ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
BARTON T. SPRUNGER JEFFREY A. MODISETT
MARK J. RICHARDS ATTORNEY GENERAL OF INDIANA
ICE MILLER DONADIO & RYAN
Indianapolis, IN DAVID A. ARTHUR
DEPUTY ATTORNEY GENERAL
FIRST CHICAGO NBD CORP., f/k/a ) NBD BANCORP, INC., et al., ) ) Petitioner, ) ) v. )Cause No. 49T10-9712-TA-00197 ) DEPARTMENT OF STATE REVENUE ) ) Respondent. ) _____________________________________________________________________
ON APPEAL FROM A FINAL DETERMINATION OF THE DEPARTMENT OF STATE REVENUE _____________________________________________________________________
March 31, 1999
First Chicago NBD Corp. f/k/a NBD Bancorp, Inc. and its many subsidiaries (hereinafter referred to collectively as NBD) challenge the Department of State
Revenue's (Department) decision to assess NBD with additional Financial Institutions
Tax (FIT) liability. See
Ind. Code Ann. § 6-5.5-2-1 (West Supp. 1998).
NBD raises one
issue for this Court's consideration:
Whether Ind. Code Ann. § 6-5.5-1-2(a)(7)See footnote 1 (West Supp. 1998), which requires the add back of taxes based on or measured by income to federal taxable incomeSee footnote 2 in computing FIT liability, requires the add back of the Michigan Single Business tax (MSBT). Mich. Comp. Laws Ann. §§ 208.1 - 208.145 (West 1998).
Stated differently, the issue is whether the MSBT is based on or measured by income.
Id. In short, measuring the value added is one method of measuring the impact of a
business on the economy. See Trinova, 498 U.S. at 363.
A VAT is different from an income tax in many respects. An income tax is based on a taxpayer's ability to pay and is measured by the price received for the particular product. See id.; see also Mobil Oil, 373 N.W.2d at 740. A VAT is a tax on the taxpayer's total business activity and is measured by the cost of producing its product. Trinova, 498 U.S. at 364; see also Mobil Oil, 373 N.W.2d at 740. Even in cases where
a company fails to make a profit, the company generally adds value through production
and thus owes the VAT. See Trinova, 498 U.S. at 364.
Although the MSBT is characterized as a VAT, it is not a pure [VAT] because it is subject to various exemptions, exclusions, and industry-specific adjustments. Caterpillar, 488 N.W.2d at 185. The first step in calculating a taxpayer's MSBT liability is to determine the taxpayer's tax base. Id. In order to determine its tax base, a taxpayer takes its federal taxable income and makes numerous adjustments including adding costs of compensation, capital costs, and interest paid. See Mich. Comp. Laws Ann. § 208.9 (West 1998); see also Trinova, 498 U.S. at 368. Once the taxpayer's tax base is determined, it is then apportioned among the states in which the taxpayer did business. See Trinova, 498 U.S. at 368-69. The portion of the tax base attributable to Michigan is the taxpayer's adjusted tax base. See Mich. Comp. Laws Ann. § 208.31(2) (West 1998). The taxpayer is assessed a tax equal to 2.35%See footnote 4 of its adjusted tax base. See Mich. Comp. Laws Ann. § 208.31(1). With this background in mind, the Court now turns to the merits of this case.
The Department claims that the MSBT is based on or measured by income because the formula for calculating a taxpayer's tax base begins with federal taxable income. NBD argues that regardless of whether income is one component of the tax base, the MSBT is not based on or measured by income. NBD is correct.
Although taxable income is one portion of the tax base formula, the MSBT is not
measured by or based on income. The fact that the calculation of a taxpayer's tax base
begins with taxable income demonstrates nothing. The income data included in the tax
base calculation is merely an effort to measure, in part, the value added by the
production of a product. In the case of the federal taxable income generated by the
product, the tax base formula is attempting to capture the value added as measured by
the open market, instead of capturing the value added as measured by the taxpayer's
costs of production. The income data is therefore not included in the tax base formula
simply to tax the producer's income.
