ATTORNEY FOR PETITONER:
ATTORNEY FOR RESPONDENT:
LARRY J. STROBLE
KAREN M. FREEMAN-WILSON
BARNES & THORNBURG
ATTORNEY GENERAL OF INDIANA
INDIANA TAX COURT
WABASH, INC., )
v. ) Cause No. 49T10-9603-TA-27
DEPARTMENT OF STATE )
ON APPEAL FROM A FINAL DETERMINATION OF THE DEPARTMENT OF STATE REVENUE
June 1, 2000
The petitioner, Wabash
Inc. (Wabash) appeals from a final determination of the Department of State Revenue
(Department), finding that Wabash erroneously included Wabashs parent company, Kearney-National Inc. (KN), on
its consolidated tax return for the 1990 tax year. In its original
tax appeal, Wabash disagrees with the Departments final determination and asks this Court
to reverse it. The Department also raises an additional issue: whether the
apportionment method used by Wabash to calculate its taxes was correct.
the reasons explained below, the Court finds in favor of Wabash on both
issues and reverses the Departments final determination.
FACTS AND PROCEDURAL HISTORY
is a manufacturing corporation located in Wabash, Indiana. Wabash is also a
wholly-owned subsidiary of Kearney-National Holdings II (KNH II), a Delaware corporation doing business
in Indiana. In turn, KNH II is a wholly-owned subsidiary of Kearney-National
Holdings (KNH), a Delaware holding company of KN that possessed no Indiana connections.
The above-named companies were all contained under the corporate umbrella of KN,
which is headquartered in White Plains, New York.
In 1989, KN considered the acquisition of the Coto Corporation (Coto), a competitor
of KNs located in Rhode Island. In furtherance of this acquisition, KN
selected Michael Carper (Carper), the general manager of Wabash, to participate in an
acquisition study in the fall of 1989 to examine the benefits that Coto
could bring to KN. Following completion of the study, KN acquired Coto
as of February 1, 1990. Following the merger, all of Wabashs operations
moved to Cotos plant in Rhode Island. KN engaged Carper to coordinate
the move of Wabashs plant, personnel and machinery to Cotos plant in Rhode
Island because of his involvement in the acquisition study. On January
1, 1990, Carper became a full-time employee of KN while working at the
Wabash plant until his voluntary departure in July or August of 1990.
Thereafter, Wabash filed its Indiana adjusted gross income and supplemental net income tax
return for the 1990 tax year as a consolidated return (return).See footnote
Ind. Code Ann. § 6-3-4-14 (West 1989). The return listed Wabash, KNH
II, KNH and KN as corporations.
See footnote Following an audit of Wabash, the
Department subsequently issued a proposed notice of assessment on March 4, 1994, which
determined that KN had erroneously been included in Wabashs 1990 tax return.
Wabash appealed this ruling, which the Department upheld in a letter of finding
on January 29, 1996. (Petr. Ex. 4.) Wabash then filed this
original tax appeal on March 26, 1996. The Court held a trial
in this matter on April 23, 1997 and oral arguments from both parties
were heard on October 22, 1997. Additional facts will be supplied where
ANALYSIS AND OPINION
Standard of Review
The Court reviews findings of the Department de novo and is bound by
neither the evidence nor the issues raised at the administrative level. See
Ind. Code Ann. § 6-8.1-5-1(h) (West 2000); see also Uniden America Corp. v.
Department of State Revenue, 718 N.E.2d 821, 824 (Ind. Tax Ct. 1999).
Wabash contends that Carpers activities on behalf of itself and KN were enough
to generate Indiana-sourced income, thus allowing KNs inclusion on Wabashs 1990 return.
The Department argues, however, that Carpers activities were not substantial enough to generate
sufficient Indiana-sourced income that would permit KNs inclusion.
Ind. Code Ann. §
6-3-4-14 (West 2000) states that several companies may file a consolidated return as
long as each company has adjusted gross income derived from Indiana sources.
