ATTORNEYS FOR PETITIONERS: ATTORNEYS FOR RESPONDENT:
LARRY J. STROBLE STEVE CARTER
JENNIFER A. DUNFEE ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG Indianapolis, IN
DEPUTY ATTORNEY GENERAL
IN THE INDIANA TAX COURT _____________________________________________________________________
SOUTHERN INDIANA GAS AND ELECTRIC ) COMPANY and VECTREN CORPORATION, ) successor in interest to SIGCORP, INC., ) ) Petitioners, ) ) v. ) Cause No. 49T10-0201-TA-4 ) INDIANA DEPARTMENT OF STATE ) REVENUE, ))
Specifically, the Department took the position that, for purposes of calculating
their supplemental net income tax liability, the Petitioners should have included the income
it received from the sales at issue in the numerator of their sales
factor for apportionment purposes.
On June 11, 1999, the Petitioners filed a protest with the Department. After holding an administrative hearing, the Department denied the Petitioners protest in a Letter of Findings issued on September 20, 2001.
The Petitioners filed an original tax appeal and petition to enjoin collection of tax with this Court on January 7, 2002. On May 6, 2002, the Department agreed not to collect the tax pending the outcome of the case. On December 5, 2003 the Court heard the parties oral arguments. Additional facts will be supplied as necessary.
the property is delivered or shipped to a purchaser, other than the United
States government, within this state, regardless of the f.o.b. point or other conditions
of the sale; or
the property is shipped from an office, a store, a warehouse, a factory,
or other place of storage in this state and:
the purchaser is the United States government; or
the taxpayer is not taxable in the state of the purchaser.
A.I.C. § 6-3-2-2(e).
When the language of a statute is plain and unambiguous, the court has no power to construe the statute for the purpose of limiting or extending its operation. C&C Oil Co., Inc. v. Indiana Dept of State Revenue, 570 N.E.2d 1376, 1380 (Ind. Tax Ct. 1991) (citation omitted). Thus, under the plain terms of Indiana Code § 6-3-2-2(e), the Petitioners sales at issue were not to be included in the numerator of the sales factor for apportionment purposes because the natural gas was not delivered to a customer in Indiana, nor was it shipped from a location in Indiana. See footnote
In its final determination, the Department conceded this point. (See Parties First Stipulation of Facts, Ex. 3 at 6.) Nevertheless, it argues:
The Uniform Division of Income for Tax Purposes Act (UDITPA) on which Indianas income statutes are largely based is premised on the fact that the state of the customer contributes to the earning of the income being taxed. In fact, the apportionment regime adopted by Indiana and specifically Ind[iana] Code § 6-3-2-2(e) is based on the UDITPA model. The rationale behind the UDITPA model is to assure that 100 per cent of income, and no more or no less, would be taxed. The Indiana statute was enacted to assure that all of a taxpayers multi-state income would be taxed in a fair and equitable manner by all States having the jurisdiction to tax such income. See footnote
(Respt Br. at 5-6 (internal citations omitted) (footnote added).) Accordingly, the Department
asserts that it was within its authority
to promulgate Indiana Administrative Code title
45, rule 3.1-1-53, to clarify the statute. That regulation provides in pertinent
If a taxpayer whose salesman operated from an office located in Indiana makes a sale to a purchaser in another state in which the taxpayer is not taxable and the property is shipped directly by a third party to the purchaser, the sale will be attributed to the state from which the property is shipped if the taxpayer is taxable in that state. If the taxpayer is not taxable in the state from which the property is shipped, then the property will be deemed to have been shipped from Indiana and the sale is attributed to Indiana. Example: The taxpayer in Indiana sold merchandise to a purchaser in State A. Taxpayer is not taxable in State A. Upon direction of the taxpayer, the merchandise was shipped directly to the purchaser by the manufacturer in State B. If the taxpayer is taxable in State B, the merchandise is deemed to have been shipped from State B to the purchaser in State A. If the taxpayer is not taxable in State B, the merchandise is deemed to have shipped from Indiana by the taxpayer to the purchaser in State A.
