ATTORNEYS FOR PETITIONERS: ATTORNEYS FOR RESPONDENT:
BARTON T. SPRUNGER STEVE CARTER
MARK J. RICHARDS ATTORNEY GENERAL OF INDIANA
ICE MILLER Indianapolis, IN
LINDA I. VILLEGAS
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
ENTERPRISE LEASING COMPANY OF )
CHICAGO, ENTERPRISE LEASING )
COMPANY OF DETROIT, ENTERPRISE )
LEASING COMPANY OF GEORGIA, and )
ENTERPRISE LEASING COMPANY OF ST. )
LOUIS, individually, and as successor to )
ENTERPRISE FLEETS, INC., )
v. ) Cause No. 49T10-9807-TA-74
INDIANA DEPARTMENT OF STATE )
ORDER ON PETITIONERS MOTION FOR SUMMARY JUDGMENT
December 18, 2002
The Petitioners, Enterprise Leasing Company of Chicago, et al., petition this Court to
set aside the final determinations of the Indiana Department of State Revenue (Department),
which assessed the Petitioners $218,878.35 in Indiana gross income tax, adjusted gross income
tax, supplemental net income tax, and penalties and interest for the fiscal years
ending July 31, 1984 through July 31, 1993 (years at issue). The
matter is currently before the Court on the Petitioners motion for summary judgment,
in which they raise the following issues:
I. Whether Petitioners gross income from leasing vehicles to customers who titled,
registered, and located the vehicles in Indiana is derived from sources within Indiana
within the meaning of Indiana Code § 6-2.1-2-2?
II. Whether, for purposes of calculating its Indiana adjusted gross income tax
and supplemental income tax liabilities, the numerator of Petitioners property factor should include
the leased vehicles that were located, titled, and registered in Indiana?
FACTS AND PROCEDURAL HISTORY
The material facts as they relate to this motion for summary judgment are
undisputed. The Petitioners are nonresident corporations with corporate headquarters located outside Indiana.
With one exception not relevant in this case, none of the Petitioners
has ever had an office, warehouse, distribution center, or any type of business
location in Indiana. None of the Petitioners has ever had employees in
The Petitioners are in the business of leasing motor vehicles to the general
public. They engage in two relevant types of leasing activity. First,
they lease vehicles to individual members of the public for periods of more
than one year (long-term retail leases). Second, they lease multiple vehicles to
business entities for periods of more than one year (fleet leases).
Under the terms of the fleet and long-term retail leases, the lessees exercise
complete control over the use and location of the leased vehicles, including the
right to designate an independent automobile dealer from which they can pick-up their
The lessees can use the leased vehicles anywhere within the continental
United States and Canada.
The lessees are responsible for repairing, maintaining, and insuring the leased vehicles.
Petitioners make no independent warranty or guaranty with respect to the leased vehicles,
and the lessees agree to pursue any claim for breach of a manufacturers
warranty directly against the manufacturer at their own expense. Furthermore, the lessees
are responsible for licensing and registering the vehicles. To the extent a
lessee chooses not to handle these matters, the Petitioners will, via mail, license
and register the vehicles in whatever state the lessee desires. The lessee,
however, is responsible for all licensing and registration costs.
All fleet and long-term retail leases are drafted, negotiated, and executed by the
Petitioners in their out-of-state headquarters. Petitioners make all billings and collections for
these leases from their out-of-state headquarters. All lease payments are sent to
the Petitioners out-of-state corporate headquarters. The terms of the lease payments are
not contingent on where the leased vehicles are used.
During the years at issue, the Petitioners entered into, and received income from,
various fleet and long-term retail leases (leases at issue). The lessees to
these leases directed the Petitioners to deliver the vehicles to Indiana, where they
were subsequently titled and registered. The Petitioners, believing the gross income it
received from these leases was not subject to Indianas gross income tax because
it was not derived from an Indiana source, did not file Indiana corporate
income tax returns for the years at issue.
In March of 1995, however, the Department issued notices of proposed assessment to
the Petitioners, assessing them for gross income tax, adjusted gross income tax, supplemental
net income tax, and interest and penalties for the years at issue.