Ind. Code Ann. § 6-3-2-2 (West 2000) lists the Indiana sources from which
Indiana-sourced income can be derived. Among the enumerated sources are:
Income from real or tangible personal property located in Indiana;
Income from doing business in Indiana;
Income from a trade or profession conducted in Indiana;
Compensation for labor or services rendered within Indiana; and
Income from stocks and bonds and other intangible personal property having receipts attributable
Wabash argues that KN meets the doing business factor because Carpers activities in
Indiana were more than minimal. While the Indiana Code does not define
doing business, Ind. Admin. Code tit. 45, r. 3.1-1-38 (1988)(codified in present form
at id. (1996)) defines the phrase as:
Maintenance of an office or other place of business in the state;
Maintenance of an inventory of merchandise or material for sale distribution, or manufacture,
or consigned goods;
Sale or distribution of merchandise to customers in the state directly from company-owned
or operated vehicles where title to the goods passes at the time of
sale or distribution;
Rendering services to customers in the state;
Ownership, rental or operation of a business or of property (real or personal)
in the state;
Acceptance of orders in the state; [and]
Any other act in such state which exceeds the mere solicitation of orders
so as to give the state nexus under P.L. 86-272 to tax its
Wabash argues that KN qualifies under Ind. Admin. Code tit. 45
r. 3.1-1-38(7) because Carpers activities on behalf of KN were more than
minimal. (Petr. Reply Br. at 10, 14.) 15 U.S.C. §§ 381-384 (1999)
(P.L. 86-272) deals with a state subjecting a foreign corporation to taxation.
In particular, section 381(a) states:
No state, or political subdivision thereof, shall have power to impose, for any
taxable year ending after September 14, 1959, a net income tax on the
income derived within such State by any person from interstate commerce if the
only business activities within such State by or on behalf of such person
during such taxable year are either, or both, of the following:
the solicitation of orders by such person, or his representative, in such State
for sales of tangible personal property, which orders are sent outside the State
for approval or rejection, and, if approved, are filled by shipment or delivery
from a point outside the State; and
the solicitation of orders by such person, or his representative,
in such State in the name
of or for the benefit of a prospective
customer of such person, if orders by such customer to such person
to enable such customer to fill orders resulting from such solicitation are orders
described in paragraph (1).
Section 381(a) thus exempts foreign corporations from tax where those companies only engage
in the mere solicitation of sales. The United States Supreme Court in
Wisconsin Department of Revenue v. William Wrigley Jr., 505 U.S. 214, 228-29
112 S.Ct. 2447, 2456-57 (1992) held that P.L. 86-272 only protects the actual
solicitation of orders, as well as other activities that serve no independent business
function apart from their connection to the solicitation of orders. In Wrigley,
Wisconsin sought to tax the Wrigley company for various activities it conducted inside
the state related to its chewing gum business. The activities in question,
among other things, consisted of the exchange of fresh gum for stale gum,
the storing of gum inside Wisconsin and the supplying of gum through agency
stock checks. The Court found that P.L. 86-272 contains a de minimis
exception if an activity is trivial in nature. See William Wrigley Jr.,
505 U.S. at 231-32, 112 S.Ct. at 2458. The Court also stated
that a company will lose the protection of P.L. 86-272 if it performs
an activity that establishes a nontrivial additional connection with the taxing state.
See id., 505 U.S. at 232, 112 S. Ct. at 2458. Despite
the fact that Wrigleys Wisconsin sales only accounted for a small percentage of
its total sales, the Court found that Wrigleys activities established a nontrivial additional
connection with Wisconsin. See id., 505 U.S. at 235, 112 S.Ct. at
2460. The Indiana Supreme Court has stated that particular emphasis should be
placed upon the totality of the business activities of a company within Indiana
when interpreting P.L. 86-272. See Department of Revenue v. Kimberly-Clark Co., 275
Ind. 378, 416 N.E.2d 1264, 1268 (1981).
II. Apportionment Formula
In examining the business activities of Wabash, it is helpful to consider how
other courts have interpreted P.L. 86-272 as well. In Magnetek Controls, Inc.
v. Department of Treasury, 562 N.W.2d 219, 224 (Mich. Ct. App. 1997), the
Michigan Court of Appeals held that the taxpayer exceeded the scope of P.L.
86-272s protection by sending sales managers into Michigan for 10-14 days per year.
Similarly, in Brown Group Retail, Inc. v. Franchise Tax Board, 44 Cal.
App. 4th 823, 836, 52 Cal. Rptr.2d 202, 209 (Cal. Ct. App. 1996),
the California Court of Appeal held that P.L. 86-272s exception did not apply
to a taxpayer who sent two of its employees to help customers with
their businesses. In addition to these two courts, the Department has held
that a taxpayer did business in Indiana where it sent its employees once
or twice a year into the state in order to deliver newspapers.
See Rul. IT96-03 (Jan. 7, 1997) (Petr. Ex. 26.)
