Indiana: Activities of Third Parties Not Sufficient to Defeat Throwback

In a recent Letter of Findings, the Indiana Department of State Revenue addressed whether a taxpayer had the requisite contacts in other states so that it could avoid throwing receipts back to Indiana. The taxpayer made sales of RVs from Indiana to customers in several other states. When it filed its Indiana corporate income tax return, the taxpayer did not include receipts from sales made to customers in 11 other jurisdictions in the sales factor numerator. On audit, the Department “threw back” these receipts to Indiana and assessed additional corporate income tax. The taxpayer protested the audit assessment. In the first Letter of Findings, the Department found that the taxpayer failed to meet the burden of showing that its activities in the other states were beyond “mere solicitation” and thus the receipts were correctly thrown back to Indiana. The taxpayer requested a rehearing.

For the tax year at issue, Indiana imposed a throwback rule. In determining whether a taxpayer was taxable in another state so that receipts were not thrown back to Indiana, the key determinant was whether the other state had jurisdiction to impose a net income tax on the taxpayer, “regardless of whether, in fact, the state does or does not.”  The Department looked at whether the taxpayer’s activities would exceed P.L. 86-272 so that the other jurisdictions would have the authority to tax the company. The taxpayer argued that the activities relating to fulfilling warranty obligations for its customers subjected it to tax in the other states and jurisdictions. At times, the taxpayer’s customers had their RVs repaired at shops in other jurisdictions and the taxpayer reimbursed the repair shops for the warranty repair services performed. Moreover, the taxpayer also provided evidence of one of its employees entering other states to assist with repairs a dealer could not resolve or to deliver replacement vehicles to the customers. In the taxpayer’s view, because it reimbursed the repair shops/dealers and had an employee enter the states in question, its income was subject to tax in those other states. The Department disagreed, holding that the taxpayer’s activities did not exceed “mere solicitation,” and thus the other states were prohibited from taxing the taxpayer’s income. In the Department’s view, not only were the repair shops unrelated to the taxpayer, there was also no ongoing contractual relationship with such shops. Further, the Department held that even if the repair shops were independent contractors, the fulfillment of warranty obligations on the taxpayer’s behalf did not go beyond “mere solicitation” because the contractors were soliciting the repair work from the taxpayer. The taxpayer was simply “spending money” in the other states to fulfill its obligations. For more information on Letter of Findings 02-20200290, please contact Marc Caito at 317-951-2434.