Specifically, the Department determined that the Petitioners gross income from the leases at
issue was taxable because the income was derived from an Indiana source.
The Department also determined that, for purposes of Indianas adjusted gross income tax
and supplemental income tax, the leased vehicles that were titled and registered in
Indiana should have been included in the numerator of the Petitioners property factor
for apportionment purposes.
On May 30, 1995, each of the Petitioners filed a protest with the
Department. After holding a joint administrative hearing, the Department denied the Petitioners
protests on February 4, 1998.
The Petitioners filed an original tax appeal with this Court on July 1,
1998. On March 25, 1999, the Petitioners filed this motion for summary
judgment. This Court conducted a hearing on the Petitioners motion for summary
judgment on July 13, 1999. Additional facts will be supplied as necessary.
ANALYSIS & OPINION
Standard of Review
This Court reviews final determinations of the Department de novo. Ind. Code
§ 6-8.1-9-1(d); Salin Bancshares v. Indiana Dept of State Revenue, 744 N.E.2d
588, 591 (Ind. Tax Ct. 2000). Accordingly, it is bound by neither the
evidence nor the issues presented at the administrative level. Salin Bancshares, 744
N.E.2d at 591.
A motion for summary judgment will be granted only when there is no
genuine issue of material fact, and a party is entitled to judgment as
a matter of law. Ind. Trial Rule 56(C); Uniden Am. Corp. v.
Indiana Dept of State Revenue, 718 N.E.2d 821, 824 (Ind. Tax Ct. 1999).
If no genuine issue of material fact exists, either the movant or
the non-movant may be granted summary judgment. Encyclopaedia Britannica, Inc., v. State
Bd. of Tax Commrs, 663 N.E.2d 1230, 1232 (Ind. Tax Ct. 1996) (internal
quotation marks omitted).
The first issue in this case is whether or not Indiana can tax
the Petitioners gross income earned as a result of the leases at issue.
More specifically, the parties dispute whether the Petitioners gross income is derived
from sources within Indiana as required by Indiana Code § 6-2.1-2-2(a).
Indiana Code § 6-2.1-2-2(a) imposes a gross income tax on the receipt of
the taxable gross income derived from activities or businesses or any other sources
within Indiana by a taxpayer who is not a resident or domiciliary of
Indiana. Ind. Code § 6-2.1-2-2(a)(2) (emphasis added). To determine whether gross
income is derived from an Indiana source, the Court must (1) isolate the
transaction giving rise to the income (the critical transaction), (2) determine whether the
Petitioners have a physical presence in, or significant business activities within the taxing
state (business situs), and (3) 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). First Natl Leasing and Fin. Corp. v.
Indiana Dept of State Revenue, 598 N.E.2d 640, 643-44 (Ind. Tax Ct. 1992);
Indiana-Kentucky Elec. Corp. v. Indiana Dept of State Revenue, 598 N.E.2d 647, 663
(Ind. Tax Ct. 1992).
A. The Critical Transaction
The critical transaction is defined as the activity that gives rise to the
gross income in dispute. First Natl Leasing, 598 N.E.2d at 643.
In this case, the activity that gives rise to the Petitioners gross income
is their leasing of vehicles. See id. at 645 (stating that
in the case of an out-of-state corporation that leased property which was located
in Indiana, the critical transaction was the leasing of property).
The Department claims, however, the critical transaction is the several leases between the
Petitioners and their customers in Indiana. (Respt Br. in Opposition to Mot.
for Summ. J. at 6.) In essence, the Department claims that the
revenue generated from the leases at issue in this case (i.e., the critical
transactions) is income derived from intangibles. (See Respt Br. in Opposition to
Mot. for Summ. J. at 10.)
Two tests are used to determine whether income from an intangible has an
Indiana source: the business situs test and the commercial domicile test.
