Taxpayer is a business incorporated in another state. As the result of an audit, the Indiana Department of Revenue ("Department") determined that Taxpayer had never paid Indiana Financial Institutions Tax ("FIT"), but that it had been conducting the business of a financial institution. The Department therefore issued proposed assessments for FIT for the tax years, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, and 2010, plus penalty and interest for each year.
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Taxpayer protests the imposition of FIT for the tax years 2001-10. Taxpayer states that it had entered into a factoring arrangement with its parent company ("Parent") and that, while Parent had nexus with Indiana, it did not have nexus with Indiana. The Department based its determination that Taxpayer was conducting the business of a financial institution in Indiana on the basis that Taxpayer purchased accounts receivable from Parent via a factoring agreement and that Taxpayer's purchase and servicing of those accounts receivable constituted the conduction of the business of a financial institution in Indiana. The Department notes that the burden of proving a proposed assessment wrong rests with the person against whom the proposed assessment is made, as provided by IC § 6-8.1-5-1(c).
In the audit process, the Department reviewed Taxpayer's credit agreements and factoring agreements with Parent and determined that the two parties were clearly involved in the factoring of extensions of credit. Taxpayer states that the function of a contract or agreement is controlling rather than the use of certain words or phrases in such a contract or agreement when determining any resulting legal and tax implications thereof.
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Here, Taxpayer has provided sufficient documentation to establish that it purchased "accounts receivable," as defined in Black's. A straightforward account receivable is clearly different from a loan. An account receivable involves routine payment for a purchase within a set number of days, while a loan involves the return of something, either money or property, from the lendee to the lender with or without interest. In the instant case, nothing is being returned. As provided by Black's, a consumer loan is or may be payable in more than four installments. Rather, Parent sold the right to collect payment from Parent's customer's purchases to Taxpayer and Parent's customers are paying Taxpayer for their purchases.
Also, it was logical for the Department to read the factoring agreement and credit agreement and to come to the conclusion that Taxpayer was extending credit. However, as provided by Mason Metals, the function of the transactions must be reviewed to determine the actual circumstances of those transactions. There is no evidence in the protest file which indicates that Taxpayer was extending any kind of credit or loans or that it was purchasing accounts which were extensions of credit or loans. Purchasing and collecting on an account receivable is not among those activities constituting the activities of a financial institution, as defined in 45 IAC 17-2-4 . Since Taxpayer was not conducting the business of a financial institution in Indiana, it is not subject to Indiana financial institutions tax. Therefore, Taxpayer has met its burden under IC § 6-8.1-5-1(c).