In this case, the Department argues that Carpers activities on behalf of KN
did not extend beyond the solicitation exception listed in P.L. 86-272.
responsibilities during the acquisition of Coto included coordinating the move of Wabashs equipment
to Rhode Island, coordinating inventory levels between Wabash and Cotos plants and advising
both companies salesmen and customers about the planned consolidation. (Trial Tr. at
22.) At trial, KNs Chief Fiancial Officer John F. Tierney, Jr. explained
that Carpers expertise was important to ensure that consolidation went smoothly: Youve got
a lot of risk and you have to make sure you do it
the right way or you can bring both companies to their knees.
So, [Carper] . . . was the best guy to do that.
(Trial Tr. at 56.)
This Court finds that KNs Indiana activities rose above mere solicitation under P.L.
86-272. The Court finds that KN did business in Indiana as defined
by Ind. Admin. Code tit. 45, r. 3.1-1-38(7). Since it generated $2 million
worth of sales attributable to Indiana, KN had Indiana-sourced income under Ind. Code
Ann. § 6-3-2-2. Since KN had Indiana-sourced income, it was properly includible
in Wabashs return under Ind. Code Ann. § 6-3-4-14. The Court reverses
the Departments final determination on this issue.
The Department next asks this Court to determine whether the apportionment formula
used by Wabash to calculate its taxes was correct. Having raised this
issue, the Department bears the burden of proving that Wabashs Indiana income does
not fairly reflect Indiana-sourced income. See Exxon Corp. v. Wisconsin Dept. of
Revenue, 447 U.S. 207, 219-20, 100 S.Ct. 2109, 2118 (1980) (determining that the
tax cannot be out of proportion to the business transacted by the appellant
in that state); see also Hunt, 709 N.E.2d at 772. (concluding that apportionment
formula can be used unless it does not fairly reflect Indiana income)(citing section
6-3-2-2(1). The Department argues that Wabashs calculations lead to a disproportionate amount
of Indiana-sourced income.
As provided by Ind. Code Ann. § 6-3-2-2(b) (West 2000), the
standard apportionment formula multiplies a companys business income by the total of its
property, payroll and sales factors divided by three to determine the tax (standard
formula). See also Ind. Admin. Code tit. 45, r. 3.1-1-39 (1988) (codified
in present form at id. (1996)) (describing the standard formula). However, if
the stated method fails to fairly represent Indiana source income, Ind. Admin. Code
tit. 45, r. 3.1- 1-39 also authorizes the Department or the taxpayer (upon
obtaining a ruling from the Department) to use another method that effectuates a
more equitable allocation and apportionment of a taxpayers income. See also Ind.
Code Ann. § 6-3-2-2.
The Department advocates using a stacked method to compute Wabashs taxes. Under this
method, KNs return would be computed separately from the rest of the companies
listed in Wabashs return by specifically applying the standard formula to each company.
(Trial Tr. at 21.) That figure would then be stacked on
top of the taxes computed by using the standard formula applied to the
other companies consolidated returns to arrive at the taxable income for Wabash. (Trial
Tr. at 21.)
The U.S. Supreme Court, this Court and the Department have all recognized that
the standard method is the method often used by related corporations to compute
their state income taxes. In Container Corp. of America v. Franchise Tax
Board, 463 U.S. 159, 170, 103 S.Ct. 2933, 2943 (1983) the United States
Supreme Court not only affirmed the standard formula but also stated that it
has become a benchmark against which other apportionment formulas are judged. The
Supreme Court further stated that the standard formula gained wide approval because the
property, payroll and sales factors reflect a large share of the activities by
which value is generated. See id., 463 U.S. at 183, 103 S.Ct.
at 2949. Thus, the standard formula may be used unless the Department
proves that the income attributed to Indiana from using that formula is out
of proportion to the business transacted in Indiana. See id., 463 U.S.
at 170, 103 S.Ct. at 2942.
This Court has also recognized Indianas reliance on the standard formula. See
Sherwin-Williams Co. v. Department of State Revenue, 673 N.E.2d 849, 851 (Ind. Tax
Ct. 1996) (stating that Indiana has adopted standard formula); see also Hunt, 709
N.E.2d at 771 n.12 (stating that the three-factor formula has been approved by
the U.S. Supreme Court) (citing Container Corp., 463 U.S. at 1701, 103 S.Ct.
The Department has acknowledged that the standard formula is the most accepted and
recognized method of computing a companys taxes. (Petr. Ex. 50.) See Ind.
Admin. Code tit. 45, r. 3.1-37,-45 (1996) (stating that the Department will depart
from the standard formula only if the use of such formula works a
hardship or injustice upon the taxpayer, results in an arbitrary division of income,
or in other respects does not fairly attribute income to Indiana). The
Court should give great weight to the Departments longstanding interpretation of its own
regulation unless this interpretation would be inconsistent with the regulation itself. See
Department of State Revenue v. Bulkmatic Transport. Co., 648 N.E.2d 1156, 1158 (Ind.
