Indiana, a unique approach to taxation

August 10, 2016

Throughout history, Indiana has taken a unique approach to some elements of taxation.

Indiana has a double-direct test for manufacturing and agricultural exemptions. The test to determine if the purchase of machinery, equipment, or tools is exempt from sales tax has been on the books in one form or another since 1937. While many states use a single-direct test, Indiana is the only state that applies “direct use in the direct production” to manufacturing and agricultural property investments to determine if they are tax exempt.

At one time, Indiana imposed its gross income tax on individuals. While other states permitted a broad range of exemptions and deductions, Indiana did not from 1933 to 1963. That meant fewer deductions and exclusions for individuals, whose gross receipts were taxed at 1 percent. For example, the basic exemption was $1,000 for each taxpayer. Now, Indiana taxes net income and affords individuals a number of ways to reduce their tax liability.

Indiana exempts some food items from sales tax, but that was not always the case. From 1963 until 1973, the state imposed sales tax on food and prescription drugs. The rate was 2 percent in 1963 and increased to 4 percent in 1973. To account for the estimated sales tax on food and prescription drugs, Indiana implemented a refundable income tax credit of $6 from 1964 to 1966 and $8 from 1967 to 1972.

Another way Indiana differed from other states is its former corporate income tax structure. Prior to 2002, Indiana was one of only a few states to tax businesses on revenue instead of profits. Extensive legislative changes in 2002 included a switch from three taxes – gross income tax, adjusted gross income tax, and supplemental net income tax – to an adjusted gross income tax.