See Bethlehem Steel Corp. v. Indiana Dept of State Revenue, 597 N.E.2d 1327,
1334-35 (Ind. Tax Ct. 1992), affd by 639 N.E.2d 264 (Ind. 1994); see
also Ind. Admin. Code tit. 45, r. 1-1-51 (repealed 1999). Unless a
taxpayer is commercially domiciled in Indiana, however, the commercial domicile test is irrelevant
because the analysis under that test is then identical to the analysis under
the business situs test. Bethlehem Steel, 597 N.E.2d at 1335 (quoting Ind.
Admin. Code tit. 45, r. 1-1-51 (repealed 1999)). Because Indiana has never
been the commercial domicile of any of the Petitioners, the question is simply
whether the Petitioners had a business situs in Indiana.
B. Business Situs
The Petitioners assert that they do not have an Indiana business situs because
they do not maintain a physical presence in Indiana (i.e., they do not
maintain offices, warehouses, inventory, or employees in Indiana), nor do they perform significant
business activities related to their leasing function (such as conducting sales, receiving rental
payments, or negotiating lease contracts) in Indiana. Furthermore, the Petitioners assert that
although they owned vehicles that were located, titled, and registered in Indiana, they
exercised no control over their location or use within the state.
The Department insists, however, that the Petitioners do have an Indiana business situs
because they have performed significant business activities in this state. Specifically, the
Department contends that the Petitioners fall within the scope of Indiana Administrative Code
title 45, rule 1-1-49, which provides that a business situs may be established
in Indiana by the [o]wnership, leasing, rental or other operation of income-producing property
in the state. Ind. Admin. Code tit. 45, r. 1-1-49(6) (repealed 1999).
As this Court has previously held, [t]he use of the word operation in
. . . 45 IAC 1-1-49(6) indicates an active participation in the listed
activities of ownership, leasing, or rental is necessary for the establishment of a
business situs in Indiana. First Natl Leasing, 598 N.E.2d at 644.
In other words, the Petitioners must be active, and not passive, participants in
the ownership, leasing and rental of its vehicles. See id. The
Petitioners claim they are nothing more than passive participants in the ownership, leasing,
and rental of property in Indiana, as the lessees exercise complete control over
the use and location of the leased vehicles and are responsible for all
repairs, maintenance, insuring, and titling and registration. The Department asserts, however, that
the Petitioners participate in a much more active capacity:
The Petitioners actively place the cars and trucks in Indiana. The Petitioners
instruct the manufacturer where to deliver the vehicles. . . .
Once the cars are located in Indiana[,] the Petitioner[s] title the cars in
Indiana in [their] own name[s] and renew the registration annually. . . .
In the case at bar the Petitioners actively not only place the cars
in Indiana but, because they renew the registration annually, and thus have regular
and ongoing knowledge of and consent to the location of the cars [sic].
(Respt Br. in Opposition to Mot. for Summ. J. at 8-9.) The
Department is mistaken.C. Tax Situs
Indiana determines tax consequences based on the substance, not the form, of a
transaction. Bethlehem Steel, 597 N.E.2d at 1331 (citing Monarch Beverage v. Indiana
Dept of State Revenue, 589 N.E.25 1209, 1215 (Ind. Tax Ct. 1992)).
In the evidence submitted to this Court, nothing indicates that the Petitioners participated
in the decisions as to where the leased vehicles were located those
were decisions that rested completely with the lessees. Once the lessees made
those decisions, the Petitioners merely issued ship-to instructions from their out-of-state headquarters, at
the request of the lessees, to facilitate delivery. The ship-to instructions do
not rise to the level of active participation in the ownership, leasing, or
rental of property in Indiana. See First Natl Leasing, 598 N.E.2d at
644 (stating that out-of-state corporation that did not consent to the location of
its leased equipment in Indiana did not have an Indiana business situs.)
The Department likewise confuses the titling and annual registration of the leased vehicles
in Indiana as active participation by the Petitioners. The evidence shows that
the Petitioners lessees handle the registering and licensing of the vehicles in Indiana.
Indeed, only in those instances where a lessee chose not to handle
those administrative matters did the Petitioners, from their out-of-state corporate headquarters, mail title
applications and/or vehicle registrations to the Indiana Bureau of Motor Vehicles for processing.
