ATTORNEYS FOR PETITIONERS:    ATTORNEYS FOR RESPONDENT:
LARRY J. STROBLE    STEVE CARTER    
JENNIFER A. DUNFEE    ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG    Indianapolis, IN
Indianapolis, IN     
     TED J. HOLADAY
    DEPUTY ATTORNEY GENERAL
    Indianapolis, IN

_____________________________________________________________________

    IN THE INDIANA TAX COURT _____________________________________________________________________

COMDISCO, INC., AND AFFILIATES,                                           )
                                                                               )
    Petitioners,                                                               )
                                                                               )
    v.                                                                         )   Cause No. 49T10-9903-TA-19
                                                                               )
INDIANA DEPARTMENT OF STATE                                                    )
REVENUE,                                                                       )
             
                                                                              
                                                                              
                                                                              
                                                                 
    )
    Respondent.            )    
_____________________________________________________________________

ORDER ON CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT


NOT FOR PUBLICATION
December 18, 2002

FISHER, J.

    Comdisco, Inc. and its Affiliates (collectively, the Petitioners) appeal the final determinations of the Indiana Department of State Revenue (Department) denying their claims for refund of 1) Indiana gross income tax for taxable years ending September 30, 1989, 1990, 1991, 1993, 1994, 1995, and 1996; and 2) Indiana gross retail tax (sales tax) for taxable years 1996 through 1998 (collectively, the years at issue). The matter is currently before the Court on the parties’ cross-motions for partial summary judgment. The Court finds the following issue dispositive: whether the Petitioners’ gross income, earned from leasing equipment to customers who located the equipment in Indiana, is derived from “sources within Indiana” within the meaning of Indiana Code § 6-2.1-2-2? See footnote
FACTS AND PROCEDURAL HISTORY

    Comdisco, Inc. (Comdisco) is the parent company of an affiliated group of entities (Affiliates). The Affiliates are Comdisco’s wholly-owned (either directly or indirectly) subsidiaries and, as it relates to this case, include Comdisco Healthcare Group, Inc. (CHG), formerly known as Comdisco Medical Equipment Inc., and Comdisco Receivables, Inc. (CRI). All are nonresident corporations with corporate headquarters located outside Indiana. See footnote
    The Petitioners are in the business of leasing high technology and medical equipment to the general public. Most of the Petitioners’ executives, technical specialists, product managers, marketing and sales personnel, as well as other support personnel, are located at the Petitioners’ headquarters in Rosemont, Illinois. From 1991 until 1996, however, the Petitioners did maintain a sales office in Indianapolis, Indiana (Indianapolis office), which was staffed by approximately two employees. See footnote
    During the years at issue, the leases between the Petitioners and their customers (lessees) were recorded on a “master” lease agreement form, which typically required no negotiation. All terms contained in the leases were first approved by Petitioners’ financial and legal employees in Illinois. The Petitioners executed all lease agreements from their headquarters in Illinois. If the lessees required any additional equipment after the execution of the initial master lease, the additional equipment was listed on a separate schedule and attached to the master lease agreement. The only restriction contained in the lease agreements was that an entity exempt from federal income tax was not permitted to use the leased equipment.
    Pursuant to the terms of the lease agreements, all leased equipment was delivered to the lessees by common carrier either directly from the manufacturer or from the Petitioners’ Illinois refurbishing center. The lessees determined the location to which the leased equipment was delivered and were responsible for all costs associated with its delivery, transportation, in-transit insurance, and installation. The lessees also exercised complete control over the use of the leased equipment and were free, upon prior written notice, to relocate the leased equipment to any location within the

