ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
LARRY J. STROBLE STEVE CARTER
RANDAL J. KALTENMARK ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG LLP Indianapolis, IN
TED J. HOLADAY
DEPUTY ATTORNEYS GENERAL
INDIANA TAX COURT
NORRELL SERVICES, INC., )
) Cause No. 49T10-9904-TA-23
INDIANA DEPARTMENT OF )
STATE REVENUE, )
ORDER ON PARTIES CROSS-MOTIONS
FOR SUMMARY JUDGMENT
September 21, 2004
Norrell Services, Inc. (Norrell) appeals the Indiana Department of State Revenues (Department) imposition
of Indiana gross income tax on franchise fees Norrell received during the years
ending November 1, 1992, October 31, 1993, and October 31, 1994 (the years
at issue). The matter is currently before the Court on the parties cross-motions
for summary judgment.
FACTS AND PROCEDURAL HISTORY
The material facts as they relate to this case are undisputed. Norrell
is a Georgia corporation with its principal office in Atlanta, Georgia. Norrell
is in the business of providing temporary employee services. Norrell entered into
franchise agreements (Agreements) with various franchisees in the State of Indiana (franchisees) during
the late 1970s. Pursuant to the Agreements, franchisees paid Norrell a fee
for the franchise and license granted [by Norrell] in th[e] Agreement, for payroll
and billing services[,] and for financing of receivables[.] (Petr App. to Br.
 in Supp. of its Mot. for Summ. J., Ex. 11 at 4.)
(See also Petr App. to Br.  in Supp. of its Mot.
for Summ. J., Ex. 3 at 5.)
In 1982, the Department audited Norrell and concluded that Norrell was liable for
gross income tax on the franchise fees it received during the 1979-1981 tax
years. In so doing, the Department concluded that the Agreements between Norrell
and its franchisees created an agency relationship rather than a franchise relationship.
(See Petr App. to Br.  in Supp. of its Mot. for Summ.
J., Ex. 1 at 3.) Norrell protested the audit. On February
17, 1984, the Department issued a Letter of Findings (1984 LOF) in which
it determined that the Agreements were franchise agreements, and that Norrells local activity
[wa]s not sufficient to permit imposing the gross income tax on the
See footnote (
See Petr App. to Br.  in Supp. of its
Mot. for Summ. J., Ex. 6 at 1-3 (footnote added).)
ANALYSIS AND OPINION
In 1996, the Department issued proposed assessment notices to Norrell to collect gross
income tax on the franchise fees it received for the years at issue.
(See Petr App. to Br.  in Supp. of its Mot. for
Summ. J., Ex. 7-9.) Norrell protested the assessment. On October 6,
1998, the Department issued a Letter of Findings (1998 LOF) in which it
determined that Norrell was liable for gross income tax on the portion of
the franchise fees it received for payment of employees wages and royalty fees.
(Petr App. to Br.  in Supp. of its Mot. for Summ.
J., Ex. 12 at 5-6.)
On April 1, 1999, Norrell initiated an original tax appeal. Norrell subsequently
filed a motion for summary judgment on June 8, 2000. The Department
filed a cross motion for summary judgment on April 20, 2001. The
Court conducted a hearing on the parties motions on September 26, 2001.
Additional facts will be supplied as necessary.
Standard of Review
This Court reviews the Departments final determinations de novo. Ind. Code Ann.
§ 6-8.1-5-1(h) (West Supp. 2004). Therefore, the Court is not bound by
either the evidence presented or the issues raised at the administrative level.
Snyder v. Indiana Dep't of State Revenue, 723 N.E.2d 487, 488 (Ind. Tax
Ct. 2000), review denied.
In addition, 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, Indianas gross income tax was imposed on the
(1) the entire taxable gross income of a taxpayer who [was] 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 [was] not a resident or a
domiciliary of Indiana.
Ind. Code Ann. § 6-2.1-2-2(a) (West 1992) (repealed 2002). Gross income included
cash, notes, credits, or other property that [was] received by the taxpayer .
. . for the taxpayer's benefit." Ind. Code Ann. § 6-2.1-1-10
(West 1992) (repealed 2002).
Norrell claims that the Departments position as stated in its 1998 LOF represents
a change of interpretation in the imposition of the gross income tax as
expressed in the 1984 LOF. (See Petr Br. in Supp. of Mot.
for Summ. J. at 7.) More specifically, Norrell explains that in its
1984 LOF, the Department determined that Norrell, as an out-of-state franchisor, was not
liable for gross income tax on the franchise fees it received from Indiana
franchisees. In the 1998 LOF, however, Norrell explains that the Department determined
that Norrell was liable for gross income tax on the portion of the
franchise fees attributable to royalty and payroll. Such a change, Norrell contends,
is prohibited by Indiana Code § 6-8.1-3-3 which, for the years at issue,
provided that [n]o change in the departments interpretation of a listed tax
See footnote may
take effect before the date the change is  adopted in a rule
under this section . . . if the change would increase a taxpayers
liability for a listed tax.