Such administrative activities do not rise to the level of active participation
in the ownership, leasing, or rental of property in Indiana. Thus, the
Petitioners did not have an Indiana business situs for the years at issue.
Assuming arguendo that the Petitioners did establish an Indiana business situs through their
ownership of leased vehicles located in Indiana, a business situs in this state
is insufficient, by itself, to impose tax on a nonresidents income. Indeed,
a taxpayer may have more than one business situs. Ind. Admin. Code
tit. 45, r. 1-1-51 (repealed 1999)(concerning intangible personal property). This is
equally true for tangible property, especially mobile property such as the cars and
trucks involved in this case. When a taxpayer has more than one
business situs, the Court must determine which is the tax situs.
See Indiana-Kentucky Elec., 598 N.E.2d at 662. To determine whether Indiana is
the Petitioners tax situs, this Court must examine whether the Petitioners Indiana activities
are related to the critical transaction and are more than minimal, not remote
or incidental to the total transaction.
The sole activity by the Petitioners in Indiana is ownership of vehicles that
are located here pursuant to the lessees direction. The critical transaction in
this case is the leasing of vehicles. All the leases at issue
were executed in the Petitioners out-of-state headquarters, not in Indiana. Furthermore, the
leases were not negotiated in Indiana, nor were the lease payments received in
Indiana. Consequently, none of the Petitioners activities related to the lease contracts
themselves are conducted in Indiana.
The purpose of a lease is to transfer for consideration certain rights in
property, generally use and possession. Indiana Dept of State Revenue v. Indianapolis
Transit Sys., Inc., 356 N.E.2d 1204, 1209-10 (Ind. Ct. App. 1976). The
Petitioners do not exert control over their lessees use or possession of the
vehicles. The decision as to where the vehicles are located and used
rests with the lessees alone.
Finally, the Petitioners do not derive their lease income from the use of
the vehicles exclusively in Indiana. Indeed, if the lessees choose to relocate
their leased vehicles from Indiana to another state (or vice versa), there is
no change in the rental payments or rental terms they remain the
same wherever the lessees use their vehicles.
In the instant case, the activities related to the lease formation and execution,
as well as their activities related to the purpose of the lease (i.e.,
the use and possession of the vehicles) are activities performed by the Petitioners
lessees. The Court, therefore, finds that the Petitioners ownership of vehicles located
in Indiana is an activity that is not more than minimal, and is
remote and incidental to the lease transaction from which their gross income is
derived. Ownership alone is . . . not the degree of activity
contemplated by the Indiana gross income tax statute. First Natl Leasing Co.,
598 N.E.2d at 645.
For the reasons stated above, the Court finds that the income the Petitioners
have derived from leasing vehicles to its customers, which are subsequently located, titled
and registered in Indiana, is not income derived from sources within Indiana.
Accordingly, the income is not subject to Indianas gross income tax.
The second issue is whether the Petitioners must include the vehicles located, titled,
and registered in Indiana in the formula for calculating their Indiana adjusted gross
income tax and supplemental net income tax
liabilities under Indiana Code § 6-3-2-2.
While both parties claim the answer is obvious under the statute, they
arrive at different outcomes.
Indiana imposes a tax on every corporations adjusted gross income derived from sources
within Indiana. Ind. Code § 6-3-2-1(b). In cases where a corporation
derives business income from sources both within and without Indiana, the adjusted gross
income derived from sources within the state of Indiana is determined by an
apportionment formula. See Ind. Code § 6-3-2-2(b). Indianas apportionment formula multiplies
the business income derived from sources both within and without Indiana by a
fraction, the numerator of which is a property factor plus a payroll factor
plus a sales factor, and the denominator of which is three. Id.
At issue in this case is the property factor of the apportionment
The property factor is a fraction, the numerator of which is the average
value of the taxpayers real and tangible personal property owned or rented and
used in this state during the taxable year and the denominator of which
is the average value of all the taxpayers real and tangible personal property
owned or rented and used during the taxable year. . . . Property
owned by the taxpayer is valued at its original cost. Property rented
by the taxpayer is valued at eight (8) times the net annual rental
Ind. Code § 6-3-2-2(c) (emphasis added). Conclusion
The Petitioners contend that this statute imposes two specific, separate requirements for property
to be included in the numerator of the property factor. First, it
must be owned or rented by a taxpayer. Second, the property must
be used by the taxpayer in Indiana during the taxable year in question.