continental United States. See footnote
    The Petitioners managed and serviced all lease agreements from Illinois. The Petitioners conducted all accounting, billing and all other administrative activities in Illinois. Lease payments were sent to the Petitioners in Illinois, or placed in various lock boxes located throughout the United States. See footnote The terms of the lease payments were not contingent on where the leased equipment was located, used, or stored.
    All lessees were contractually responsible for property taxes assessed against the leased equipment, as well as for the costs associated with repairing, storing, and insuring the leased equipment. The Petitioners assigned all manufacturer warranties to the lessees for the duration of the leases and provided no additional or independent warranties for the leased equipment.
    At the expiration of a lease agreement, Petitioners’ sales personnel would contact the lessee to determine whether it intended to buy the leased equipment, extend the term of the lease agreement, or return the leased equipment. If a lessee intended to buy the leased equipment or extend the term of the lease agreement, the purchase agreement or extended lease agreement was submitted to one of Petitioners’ officers in Illinois for final approval. If a lessee decided to return the leased equipment, the lessee was responsible for all costs associated with the dismantling and transportation of, as well as the in-transit insurance on, the leased equipment.
    During the years at issue, the Petitioners classified their leasing agreements into two categories. The first, “Class A” agreements, were negotiated with the assistance of the Petitioners’ sales personnel in Indianapolis. The second, “Class B” agreements, were negotiated without the involvement of Petitioners’ sales personnel in Indianapolis. For purposes of the Petitioners’ motion for partial summary judgment, only the “Class B” agreements in which the leased equipment was located in Indiana are at issue (leases at issue). See footnote
    In 1996, as a result of both an audit and a supplemental audit, the Department issued notices to Comdisco proposing an additional assessment of $357,941.97 in gross income tax, penalties, and interest for the taxable years ending September 30, 1989, 1990, and 1991. Comdisco paid the assessment and subsequently filed with the Department three amended corporate income tax returns in which it claimed refunds of Indiana gross income tax for the years ending September 30, 1989, 1990, and 1991. See footnote As the basis for its claims, Comdisco asserted that the gross income it received from the leases at issue was not subject to Indiana’s gross income tax because it was not derived from an Indiana source.
    On March 18, 1998, the Petitioners filed with the Department four amended corporate income tax returns in which they claimed refunds of Indiana gross income tax for the years ending September 30, 1993, 1994, 1995, and 1996. See footnote Again, the Petitioners believed the income it received from the leases at issue was not subject to Indiana’s gross income tax because it was not derived from an Indiana source.
    On December 16, 1998, the Department, asserting that the Petitioners’ gross income from the leases at issue was derived from an Indiana source, denied all seven claims for refund. See footnote The Petitioners subsequently filed an original tax appeal with this Court on March 10, 1999.
    On March 15, 1999, Comdisco and CHG filed with the Department claims for refund of Indiana gross retail tax (sales tax) for the years 1996 through 1998, See footnote asserting that because the gross receipts derived from the leases at issue are exempt from the gross income tax, the gross retail income from the same transactions is exempt from the state sales tax under Indiana Code § 6-2.5-5-24(b). On June 3, 1999, after the Department denied their claims for refund, Comdisco and CHG filed an original tax appeal with this Court.
    On October 15, 1999, Comdisco and Affiliates filed a motion with this Court to consolidate their gross income tax and sales tax appeals. The Court granted the motion on October 28, 1999. On February 24, 2000, the Petitioners filed their motion for partial summary judgment. On September 22, 2000, the Department filed its cross motion for partial summary judgment. This Court conducted a hearing on the parties’ motions on October 10, 2000. 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 Dep’t 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 Dep’t 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 Comm’rs, 663 N.E.2d 1230, 1232 (Ind. Tax Ct. 1996) (internal quotation marks omitted). Cross-motions for summary judgment do not alter this standard. Chrysler Fin. Co., LLC v. Indiana Dep’t of State Revenue, 761 N.E.2d 909, 911 (Ind. Tax Ct. 2002).


Discussion

    The issue in this case is whether Indiana can tax the Petitioners’ gross income earned as a result of the leases of 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 Nat’l Leasing and Fin. Corp. v. Indiana Dep’t of State Revenue, 598 N.E.2d 640, 643-44 (Ind. Tax Ct. 1992); Indiana-Kentucky Elec. Corp. v. Indiana Dep’t 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 Nat’l Leasing, 598 N.E.2d at 643. In this case, the activity that gives rise to the Petitioners’ gross income is their leasing of equipment. 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, that “the critical transaction is the several leases between the Petitioners and their customers.” (Resp’t Resp. to Mot. for Partial Summ. J. at 13-14.) Apparently, the Department claims (as it did in Enterprise Leasing et al. v. Indiana Department of State Revenue, handed down contemporaneously with this one) that the revenue generated from the leases at issue in this case is income derived from intangibles. See generally Enter. Leasing Co. v. Dep’t of State Revenue, Cause No. 49T10-9807-TA-74, slip op. at 7-8 (Ind. Tax Ct. 2002). Nevertheless, as this Court stated in Enterprise Leasing:
Two tests are used to determine whether income from an intangible has an Indiana source: the “business situs” test and the “commercial domicile” test. 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.