Likewise, the income data included in the tax base formula is not an attempt to provide a complete measure of the tax owed or the value added. In the MSBT formula, corporate outlays such as wages are added to income to calculate the tax base. This formula is therefore not designed to measure income but rather the value added through the production process. In contrast, a tax based on or measured by income would be calculated by subtracting such outlays in order to arrive at the income or profit made after the product is sold, and a tax measured by gross income or gross receipts would not add such outlays_it would merely look to what the taxpayer received during that tax period. See, e.g., Ind. Code Ann. § 6-2.1-1-2 (West 1989). Indeed, the MSBT is the antithesis of a tax based on or measured by income, it is a tax based on value added. See Mobil Oil, 373 N.W.2d at 740. This Court notes that courts in Michigan have viewed the MSBT in the same manner.
The Michigan Supreme Court in Mobil Oil described the use of federal taxable income in the tax base formula as simply a starting point for ease of administration but
noted that various adjustments converted the tax from an income type tax to a VAT.
Mobil Oil, 373 N.W.2d 741-42. Perhaps more importantly, the Michigan Court of
Appeals has expressly held that the MSBT is not a tax that is measured by income.
Gillette Co. v. Department of Treasury, 497 N.W.2d 595, 598-99 (Mich Ct. App. 1993).
The Gillette Court held that the MSBT was not measured by income because of the
extensive adjustments required to compute the single business tax . . . . Id. at 598.
In addition to these holdings, courts and administrative bodies from other
jurisdictions have agreed that the MSBT is not a tax that is based on or measured by
income. See Ardire v. Tracy, 674 N.E.2d 1155 (Ohio 1997); Kellogg Sales Co. v.
Department of Revenue, 10 Or. Tax 480, 486-87 (1987), aff'd, 766 P.2d 1029 (Or.
Revenue Cabinet v. General Motors Corp., 794 S.W.2d 178, 179 (Ky. Ct.
App. 1990); see also In re Appeal of Kelly Serv., Inc., No. 97-SBE-010,
466851 (Cal. Bd. Eq. May 8, 1997); In re Private Letter Ruling, No. PD 94-313, 1994
WL 663482 (Va. Dep't Tax. Oct. 17, 1994). Central to the reasoning of each of these
courts and tribunals was the acknowledgement of how the adjustments to federal
taxable income by the MSBT change how the tax is measured. In the words of the
General Motors court, [T]he MSBT base has no relationship to gross or net income . . .
. 794 S.W.2d at 179. Although these decisions are not binding on this Court, the
Court sees no reason to disagree with the decisions of the Michigan courts or the
decisions of the other jurisdictions.
Accordingly, this Court cannot find that the MSBT is based on or measured by income. Although income is certainly one element of the MSBT, the transformation that
occurs through the adjustments so radicallySee footnote
alter the income element so as to make it
impossible to conclude that the MSBT is based on or measured by income. Although
not every tax that is measured by income subtracts costs of production, see
Consolidated Coal Co. v. Department of State Revenue, 583 N.E.2d 1199 (Ind. 1991),
no tax that is measured by income adds costs of production. The MSBT may start out
with income, but after the extensive adjustments incorporated into the calculation of the
MSBT, the MSBT becomes an entirely different tax, one that cannot be fairly read to fit
under the based on or measured by income language chosen by the Indiana General
The Department's argument is an attempt to fit the square peg of the MSBT into the round hole of the based on or measured by income language that the Indiana General Assembly has chosen.See footnote 7 Admittedly, income is one way to measure the market's valuation of the production process. However, based on this reasoning, almost every tax could be construed as measured by income. Income is naturally linked to all aspects of the production process. As the Supreme Court noted, compensation, depreciation and profit are not independent variables to be adjusted
without reference to each other. Trinova, 498 U.S. at 376. However, this does not
mean that every tax is based on income. Other aspects of the production process may
be valued and taxed just as readily as income, and this is what has been done in
Michigan with the MSBT.
Converted from WP6.1 by the Access Indiana Information Network