(See Petrs Br. in Support of Mot. for Summ. J. at 29.)
While the Petitioners admit that they own the leased vehicles at issue
in this case, they argue that because they did not physically use the
vehicles in Indiana, they should not have to include them in the numerators
of their property factors.
The Department responds, however, that Indiana Code § 6-3-2-2(c) imposes two alternative
requirements for property to be included in the property factor numerator: it
is either 1) owned [by the taxpayer], or 2) rented and used.
(Respt Br. in Opposition to Mot. for Summ. J. at 18 (emphasis in
original).) Accordingly, the Department maintains that because the Petitioners owned the leased
vehicles, they were properly included in the Petitioners property factor numerators.
The Court will construe and interpret a statute only if is unclear and
ambiguous. Shoup Buses, Inc. v. Indiana Dept of State Revenue, 635 N.E.2d
1165, 1167 (Ind. Tax Ct. 1994). When a statute is susceptible to
more than one interpretation, it is ambiguous. Amoco Prod. Co. v Laird,
622 N.E.2d 912, 915 (Ind. 1993). Although a disagreement between the parties
does not necessarily indicate ambiguity, opposing interpretations are persuasive in suggesting than an
ambiguity exists. Shoup Buses, 635 N.E.2d at 1168. When construing a
statute, the Courts function is to give effect to the intent of the
legislature in enacting the statutory provision. Mynsberge v. Indiana Dept of State
Revenue, 716 N.E.2d 629, 632 (Ind. Tax Ct. 1999). Generally, the best
evidence of that intent is found in the language of the statute.
Id. The Court will strive to give words and phrases in a
statute their plain, ordinary and usual meaning. Uniden Am. Corp., 718 N.E.2d
at 824. Further, the Court must read a statute to give effect
to every word. USAir, Inc. v. Indiana Dept of State Revenue, 623
N.E.2d 466, 470 (Ind. Tax Ct. 1993). The Court will avoid an
interpretation that renders any part of the statute meaningless or superfluous. Id.
Using these rules of statutory construction, the Court concludes that the Petitioners
interpretation of Indiana Code § 6-3-2-2(c) is the correct interpretation.
First, under Indiana Code § 6-3-2-2(c), property can be attributed to a taxpayer
as either the owner or a lessee. In fact, the statute specifically
addresses how the value of the property is calculated, depending on whether the
taxpayer is the owner of the property or the lessee of the property.
Ind. Code § 6-3-2-2(c) (stating that while [p]roperty owned by the taxpayer
is valued at its original cost. . . . [p]roperty rented by the
taxpayer is valued at eight (8) times the net annual rental rate).
If the Court reads this provision in conjunction with the owned or rented
and used language earlier in the statute, the terms owned and rented can
only mean owned or rented by the taxpayer. It follows, then, that
used means by the taxpayer as well.
Second, when Indiana Code § 6-3-2-2(c) specifically addresses the value of property held
by the taxpayer as either its owner or the lessee (again, [p]roperty owned
by the taxpayer is valued at its original cost. . . . [p]roperty
rented by the taxpayer is valued at eight (8) times the net annual
rental rate), it is clear that the legislature intended that property 1) be
owned or rented by the taxpayer, and 2) be used by the taxpayer
in Indiana. Had the legislature intended the statute to be read as
two alternative requirements (i.e., that property is either owned or rented and used),
the legislature would have stated that [p]roperty owned by the taxpayer is valued
at its original cost and that [p]roperty rented and used is valued at
eight (8) times the net annual rental rate.
For all the above stated reasons, this Court holds that the Petitioners are
not required to include the vehicles located, titled and registered in Indiana in
their property factor numerators.
