Taxpayer is a corporation that is a manufacturer domiciled in Indiana with business operations in Indiana and other states. Taxpayer is a wholly owned subsidiary corporation. Taxpayer's parent corporation does not file a tax return in Indiana. However, Taxpayer's parent corporation has two other subsidiary corporations that also do business in Indiana that have elected to file a consolidated Indiana adjusted gross income tax return with Taxpayer. The Indiana Department of Revenue ("Department") conducted an audit review of Taxpayer's business records and tax returns for the 2007 to 2010 tax years.
After reviewing Taxpayer's federal and state income tax returns and supporting information, the Department made adjustments to the calculation of the Indiana consolidated group's adjusted gross income tax. Specifically, the Department increased Taxpayer's sales factor apportionment numerator to include the throwback to Indiana of sales destined to several foreign states, because the Department found that Taxpayer's activities in those states did not exceed the protection of P.L. 86-272. As a result of the audit adjustments, the Department recalculated the consolidated group's Indiana apportioned business income and net operation loss deductions for the 2008 to 2010 tax years and issued an assessment of additional adjusted gross income tax for the 2007 tax year. Taxpayer protested. An administrative hearing was conducted, and this Letter of Findings results. Additional facts will be provided as necessary.
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The Department determined that, for purposes of calculating Taxpayer's Indiana tax liability, the receipts from certain 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 that 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 property is shipped from Indiana. Such sales are designated as "throw-back" sales. Id.
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Taxpayer asserts that the Department's audit has incorrectly computed its Indiana apportionment sales tax numerator by including throw-back sales from California, Illinois, Michigan, Minnesota, North Carolina, Ohio, Pennsylvania, Utah, Washington, and Wisconsin. Taxpayer maintains that the sales to these states should not be thrown back because at least one of the entities in its consolidated groups has nexus in these states. Moreover, Taxpayer maintains that the sales to certain of the states should not be thrown back because it paid taxes, including "franchise taxes for the privileged of doing business," to those states. Finally, Taxpayer states that, for the 2009 and 2010 tax years, the sales to Wisconsin should not be thrown back because it had a physical presence in Wisconsin as of 2009.
A. Consolidate Group Nexus: "Finnigan" Concept.
The Department determined the amount of Taxpayer's sales factor numerator by including the throw back to Indiana of Taxpayer's sales that were destined to several foreign states, because the Department found that Taxpayer's activities in those states did not exceed the protection of P.L. 86-272. The Department required that Taxpayer throw back those sales made by a member of the affiliated group into states for which that member did not have nexus.
Taxpayer argues that the proper filing method requires Taxpayer and its subsidiary corporations to throwback sales only if none of the entities in the consolidated group have taxable nexus with that state. This is commonly referred to as the "Finnigan" concept.
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Taxpayer supports its argument by stating that since credits for the entities in the consolidated return are taken regardless of which entity in the return earned the credit and how much income that entity earned, the apportionment rules for the consolidated return should also follow this same logic.
However, Taxpayer is mistaken. IC § 6-3-4-14 provides that each entity in the consolidated return shall determine its adjusted gross income pursuant to Section 1502 of the Internal Revenue Code. These regulations state that, in order to determine the taxpayer's "consolidated taxable income" under the regulations, each member of the consolidated group must first calculate its "separate taxable income." Treas. Reg. § 1.1502–11(a). This figure for each member "is computed in accordance with the provisions of the Code covering the determinations of taxable income of separate corporations," subject to sixteen adjustments. Treas. Reg. § 1.1502–12. Thus, each corporation in the group first determines its individual taxable income under chapter 1 (and I.R.C. § 63) and then specially modifies that figure for the purposes of chapter 6. Then, the group's "consolidated taxable income" is determined by aggregating the members' separate taxable incomes, subject to seven additional adjustments. Treas. Reg. § 1.1502–11. Since the regulations prescribed under Section 1502 provide that each member of the consolidated group must first calculate its "separate taxable income" in order to determine the taxpayer's "consolidated taxable income," then for the Indiana consolidated return purposes each taxpayer in the consolidate group is also considered on a separate basis. Therefore, without IC § 6-3-4-14(d) specifically providing the exception–to this separate calculation rule–that the credits will be allowed against the group's consolidated tax liability regardless of the entity's income tax liability that had earned the credit, the statutory return calculation would limit the application of the credits to that specific entity's tax liability.