The Department has reiterated its preference for the standard method in a
series of revenue rulings where the taxpayer sought to use the stacked method.
See Rul. 81-4381 GIT (May 29, 1981) (Petr Ex. 52) (The Indiana
Department of Revenue has consistently required that a consolidated return use a combined
three-factor apportionment formula as the fairest method of reflecting the income derived from
Indiana sources.); Rul. 84-6943 ITC (October 3, 1986) (Petr. Ex. 45) (The basic
premise behind a consolidated income tax return is that the group is treated
as a single corporation . . . [A] combined three-factor formula is employed
to fairly reflect the income derived from Indiana sources.); see also Rul. 90-0114
ITC (November 13, 1990) (Petr. Ex. 46) (The Indiana Department of Revenue forms
[ ] do not provide for the calculation of income as described by
the taxpayer. . . . There are no provisions for separate calculations with
a single consolidation to determine Indiana taxable income.) (emphasis in original).
The spirit and intent of a consolidated adjusted gross income tax
return is to treat an affiliated group as a single taxpayer. Cf.
Associated Ins. Cos., v. Department of State Revenue, 655 N.E.2d 1271, 1274-75 (Ind.
Tax Ct. 1995) trans. denied. Further, in a consolidated return the seperte
entities of the various member corporations are disregarded; the consolidated income of the
entire group is reported on a single return and a single tax is
paid on the total income. See Chesapeake Industries, Inc. v. Comptroller of
the Treasury, 475 A.2d 1224,26 (Md. App. 1984). Sufficient differences in the
method of doing business may be justification for separate classification and differential tax
treatment. See Area Interstate Trucking, Inc. v. Department of State Reveune, 605
N.E.2d 272, 277-78 (Ind. Tax Ct. 1992) cert. denied, 510 U.S.864, 114 S.
Ct. 183 (1993) (citing Sunshine Promotions, Inc. v. Ridlen, 483 N.E.2d 761, 766
(Ind. Ct. App. 1985) trans. denied. In this case, however, the Department
has failed to show how the standard formula employed by Wabash for the
1990 tax year unfairly reflects Wabashs Indiana-sourced income. Thus, it was appropriate
for Wabash to use the standard formula.
For the aforementioned reasons, the Court finds that KN had sufficient Indiana-sourced income
for the 1990 tax year to be included on Wabashs return. The
Court further finds that the standard three-factor apportionment formula employed by Wabash on
its 1990 return was correct. Thus, the Court now REVERSES the Departments
final determination in this case.
This issue was raised by the Department after the filing
of the instant case; nonetheless, the Court possesses jurisdiction to decide it.
See Ind. Code Ann. § 6-8.1-5-1(h) (West 2000) (stating that the
Court shall hear appeals from the Department de novo).
The State Board places some emphasis on the fact that
taxable year ended on January 31, 1990. (Respt Br. at 17-19.)
Thus, the State Board argues, KN only employed Carper for 31 days during
the 1990 tax year. However, the length of employment is not dispositive
in such instances. Rather, minimum contacts with the taxing state are what
matter for tax purposes. See Hunt Corp. v. Department of State Revenue,
709 N.E.2d 766, 768 (Ind. Tax Ct. 1999). As a result, the
Court will not consider this argument.
KN suffered a loss for the 1990 tax year, which enabled
Wabash to decrease its taxes when it included this loss on its return.
Despite the fact that KNH has no Indiana connections, the
Department did not dispute its inclusion in Wabashs 1990 tax return.
At trial, the Department made a number of relevancy objections
to some of Wabashs exhibits. Relevancy is defined by the Indiana Rules
of Evidence as evidence having any tendency to make the existence of any
fact that is of consequence to the determination of the action more probable
or less probable than it would be without the evidence. Ind. R.
Evid. 401. Relevant evidence is generally admissible. See Robinson v. State,
720 N.E.2d 1269, 1271 (Ind. Ct. App. 1999). After taking the objections
under advisement, the Court finds the exhibits relevant to the case at hand
and thus OVERRULES the Departments objections.
Normally, the Department, not the petitioner argues in such cases
that the petitioners activities exceeded the solicitation exception noted in P.L. 86-272.
See West Publg Co. v. Department of State Revenue, 524 N.E.2d 1329, 1336
(Ind. Tax Ct. 1988).