For the foregoing reasons, this Court hereby grants the Petitioners motion for summary
SO ORDERED this 18th day of December, 2002.
Thomas G. Fisher, Judge
Barton T. Sprunger
Mark J. Richards
One American Square
Indianapolis, IN 46282-2219
Attorney General of Indiana
By: Linda I. Villegas
Deputy Attorney General
Indiana Government Center South, Fifth Floor
402 West Washington Street
Indianapolis, IN 46204-2770
The Petitioners also allege that if this Court determines their gross
income is derived
from sources within Indiana, it must then determine whether the
income is taxable gross income under Indiana Code § 6-2.1-2-2(a)(2) or whether it
is exempt from tax under Indiana Code § 6-2.1-3-3 and the Commerce Clause
of the United States Constitution. However, as a result of the Courts
decision that the Petitioners gross income is not derived from sources within Indiana,
the Court need not reach those questions. See Indiana Dept of State
Revenue v. J.C. Penney Co., 412 N.E.2d 1246, 1252 (Ind. Ct. App. 1980)
(stating that [c]ourts will not decide Constitutional questions unless such a determination is
necessary). Indeed, [i]f the activities giving rise to the income sought to
be taxed do not occur within Indiana, then the tax may not be
leviednot because to do so is forbidden by the United States Constitution .
. . but rather because under those facts the levy is forbidden by
the statute. Indiana Dept of State Revenue v. Convenient Indus. of Am.,
Inc., 299 N.E.2d 641, 645 (Ind. Ct. App. 1973).
Enterprise Leasing Company of Chicago is a Nevada corporation that has
its corporate headquarters in Elmhurst, Illinois. Enterprise Leasing Company of Detroit is
a Michigan corporation that, during the years at issue, had its corporate headquarters
in Livonia, Michigan. Enterprise Leasing Company of Georgia is a Missouri corporation
that has its corporate headquarters in Atlanta, Georgia. Enterprise Leasing Company of
St. Louis is a Missouri corporation that has its corporate headquarters in St.
Louis, Missouri. Enterprise Fleets, Inc. (Fleets) was a Missouri corporation that had its
corporate headquarters in St. Louis, Missouri. Effective March 31, 1998, Fleets merged
with and into Enterprise Leasing Company of St. Louis, with Enterprise Leasing Company
of St. Louis being the surviving corporation and acquiring all assets and liabilities
of Fleets by operation of law.
Footnote: At the hearing, the Petitioners offered a hypothetical:
Enterprise Fleets of St. Louis enters into a fleet lease with Anheuser-Busch.
It may cover 400 vehicles. Anheuser-Busch decides 100 of them go to
St. Louis, 50 to Phoenix, 30 to Los Angeles,
10 to Indianapolis, 20 to Columbus, Ohio, and so forth and so on.* * * *
When they make that choice, [Enterprise Fleets of St. Louis, which is] located
outside of Indiana, send[s] ship-to instructions to the new vehicle manufacturers and/or common
carriers and say these should be shipped to whatever dealer location that the
lessee has chosen and they are all shipped by common carrier and that
is where they are picked up by the lessee.
(Summ. J. Tr. at 6-8.)
The business situs test that is applied in determining whether or
not income from an intangible has an Indiana source is a little more
stringent in that it requires the taxpayer not only to have a business
situs in Indiana but that the intangible or the income derived therefrom forms
an integral part of a business regularly conducted at a situs in Indiana[.]
Bethlehem Steel Corp. v. Indiana Dept of State Revenue, 597 N.E.2d 1327,
1335 (Ind. Tax Ct. 1992), affd by 639 N.E.2d 264 (Ind. 1994), (quoting
45 IAC 1-1-51) (emphasis added) (repealed 1999). The term integral is defined
as of, relating to, or serving to form a whole: essential to
Because the imposition of the supplemental net income tax is dependent
upon determinations made in computing adjusted gross income tax, the Court need only
analyze the calculation of the Petitioners adjusted gross income tax liability.
Indiana Dept of State Revenue v. Endress & Hauser, Inc., 404 N.E.2d 1173,
1175 (Ind. Ct. App. 1980).