Ind. Code Ann. § 6-8.1-3-3(b) (West 1994)
(amended 1996) (footnote added).
It is clear to the Court that the position of the Department in
its 1998 LOF is different than the position it took in its 1984
LOF. Specifically, in its 1998 LOF, the Department concluded that the payroll
portion of the franchise fees was taxable because Norrell was acting as an
agent of its franchisees.
See footnote (
See Petr App. to Br.  in Supp.
of its Mot. for Summ. J., Ex. 12 at 5.) In contrast,
the 1984 LOF determined that an agency relationship did not exist between Norrell
and its franchisees. Similarly, the Department determined in its 1998 LOF that
the royalty portion of the franchise fee was taxable because it was an
intangible with a business situs in Indiana (i.e., the
See footnote Yet, in its 1984 LOF, the Department did not attribute the
franchisees activities to Norrell when it determined that Norrell did not have sufficient
local activities to support the imposition of the gross income tax.
Absent a modification in the Agreements, or a change in the governing regulations,
the Department improperly altered its 1984 LOF interpretation as to the imposition of
gross income tax against Norrell.See footnote Accordingly, the Court grants summary judgment in
favor of Norrell and against the Department.
For the above stated reasons, the Court GRANTS the Petitioners motion for summary
judgment and DENIES the Departments motion for summary judgment.
SO ORDERED this 21st day of September, 2004.
Thomas G. Fisher, Judge
Indiana Tax Court
Larry J. Stroble
Randal J. Kaltenmark
Barnes & Thornburg, LLP
1313 Merchants Bank Building
11 South Meridian St.
Indianapolis, IN 46204
Attorney General of Indiana
By: Ted J. Holaday & Laureanne Nordstrom
Deputy Attorneys General
Indiana Government Center South, Fifth Floor
402 West Washington Street
Indianapolis, Indiana 46204-2770
The Departments regulations provide that an
[out]-of-state franchisor with an Indiana franchisee . . . is taxable upon that
part of his fees and income derived from activities in this state, including
the operation of an in-state business situs, the rental of real and personal
property in Indiana, and the performance of services for in-state franchisees, more than
a minimal or incidental amount of which takes place in the state.
Ind. Admin. Code tit. 45, r. 1-1-48(4) (1992).
Indianas gross income tax is a listed tax pursuant to Indiana Code
Ind. Code Ann. § 6-8.1-1-1 (West 1994) (amended 2002).
Taxpayers are not required to pay gross income tax on income they
receive in an agency capacity. See U-Haul Co. of Indiana, Inc. v.
Indiana Dept of State Revenue, 784 N.E.2d 1078, 1082 (Ind. Tax Ct. 2002).
See also Ind. Admin. Code tit. 45, r. 1-1-54 (1992). The
Indiana Supreme Court has defined agency as "the relationship which results from the
manifestation of consent by one person to another that the other shall act
on his behalf and subject to his control, and consent by the other
so to act." Dept of Treasury v. Ice Service, Inc., 41
N.E.2d 201, 203 (Ind. 1942) (quoting Restatement of the Law of Agency, Vol.
I, § 1, p.7).
[I]f a taxpayer has a business situs in Indiana . . .
and the intangible or the income derived therefrom is connected with that business,
either actually or constructively, the gross receipts of those intangibles will be required
to be reported for gross income tax purposes.
Ind. Admin. Code tit.
45, r. 1-1-51 (1992). A business situs may be established when a
taxpayer uses, occupies, or operates an office or performs services within Indiana.
See Ind. Admin. Code tit. 45, r. 1-1-49 (1992).
The Court notes that
the [D]epartment may exercise its discretion to retroactively rescind or modify rulings in
extreme circumstances, which are not all inclusive:
There was a misstatement or omission of material facts.
The facts, as developed after the ruling, were materially different from the facts
on which the department based its ruling.
There was a change in the applicable statute, case law or regulation.
The taxpayer directly involved in the ruling did not act in good faith.
Ind. Admin. Code tit. 45, r. 15-3-2(d)(2) (1992) (emphasis added). Nevertheless, the
Department has not pointed to any evidence to justify its change in policy
from its 1984 LOF to its 1998 LOF. See also State ex
rel. ANR Pipeline Co. v. Indiana Dep't of State Revenue, 672 N.E.2d 91,
94 (Ind. Tax Ct. 1996) (stating that a change in reasoning does not
constitute an error of law and does not justify the alteration of a
final administrative decision).