Ind. Admin. Code tit. 45, r. 3.1-1-53(6) (1996). It is pursuant to
this regulation, the Department maintains, that the Petitioners sales at issue were to
be included in the numerator of their sales factor for apportionment purposes.
Indiana Administrative Code title 45, rule 3.1-1-53(6) addresses the rules for apportionment in those situations where the following conditions have been met: a) a taxpayer whose salesman operated from an office located in Indiana; b) makes a sale to a purchaser in another state in which the taxpayer is not taxable; and c) the property is shipped directly by a third party to the purchaser. 45 IAC 3.1-1-53(6). When those conditions have been met, the sale will be attributed to the state from which the property is shipped if the taxpayer is taxable in that state. Id. If, however, the taxpayer is not taxable in that state, then the sale will be attributed to Indiana. Id.
In the case at bar, the parties agree that the first two conditions of the regulation have been met. They disagree, however, as to the third condition. The Petitioners assert that in order for the third condition to be met, the producer of the natural gas was required to ship it directly to the Petitioners customers. Instead, [the Petitioners] took over the ownership of the gas directly from the [producer] and made its own arrangements for shipment of the gas [to its customers]. (Petrs Br. at 13.)
The Department maintains, on the other hand, that the regulation does not . . . define  third party. The term third party is not restricted . . . to suppliers and manufacturers of goods sold. Under the regulation, a transportation company could be a third party. Additionally . . . it does not matter for whom the third party is shipping. Shipment may be arranged by the seller, the purchaser, the supplier . . . or another third party. (Respt Br. at 8.) In other words, the Department implies that the interstate pipeline (which was acting as the common carrier) is the third party in this case. Because the Petitioners customers received the natural gas directly from a pipeline (the third party), the income derived from that sale must be apportioned to Indiana. The Court, however, disagrees.
The rules of statutory construction also apply to the construction of administrative rules and regulations. LDI Mfg. Co., Inc. v. State Bd. of Tax Commrs, 759 N.E.2d 685, 689 (Ind. Tax Ct. 2001). Consequently, the words in a regulation must be given their plain, ordinary, and common meaning, unless the administrative agency intended otherwise. Id. Non-technical, undefined words in a regulation are to be defined by their ordinary and accepted dictionary meaning. Id. The dictionary defines third party as a person other than the principals. Websters Third New Intl Dictionary 2378 (1981). While this definition alone is not particularly instructive, it must be read within the scope of the regulations intended context: that of a drop shipment. Drop shipment is defined as a shipment of goods made by a manufacturer directly to a retailer and not by the wholesaler who made the sale. Id. at 694. See also Blacks Law Dictionary 513 (7th ed. 1999) (stating that a drop shipment is [a] manufacturers shipment of goods directly to the consumer rather than initially to a wholesaler). Accordingly, it is clear that the third party, in the context of a drop shipment, is the manufacturer of the product for sale. Thus, the regulation at issue in this case would only apply if the producers of the natural gas (the third party) were shipping the natural gas to the Petitioners customers directly. 45 IAC 3.1-1-53(6). Instead, the Petitioners were shipping the natural gas to their customers.
The Departments argument must fail for a second reason. A shipper is [o]ne who ships goods to another[; o]ne who tenders goods to a carrier for transportation. Blacks Law Dictionary 513 (emphasis added). In the case at bar, it is clear that the shipper and the common carrier are two different entities. Indeed, the interstate pipelines merely act as carriers of the natural gas they do not ship it.
This Court cannot say that the Petitioners sales at issue meet the requirements of Indiana Administrative Code title 45, rule 3.1-1-53(6). As such, Petitioners sales at issue are not allocable to Indiana, and are therefore not required to be included in the numerator of the formula for computing the Petitioners supplemental net income tax liability.
If the allocation and apportionment provisions of this article do not fairly represent
the taxpayers income derived from sources within the state of Indiana . .
. the department may require, in respect to all or any part of
the taxpayers business activity if reasonable: