ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
BARTON T. SPRUNGER
MARK J. RICHARDS
ATTORNEY GENERAL OF INDIANA
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
U-HAUL INTERNATIONAL, INC., )
v. ) Cause No. 49T10-0405-TA-23
INDIANA DEPARTMENT OF )
STATE REVENUE, )
ORDER ON PARTIES CROSS-MOTIONS
FOR SUMMARY JUDGMENT
May 3, 2005
U-Haul International, Inc. (UHI) appeals the Indiana Department of State Revenues (Department) finding
that it is liable for gross income tax on 100% of certain rental
receipts for the tax years ending March 1, 1988, 1989, 1993, 1994, and
1995 (the years at issue). The matter is currently before the Court
on the parties cross-motions for summary judgment. The issue for the Court
to decide is whether UHIs gross income was derived from Indiana sources as
required by the gross income tax imposition statute.
The following material facts as they relate to the years at issue are
undisputed. The U-Haul Rental System (U-Haul System) rents moving equipment (i.e., trucks,
trailers, and associated rental equipment) to the public for use throughout the United
States. The U-Haul System is composed of four groups: (1) Fleet Owners;
(2) Rental Companies; (3) Rental Dealers; and (4) UHI. These four groups
are bound together by a series of contractual relationships, with UHI controlling the
form, terms, and conditions of each contract.
The Fleet Owners are corporations, partnerships, or individuals that own and supply the
moving equipment to the U-Haul System for rental purposes. Pursuant to contracts
with UHI (Fleet Owner Contracts), all Fleet Owners entrust their equipment to the
U-Haul System in exchange for a percentage of the gross rental income collected
by the Rental Dealers from the public.
The Rental Companies are separate corporations that merchandise and supervise the maintenance and
repair of the rental equipment. The Rental Companies contract with UHI (Rental
Company Contracts), and UHI assigns a territory wherein the Rental Companies are responsible
for establishing and servicing Rental Dealers for the U-Haul System. Pursuant to
those contracts, the Rental Companies receive a percentage of the gross rental income
collected by Rental Dealers located in their territories.
The Rental Dealers are business entities that display and rent the U-Haul moving
equipment to the public. Typically, the Rental Dealers have been local gas
stations and are unrelated to other members of the U-Haul System.
See footnote Pursuant
to their contracts with the Rental Companies (Rental Dealer Contracts), the Rental Dealers
make weekly deposits of all rental income collected from the public to a
depository bank account belonging to UHI. Rental Dealers are entitled to a
contractual percentage of the gross rental amounts they collect from the public upon
the leasing of the moving equipment.
UHI, a Nevada corporation, is located in Phoenix, Arizona. UHI provides clearinghouse,
accounting, computer, management analysis, and other services to the U-Haul System in accordance
with its contracts with the Fleet Owners and Rental Companies. Upon receipt
of the rental amounts collected by the Rental Dealers, UHI is responsible for
distributing the contractual shares of the rental amounts to the Fleet Owners, Rental
Companies, and Rental Dealers.
Under the contractual structure of the U-Haul System during the years at issue,
UHI received service fees from other members of the System as compensation for
the services it provided to them. These fees were based upon the
volume of work performed by UHI. UHI received no other fees, compensation,
or other gross income. It did not retain any percentage of the
rental amounts that Rental Dealers collected from the public.
UHI never had an office, warehouse, retail outlet, or any other type of
business location in Indiana, never owned any tangible property in Indiana, never had
any employees located in Indiana, and never performed any services in Indiana.
At all times, UHI conducted its business activities entirely at its headquarters in
For the years at issue, UHI filed Arizona income tax returns, reporting all
of its gross income as income generated in Arizona. UHI has never
reported the shares of the Fleet Owners, Rental Companies, or Rental Dealers as
its gross income for either federal or state income tax purposes. UHI
did not file state income tax returns in any state other than Arizona.
After conducting audits in 1991 and 1996, the Department assessed the Rental Companies
for gross income tax on 100% of the rental amounts collected by the
Indiana Rental Dealers for the years at issue. The Rental Companies protested
the assessments, which were ultimately upheld by the Department. On January 6,
1998, the Rental Companies filed an original tax appeal. This Court issued
its opinion on December 20, 2002, holding that the Rental Companies were not
liable for gross income tax on 100% of the Indiana rental receipts because
they had no right or beneficial interest in the receipts beyond their contractually
specified percentage. See U-Haul Co. of Indiana, Inc. v. Indiana Dept of
State Revenue, 784 N.E.2d 1078, 1084 (Ind. Tax Ct. 2002) (U-Haul I).
On February 17, 2003, the Department issued proposed assessments against UHI, assessing it
for gross income tax on 100% of the rental receipts collected by the
Indiana Rental Dealers. UHI protested the assessments and the Department held a
hearing on January 6, 2003. The Department denied the protest in a
letter of findings issued on January 29, 2004.
On May 26, 2004, UHI initiated an original tax appeal. UHI subsequently
filed a motion for summary judgment on September 28, 2004. The Department
filed a cross-motion for summary judgment on January 28, 2005. The Court
conducted a hearing on the parties motions on April 4, 2005. Additional
facts will be supplied as necessary.
Standard of Review
This Court reviews the Departments determinations de novo. Ind. Code Ann. §
6-8.1-5-1(h) (West 2005). Therefore, the Court is bound by neither the evidence
presented nor the issues raised at the administrative level. Snyder v. Indiana
Dept of State Revenue, 723 N.E.2d 487, 488 (Ind. Tax Ct. 2000), review
denied. In addition, the gross income tax statute must be construed most
strongly against the state and in favor of the taxpayer. Bethlehem Steel
Corp. v. Indiana Dept of State Revenue, 597 N.E.2d 1327, 1336 (Ind. Tax
Ct. 1992) (internal citation omitted).
A motion for summary judgment will be granted only when there is no
genuine issue of material fact and the moving party is entitled to judgment
as a matter of law. Ind. Trial Rule 56(C). Cross-motions for
summary judgment do not alter this standard. Snyder, 723 N.E.2d at 488.
During the years at issue, the gross income tax was imposed by Indiana
Code § 6-2.1-2-2, which provided that the tax was to be levied upon
the receipt of (1) the entire taxable gross income of a taxpayer who
is a resident or a domiciliary of Indiana; and (2) the taxable gross
income derived from activities or businesses or any other sources within Indiana by
a taxpayer who is not a resident or a domiciliary of Indiana.
Ind. Code Ann. § 6-2.1-2-2 (West 1995) (repealed 2002). Thus, as a
non-resident of Indiana, UHI was subject to gross income tax on income it
derived from Indiana sources only. See id. To determine whether gross
income was derived from an Indiana source, this Court must:
isolate the transaction giving rise to the income (the critical transaction);
determine whether the taxpayer has a physical presence in, or significant business activities
within the taxing state (business situs); and
determine whether the Indiana activities are related to the critical transaction and are
more than minimal, not remote or incidental to the total transaction (tax situs).
See Enterprise Leasing Co. of Chicago v. Indiana Dept of State Revenue, 779
N.E.2d 1284, 1290 (Ind. Tax Ct. 2002), review denied.
The Critical Transaction
The critical transaction is defined as the activity that gives rise to the
gross income in dispute. Id. (citation omitted). During the years at
issue, UHIs gross income arose entirely from the services it provided in Arizona
to members of the U-Haul System. (See Aff. of George R. Olds
(Olds Aff.) ¶¶ 8-9; Supplemental Aff. of George R. Olds (Supplemental Olds Aff.)
¶¶ 3-4.) More specifically, UHI received income in exchange for the clearinghouse,
accounting, computer, management analysis, and other services it provided. (See Olds Aff.
¶ 8; Supplemental Olds Aff. ¶ 3.) This income was the only
income received by UHI and was derived from activities taking place wholly outside
of Indiana. (See Supplemental Olds Aff. ¶ 4.)
A similar factual setting was assessed by the Indiana Court of Appeals in
Indiana Department of State Revenue v. Convenient Industries of America, Inc. See
Indiana Dept of State Revenue v. Convenient Indus. of America, Inc., 299 N.E.2d
641 (Ind. Ct. App. 1973). In that case, Convenient, a Kentucky corporation
headquartered in Louisville, was engaged in the franchising of food marts in several
states, including Indiana. See id. at 642. In return for a
service fee, Convenient provided a number of management and bookkeeping services to its
Indiana franchisees, all from its Louisville headquarters.
See id. at 643, 646
(footnote added). In addition, however, Convenient performed some services in Indiana, including
supervisory inspections of the stores and occasional transport of daily report forms back
to Kentucky, as well as a small amount of advertising. See id.
at 642-43. The court held that Convenient had performed substantially all of
its activities in Kentucky and the minimal activities taking place within the State
of Indiana . . . f[e]ll far short of the degree of activity
contemplated by the Indiana Gross Income Tax Act.
Id. at 647 (footnote
added). Accordingly, Convenient was not subject to gross income tax on the
service fees received from its Indiana franchisees.
See footnote The analogous facts of the
present case compel the same conclusion: UHI is likewise exempt from Indianas
gross income tax on its receipt of service income.See footnote
The Department argues, however, that it is not attempting to assess UHIs service
income; rather, it is attempting to assess the income UHI derived from the
rental of moving equipment in Indiana. In other words, the Department claims
that UHI received an interest in the income generated by the Indiana rentals
and should therefore be taxed on that income. To support its claim,
the Department relies on this Courts holding in
U-Haul I for the proposition
that an agency relationship exists between UHI (the principal) and the other members
of the U-Haul System (the agents). More specifically, the Department argues that
because the other members of the System were merely conduits for the Indiana
rental income to pass through to UHI, UHI ultimately received a beneficial interest
in 100% of that income. (See Respt Br. in Resp. to Petr
Mot. For Summ. J. and in Supp. Of Its Cross Mot. For Summ.
J. at 8-12.) The Department, however, has misinterpreted this Courts holding in
In U-Haul I, the Court held that the Rental Companies are agents of
UHI. See U-Haul I, 784 N.E.2d at 1083. While a taxpayer
is generally not subject to gross income tax on income it receives in
an agency capacity, it is subject to tax on income it receives in
an agency capacity if it has a right, title, or interest in the
income. See U-Haul I, 784 N.E.2d at 1083; see also Ind. Admin.
Code tit. 45, r. 1-1-54 (1992 & 1996). In U-Haul I, the
Court held that the Rental Companies do have a beneficial interest in their
contractually specified percentage of the rental receipts. See U-Haul I, 784 N.E.2d
at 1084. What logically and naturally follows from that holding is that
each member of the U-Haul System has a beneficial interest in its own
contractually specified percentage of the rental receipts. See id.
UHI, however, is not contractually entitled to any of the rental receipts.
(See Olds Aff. ¶¶ 7, 9; Supplemental Olds Aff. ¶ 3.) Indeed,
the amounts collected by the Rental Dealers during the years at issue were,
dollar for dollar, allocated by UHI to the other members of the U-Haul
System in accordance with their contractually specified shares of such amounts. (Supplemental
Olds Aff. ¶ 3.) In other words, UHI acts as a clearinghouse,
collecting and then distributing rental income to its rightful owners. The Rental
Dealers, Fleet Owners, and Rental Companies each have a beneficial interest in the
rental receipts; UHI does not. Accordingly, the other members of the U-Haul
System are subject to gross income tax on that portion of the rental
income in which they have a beneficial interest.
See U-Haul I, 784
N.E.2d at 1084 (footnote added). As UHI has no beneficial interest in
any portion of the rental income, it may not be taxed on that
In sum, UHIs income is not derived from Indiana sources for purposes of
the gross income tax. See, e.g., Enterprise Leasing Co., 779 N.E.2d at
1289-90 (setting forth the three-part test for determining whether gross income is derived
from Indiana sources). Indeed, UHIs income arises from the services it provides
in Arizona, not from the rental of moving equipment in Indiana by the
Rental Dealers. Therefore, the critical transaction is the provision of services.
See id. Moreover, UHI has no physical presence or significant business activities
in Indiana giving rise to a business situs within the state. See
id. Finally, there are no minimal or incidental activities related to the
critical transaction which take place in Indiana and give rise to a tax
situs within the state. See id. Consequently, UHIs income is not
derived from Indiana sources and it is not subject to Indianas gross income
For the above stated reasons, the Court GRANTS UHIs motion for summary judgment
and DENIES the Departments motion for summary judgment.
SO ORDERED this 3rd day of May, 2005.
Thomas G. Fisher, Judge
Indiana Tax Court
Barton T. Sprunger
Mark J. Richards
One American Square
Indianapolis, IN 46282-0002
Attorney General of Indiana
By: Allen Morford
Deputy Attorney General
Indiana Government Center South, Fifth Floor
302 West Washington Street
Indianapolis, IN 46204
UHI also argues that taxation of its receipts is impermissible under the
Commerce Clause of the United States Constitution. (
See Petr Br. In Supp.
Of [Its] Mot. For Summ. J. at 14-15.) Nevertheless, because the Court
resolves this case on statutory grounds, it is unnecessary to reach this Constitutional
question. See Bethlehem Steel Corp. v. Indiana Dept of State Revenue, 597
N.E.2d 1327, 1330 (Ind. Tax Ct. 1992).
Over the years, however, some subsidiaries of UHI have acquired property to
serve as retail locations to lease moving equipment. Thus, some Rental Companies
also serve as Rental Dealers at company-owned locations within their territories.
Footnote: These services included preparation of payroll, tax returns, profit and loss statements,
balance sheets, computer analysis, and advice in ways to increase efficiency.
Indiana Dept of State Revenue v. Convenient Indus. of America, Inc., 299 N.E.2d
641, 643, 646 (Ind. Ct. App. 1973).
The facts are even more straightforward in the present case, as UHI
all of its services at its headquarters in Phoenix.
Accord, Enterprise Leasing Co. of Chicago v. Indiana Dept of State Revenue,
779 N.E.2d 1284 (Ind. Tax Ct. 2002) (out-of-state taxpayer not subject to gross
income tax on lease receipts where leased vehicles were located in Indiana, but
all of taxpayers activities in drafting, negotiating, executing, billing, and collecting on leases
occurred at taxpayers out-of-state corporate headquarters), review denied.
The Departments own regulations also support this conclusion, as they provide that
an out-of-state taxpayer with no business situs in Indiana is not subject to
gross income tax on service income if the services performed within the state
are minimal or incidental in comparison to the services performed out-of-state.
Ind. Admin. Code tit. 45, r. 1-1-121 (1992 & 1996).
Although this was not expressly stated by the Court in
it is the natural implication of the Courts holding in that case.
It should be noted that in U-Haul I, the Court addressed the question
of whether the Rental Companies could be taxed on 100% of the Indiana
rental income. As to that question, the Court answered no. The
Court did not hold, as the Department seems to imply, that the Rental
Companies were exempt from taxation on that portion of the rental income in
which they had a beneficial interest. See U-Haul Co. of Indiana, Inc.
v. Indiana Dept of State Revenue, 784 N.E.2d 1078, 1084 (Ind. Tax Ct.