for the 2008, 2009, and 2010 tax years. As a result of the additional income tax due from the audit assessments, Taxpayer was also assessed underpayment of estimated tax penalties for the 2008 and 2010 tax years.
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The Department assessed Taxpayer additional adjusted gross income tax on the ground that Taxpayer failed to add back the Texas Franchise Tax and the "modified gross receipts tax" portion of the Michigan Business Tax. The Department's audit report states that these taxes are state taxes that are based upon income and that Indiana law requires that all taxes based on or measured by income, which are levied by any subdivision of any state, must be added back to Federal taxable income.
Taxpayer maintains that the Texas Franchise Tax and the "modified gross receipts tax" portion of the Michigan Business Tax are not taxes based upon income.
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The "Modified Gross Receipts Tax" portion of the Michigan Business Tax computation, by statute, starts with and is based on totaling the entity's gross receipts. After certain expenses and deductions are subtracted making adjustments to that amount and an apportioned method is applied, a tax of .8 is calculated and imposed. Therefore, it is apparent from the face of the law that the "Modified Gross Receipts Tax" is a tax that is "based on or measured by income . . ." and is required to be added back pursuant toIC 6-3-1-3.5 . As explained in First Chicago NBD and Aztar, a tax calculated by totaling a taxpayer's income, cash, or property received and subtracting outlays, expenses, or other adjustments in order to arrive at the income or profit made is a tax that is based on income or measured by income.
Accordingly, Taxpayer's protest to the imposition of adjusted gross income tax based upon the Department "adding back" the "modified gross receipts tax" portion of the Michigan Business Tax is respectfully denied.
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The Department determined that Taxpayer had failed to include a number of its Indiana sales in its sales factor numerator in each year and made adjustments to account for these additional Indiana sales.
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Taxpayer asserts that the Department overstated the adjustments made to its sales factor numerator for the additional Indiana sales. Taxpayer maintains that the Department mistakenly included Taxpayer's sales to "Customer W" in the adjustments to the sales factor numerators in each year. Taxpayer states that its sales to "Customer W" were not Indiana sales, but were "Illinois sales" that should not be included in the Indiana sales factor numerator.
During the hearing, Taxpayer presented documentation, including invoices and bills of lading, to establish that its sales to "Customer W" occurred in Illinois and were Illinois sales. These records demonstrate that "Customer W" purchased the goods in Illinois and took physical and legal possession of the goods in Illinois. Therefore, Taxpayer has met its burden of proof, pursuant to IC 6-8.1-5-1 (c), establishing that – for the audit years 2008, 2009, 2010 – these specific sales to "Customer W" were Illinois sales and should not be included in the sales factor numerator.
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The Department issued proposed assessments for the underpayment of estimated penalties for the 2008 and 2010 tax years under IC 6-3-4-4.1 (d). Taxpayer protested the imposition of the underpayment penalties that were assessed as a result of the additional income tax from the audit adjustments.
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Taxpayer has met its burden of demonstrating that the imposition of the underpayment penalties is not appropriate.
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