Accordingly, for taxpayers filing in a consolidated return, the attribution of sales is done prior to the aggregation of those sales into the consolidated factor and only those tax attributes of the member are relevant. In fact, for each of the tax years, the instructions for Schedule E, "Apportionment of Adjusted Gross Income for Corporations," of the Form IT-20, "Indiana Corporate Adjusted Gross Income Tax Return," followed this separate basis rule and provided that "[e]ach filing entity having income from sources both within and outside Indiana must complete a three-factor apportionment."
In the instant case, Taxpayer has not petitioned to file a combined return, and the Department is not attempting to require such a return. Since Taxpayer files its returns on a consolidated basis and not on a combined unitary basis, the "Finnigan" concept and analysis in making such determination in the context of a combined filing are inapplicable to Taxpayer's return calculation. Taxpayer wishes to take a "best of both worlds" approach and receive one of the equitable benefits that the Department grants to those entities filling on a combined unitary basis without reporting its income to Indiana on the combined unitary basis. Therefore, Taxpayer has failed to provide evidence sufficient to contradict the Department's determination that taxpayer is required to throw back those sales made by a member of the affiliated group into states for which that member did not have nexus, even though another member of its group did have nexus in that state.
B. "Taxable in Another State."
Taxpayer maintains that the audit assessment overlooks the nexus and taxation of Taxpayer in states where Taxpayer was "taxable in another state" including states where Taxpayer was "subject to a franchise tax for the privilege of doing business."
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During the hearing, Taxpayer was asked to provide any documentation that establishes that it had business activities in the particular state and that it was subject to tax in that state based upon its business activities in that specific state. In response, during the course of the protest, Taxpayer presented tax returns, for the respective tax years, that were filed with Michigan (2007-2010 tax years), North Carolina (2007-2010 tax years), Ohio (2008-2009 tax years), Pennsylvania (2007-2010 tax years), Washington (2007-2010), Illinois (2007 tax year), California (2007 tax year), Wisconsin (2009 tax year), and Utah (2007 tax year) to demonstrate that Taxpayer was "subject to tax or taxable" in those states. A number of the returns were tax returns filed to report a tax that was either a net income tax or a franchise tax that was based upon net income. However, a number of the tax returns were filed to report a tax that was not based upon net income but upon the privilege of doing business in those states. The respective states will be discussed based upon the type of return that was filed.
1. "Net Income Taxes" or "Franchise Taxes Based upon Net Income."
The California Corporate Income and Franchise Tax Return, the Illinois Corporate Income or Replacement Tax Return, the Utah Corporation Franchise or Income Tax Return, and the Wisconsin Franchise Income Tax Return presented were tax returns filed to report a tax that was either a "net income tax" or a "franchise tax that was based upon net income."
California
The tax return that Taxpayer presented failed to demonstrate that it operated a business enterprise or conducted business activity in California. Thus, the documentation Taxpayer presented did not show that Taxpayer maintained an office or other place of business in California; maintained an inventory of merchandise or material for sale distribution, or manufacture, or consigned goods in California; conducted the sale or distribution of merchandise to customers in California directly from company-owned or operated vehicles where title to the goods passes at the time of sale or distribution; rendered services to customers in California; owned, rented or operated a business or of property (real or personal) in California; accepted orders in California; and/or had any other act in those states which exceeds the mere solicitation of orders so as to give the state nexus under P.L. 86-272 to tax its net income. Thus, pursuant to 45 IAC 3.1-1-38 , Taxpayer did not meet the first statutory requirement–doing business in California.
Specifically, Taxpayer's documentation demonstrated that Taxpayer was included in combined California Corporate Income and Franchise Tax Return filing–apparently "claiming P.L. 86-272 protection" for the 2007 tax year. All three entities, including Taxpayer, that were listed on the combined return had checked the box where the taxpayer makes the declaration that the "entity is not doing business in the state" for the 2007 tax year. Therefore, absent Taxpayer providing additional documentation demonstrating that Taxpayer had business activities in California that "exceed the mere solicitation of orders so as to give the state nexus under P.L. 86-272," the Department cannot agree with Taxpayer's contention that Taxpayer's "California sales" should no longer be thrown back to Indiana.
Illinois
The tax return that Taxpayer presented failed to demonstrate that it operated a business enterprise or conducted business activity in Illinois. Thus, the documentation that Taxpayer presented did not show that Taxpayer maintained an office or other place of business in Illinois; maintained an inventory of merchandise or material for sale distribution, or manufacture, or consigned goods in Illinois; conducted the sale or distribution of merchandise to customers in Illinois directly from company-owned or operated vehicles where title to the goods passes at the time of sale or distribution; rendered services to customers in Illinois; owned, rented or operated a business or of property (real or personal) in Illinois; accepted orders in Illinois; and/or had any other act in those states which exceeds the mere solicitation of orders so as to give the state nexus under P.L. 86-272 to tax its net income. Thus, pursuant to 45 IAC 3.1-1-38 , Taxpayer did not meet the first statutory requirement–doing business in Illinois.
