ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
LARRY J. STROBLE STEVE CARTER
RANDAL J. KALTENMARK ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG LLP ANDREW W. SWAIN
Indianapolis, IN SPECIAL COUNSEL
AMBER MERLAU ST.AMOUR
DEPUTY ATTORNEY GENERAL
IN THE INDIANA TAX COURT ________________________________________________________________________
DAVID R. WEBB COMPANY, INC., ) ) Petitioner, ) ) v. ) Cause No. 49T10-0310-TA-50 ) INDIANA DEPARTMENT OF ) STATE REVENUE, ))
45 IAC 1-1-119(1)(a); 45 IAC 1-1-119(2)(b).
The Department asserts that the sales at issue were completed in Indiana and the resulting income is, therefore, taxable pursuant to 45 IAC 1-1-119(2)(b). (See Respt Br. In Resp. to [Petr] Mot. for Summ. J. and In Supp. of [Its] Cross Mot. for Summ. J. (hereinafter, Respt Br.) at 6.) Specifically, the Department contends that the sales at issue were completed in Indiana when the Foreign Customers representatives physically came to Edinburgh, Indiana, inspected the wood veneer, and then accepted it when they signed the sales agreements. (See Respt Br. at 12-13.)
Webb, in challenging the imposition of the tax, claims that the Department has improperly expanded the holdings in Wood Preserving and International Harvester to include in-state inspection and acceptance as adequate taxable events under 45 IAC 1-1-119(2)(b). Rather, Webb asserts that those cases stand for the sole proposition that a sale cannot be completed prior to the buyer taking actual physical delivery of the purchased goods. (See Petr Br. In Supp. of Its Mot. for Summ. J. (hereinafter, Petr Br.) at 8-12.) In turn, because Webbs Foreign Customers never took physical delivery [of the veneer] until they received [it] at the Ports of Destination[,] the sales at issue were clearly not completed in Indiana. (See Petr Br. at 8, 12.) As a result, Webb maintains the sales at issue are nontaxable pursuant to 45 IAC 1-1-119(1)(a).
The United States Supreme Courts decisions in Wood Preserving and International Harvester hold that a sales transaction is deemed completed in Indiana upon delivery in Indiana to an out-of-state buyer, despite the fact that the goods are taken immediately outside the state. See Gross Income Tax Div. v. Shane Mfg. Co., 191 N.E.2d 310, 311 (Ind. 1963). Indeed, as the Indiana Supreme Court explained:
In the case of . . . Wood Preserving Corp.[,] . . . an Indiana corporation sold to the Baltimore & Ohio Railroad Company railroad ties which were delivered in the State of Indiana. The ties were then carried by the purchasing railroad out of Indiana to be used at various points outside the state. The [U.S. Supreme C]ourt, in determining whether or not the sale of ties by the Wood Preserving Corporation was taxable, stated:
These were local transactions sales and deliveries of particular ties by respondent
to the Railroad Company in Indiana. The transactions were none the less
intrastate activities because the ties thus sold and delivered were forthwith loaded on
the railroad cars to go to Ohio for [creosoting] treatment. The contract
providing for that treatment called for the treatment of ties to be delivered
by the Railroad Company at the Ohio plant, and the ties bought by
the Railroad Company in Indiana, as above stated, were transported and delivered by
the Railroad Company to that treatment plant. Respondent did not pay the
freight for that transportation and the circumstance that the billing was in its
name as consignor is not of consequence in the light of the facts
showing the completed delivery to the Railroad Company in Indiana.
In the case of International Harvester[,] . . . the International Harvester Company
made sales to out-of-state dealers who came into Indiana and took delivery.
The [U.S. Supreme C]ourt said in that case:
The Class D sales are sales by an Indiana seller of Indiana goods
to an out-of-state buyer who comes to Indiana, takes delivery there and transports
the goods to another State. The Wood Preserving Corp. case indicates that
it is immaterial to the present issue that the goods are to be
transported out of Indiana immediately on delivery. Moreover, both the agreement to
sell and the delivery took place in Indiana. Those events would be
adequate to sustain a  tax by Indiana.
Id. at 311-12 (emphasis in original). Wood Preserving and International
Harvester do not discuss whether the acts of inspection and acceptance constitute adequate
taxable events .
Indiana Administrative Code title 45, rule 1-1-119(2)(b) interprets the interstate commerce exemption from gross income tax (i.e., Indiana Code § 6-2.1-3-3) for which a judicially created body of law exists. If a regulation conflicts with a case law interpretation, little weight is afforded the regulation . Bethlehem Steel Corp. v. Indiana Dept of State Revenue, 597 N.E.2d 1327, 1335 (Ind. Tax Ct. 1992) (citation omitted). Additionally, an administrative interpretation that is incorrect is entitled to no weight. Id. at 1335-36. Therefore, to have force, 45 IAC 1-1-119(2)(b) must be consistent with the relevant case law. To the extent that 45 IAC 1-1-119(2)(b) exceeds the scope of Wood Preserving and International Harvester, it is invalid.
The Department counters, however, that while [p]hysical delivery in Indiana of goods sold to an out-of-state purchaser is an adequate taxable event, [it is] not the only event adequate to make a transaction local. (Respt Br. at 8.) [Wood Preserving and International Harvester] dealt only with the effect of in-state delivery to out-of-state purchasers . . . because in-state delivery was the question raised by those specific facts. (Respt Br. at 8.) Nothing in [those cases] suggests that in-state delivery is the only in-state event adequate to making a transaction taxable; it is only one example of such an event. See footnote (Respt Br. at 10 (footnote added).) The Departments argument, however, ignores the very meaning of, and relationship between, the acts of inspection, acceptance, and delivery.
Pursuant to Indianas Uniform Commercial Code (UCC),See footnote the sequence of events in a typical sales transaction is: 1) delivery; 2) inspection; and 3) acceptance. For example, [t]ender of delivery requires that the seller put and hold conforming goods at the buyers disposition and give the buyer any notification reasonably necessary to enable him to take delivery. Ind. Code Ann. § 26-1-2-503(1) (West 1995). Tender of delivery is a condition to the buyers duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract. Ind. Code Ann. § 26-1-2-507(1) (West 1995).
Once delivery of goods has been tendered, a buyer has a right to inspect those goods. Indeed:
Unless otherwise agreed . . . where goods are tendered or delivered or identified to the contract for sale, the buyer has a right before payment or acceptance to inspect them at any reasonable place and time and in any reasonable manner. When the seller is required or authorized to send the goods to the buyer, the inspection may be after their arrival.
Ind. Code Ann. § 26-1-2-513(1) (West 1995). Finally, acceptance occurs when, after
a reasonable opportunity to inspect the goods [the buyer] signifies to the seller
that the goods are conforming or that he will take or retain them
in spite of their nonconformity[.] Ind. Code Ann. § 26-1-2-606(1)(a) (West 1995).
The Department claims that Webb tendered delivery of the veneer in Edinburgh when it set it aside for the Foreign Customers to inspect. (See Respt Br. at 14.) The Department argues that after Webbs Foreign Customers had a reasonable opportunity to inspect the veneer, they accepted it by indicat[ing] to Webb that the goods conformed to the purchase agreement because the Foreign Customers completed [s]ales [a]greements for the veneer they selected. (See Respt Br. at 13.)
The Department is trying to put square pegs into round holes. Indeed, the Department is taking the sequence of events in this case and attempting to fit them into the sequential mold of delivery, inspection, and acceptance. For instance, when Webb presented the veneer to the Foreign Customers upon their arrival in Edinburgh, it was not tendering delivery, as the Department claims. Indeed, Indiana Code § 26-1-2-503 provides the tender of delivery is made pursuant to the provisions of the applicable sales agreement. A.I.C. § 26-1-2-503(1) (emphasis added). At this point in time, however, no sales agreements yet existed between Webb and its Foreign Customers.
In turn, when the Foreign Customers viewed Webbs veneer, they were not inspecting the veneer as the Department claims. Rather, the Foreign Customers were merely examining the veneer. See A.I.C. § 26-1-2-513 (at Official Comment 9 (providing that [i]nspection . . . has to do with the buyers check-up on whether the sellers performance is in accordance with a contract previously made and is not to be confused with the examination of the goods or of a sample or model of them at the time of contracting)). See also Associated Milk Producers, Inc. v. Indiana Dept of State Revenue, 534 N.E.2d 715, 718 (Ind. 1989) (stating that inspection, which is merely a right of the buyer to determine whether the goods conform to the contract, may be exercised at the time of delivery, upon arrival of the goods, or later if the parties so agree).
Finally, when the Foreign Customers signed the sales agreements, they were not accepting the veneer. Rather, the parties were contracting, or agreeing to, the terms of each partys performance or conduct in order to carry out the sale. As part of that contract, Webb was required to deliver conforming veneer to a designated destination outside Indiana.
The determination of whether certain activities constitute local transactions or interstate commerce must be made on a case by case basis. Indiana Dept of State Revenue v. Brown Boveri Corp., 439 N.E.2d 561, 564 (Ind. 1982) (internal quotation and citation omitted). [T]he determining factor in deciding what activity constitutes interstate commerce is whether the activities in Indiana are so intrinsically related to and inherently a part of the interstate sale that it is seen as one continuing transaction. Id. See also Ind. Dept of State Revenue v. Frank Purcell Walnut Lumber Co., 282 N.E.2d 336, 343 (Ind. Ct. App. 1972).
The facts in this case reveal that the sales at issue are interstate transactions. Indeed, the overall interstate character of these transactions the sale of veneer to customers located outside of Indiana, the transportation and delivery of the veneer to a destination outside Indiana, the inspection and acceptance of that veneer outside Indiana outweigh the local activities. Accordingly, the Department erred in finding that the sales at issue were local transactions subject to Indianas gross income tax.
Larry J. Stroble
Randal J. Kaltenmark
BARNES & THORNBURG LLP
11 South Meridian Street
Indianapolis, Indiana 46204
Attorney General of Indiana
By: Andrew W. Swain, Special Counsel
Amber Merlau St.Amour, Deputy Attorney General
Indiana Government Center South, Fifth Floor
302 West Washington Street
Indianapolis, IN 46204-2770