Specifically, the Illinois return presented was not Taxpayer's return but was a return filed by Taxpayer's parent corporation for the 2007 tax year. Taxpayer's documentation presented for Illinois demonstrated that Taxpayer's parent corporation filed an Illinois "net income and replacement tax return" imposing an income tax measured or based upon "net income." Since the Illinois return is imposing an income tax that is measured or based upon "net income," P.L. 86-272 applies to the return filed in Illinois. Since Taxpayer is not the entity filing the combined income tax return and merely has its income reported in its parent corporation's combined income to determine the tax due for its parent corporation, the documentation presented only shows that Taxpayer's parent corporation is taxable in Illinois for the 2007 tax year and does not demonstrate that Taxpayer's connections with Illinois exceeded the protections of P.L. 86-272. Thus, without Taxpayer providing additional documentation demonstrating that Taxpayer connection's with Illinois exceed the protections of P.L. 86-272, Taxpayer's documentation presented does not demonstrate that Taxpayer is "subject to tax" in Illinois. Therefore, the Department cannot agree with Taxpayer's contention that Taxpayer's "Illinois sales" should no longer be thrown back to Indiana.
Utah
The tax return that Taxpayer presented failed to demonstrate that it operated a business enterprise or conducted business activity in Utah. Thus, the documentation that Taxpayer presented did not show that Taxpayer maintained an office or other place of business in Utah; maintained an inventory of merchandise or material for sale distribution, or manufacture, or consigned goods in Utah; conducted the sale or distribution of merchandise to customers in Utah directly from company-owned or operated vehicles where title to the goods passes at the time of sale or distribution; rendered services to customers in Utah; owned, rented or operated a business or of property (real or personal) in Utah; accepted orders in Utah; and/or had any other act in those states which exceeds the mere solicitation of orders so as to give the state nexus under P.L. 86-272 to tax its net income. Thus, pursuant to 45 IAC 3.1-1-38 , Taxpayer did not meet the first statutory requirement–doing business in Utah.
Specifically, the Utah return that Taxpayer provided was not Taxpayer's return but was a Utah return filed by an affiliated corporation for the 2007 tax year. Since Taxpayer is not the entity filing the income tax return, the documentation presented only shows that Taxpayer's affiliated corporation may be taxable in Utah and does not demonstrate that Taxpayer's connections with Utah exceeded the protections of P.L. 86-272. Thus, without Taxpayer providing additional documentation demonstrating that Taxpayer had business activities in Utah, the Department cannot agree with Taxpayer's contention that Taxpayer's "Utah sales" should no longer be thrown back to Indiana.
Wisconsin
The documentation Taxpayer presented for Wisconsin demonstrates that Taxpayer owned business property in Wisconsin and, therefore, had substantial nexus with Wisconsin for the 2009 tax year. Thus, Taxpayer was "taxable" in the state of Wisconsin for this year. Therefore, Taxpayer's protest to the imposition of tax resulting from the Department's inclusion of Taxpayer sales to Wisconsin as sales thrown back to Indiana for the 2009 tax year is sustained.
Accordingly, Taxpayer's protest to the imposition of tax resulting from the Department's including Taxpayer's sales to California, Illinois, and Utah as sales thrown back to Indiana is denied. However, Taxpayer's protest to the imposition of tax resulting from Taxpayer sales to Wisconsin being thrown back to Indiana for the 2009 tax year is sustained.
2. "Franchise Tax:" "for the Privilege of Doing Business."
The Washington Business and Occupation Actions Returns, the North Carolina Corporation Tax Returns, the Michigan Single Business Tax Returns, the Pennsylvania Corporate Tax Reports, and the Ohio Corporate Franchise Tax Reports presented were tax returns filed to report a tax that was not based upon net income but upon the "privilege of doing business" in those states.
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Taxpayer's documentation demonstrated that Taxpayer operated a business enterprise and/or conducted business activity in such state and that the state tax "franchise tax returns" were filed and the taxes imposed were in connection to Taxpayer's business activities or enterprises in those states. Accordingly, Taxpayer's protest to the imposition of tax resulting from Taxpayer sales to Washington for the 2007 through 2010 tax years, to Michigan for the 2007 through 2010 tax years, to North Carolina for the 2007 through 2010 tax years, to Pennsylvania for the 2007 through 2010 tax years, and to Ohio for the 2008 and 2009 tax years being thrown back to Indiana is sustained.