Id. (citations omitted). Consequently, 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, with respect to the leases at issue, 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 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 equipment that was located and used in Indiana, they exercised no control over the equipment’s 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 Nat’l 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 equipment. 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 equipment and are responsible for all repairs, maintenance, and insuring. The Department asserts, however, that the Petitioners participate in a much more active capacity:
[The Petitioners] limit[] who may use the property and maintain[] a perfected security interest in it. Lessees sign the leases in Indiana and make payments from Indiana locations. [The Petitioners] opened a[n] office in Indianapolis with employees who were part of the [Petitioners’] team, responsible for all customer service and supporting [the] customer base. . . . Thus, the Petitioners do participate actively in the ownership and leasing of the property and they have a business situs in Indiana.

(Resp’t Resp. to Mot. for Partial Summ. J. at 15-16, footnote omitted.) The Department, however, is mistaken.
    First, the Department argues that because the Petitioners contractually limit who may not use the property, they actively participate in its ownership, leasing and rental. While the Petitioners admit that they prohibit certain entities from using the equipment, See footnote the Court finds that the restriction does not rise to the level of “active participation” by the Petitioners. Indeed, it was a condition the lessee had to agree to before it signed the lease. Furthermore, it was not a discretionary right of control retained by the Petitioners, as it did not give the Petitioners the right to dictate to the lessees how or where the equipment was to be used.
    Second, the Department erroneously maintains that because the Petitioners maintain a perfected security interest in the leased equipment, they actively participate in its “ownership, leasing, and rental.” As this Court explained in First National Leasing, however, mere ownership of property in Indiana is not enough to find that a taxpayer has a “tax situs” in Indiana, let alone a “business situs.” See First Nat’l Leasing, 598 N.E.2d at 645. Consequently, a security interest, which is no more of an interest than
outright ownership, See footnote is also insufficient to create a “business situs.” See footnote See id.
    Third, the Department confuses the lessees’ signing of lease agreements in Indiana and/or the mailing of their rental payments from Indiana as active participation by the Petitioners. Again, as this Court explained in First National Leasing, it is concerned with the performance of significant business activities in Indiana by the lessors (ie., the Petitioners). See First Nat’l Leasing, 598 N.E.2d at 643. Thus, the fact that the lessees may sign the leases in Indiana before returning them to the Petitioners in Illinois (whether by facsimile, mail, etc.), or that the lessees mail their rental payments from Indiana, is irrelevant to determining whether the Petitioners have established an Indiana “business situs.” See footnote
    Finally, the Department maintains that the Petitioners’ office in Indianapolis played a much more significant role in the negotiation and execution of “Class B” lease agreements. Indeed, it maintains that the Indianapolis office was staffed
with employees who were part of the [Petitioners’] team, responsible for all customer service and supporting [its] customer base. A regional sales manager was located there. Employees at the Indianapolis office clearly had responsibilities beyond soliciting business that were designed to assist [the Petitioners’] overall business without being limited to transactions credited to that particular office.

(Resp’t Resp. to Mot. for Partial Summ. J. at 15). To support its argument, the Department offered the Indianapolis marketing associate’s job responsibilities it received during discovery. See footnote (Resp’t Designation of Facts and Evidence in Resp. to Mot. for Partial Summ. J. at 52-53). Nevertheless, the job description does not state whether or not those activities are restricted to clients or prospects in Indiana. Because this a motion for summary judgment, the Court will construe the job description in a light most favorable to the Department. See Knauf Fiber Glass GmbH v. State Bd. of Tax Comm’rs, 629 N.E.2d 959, 961 (Ind. Tax Ct. 1994). However, there is simply not enough to find that, by way of the Indianapolis office’s activities, the Petitioners actively participate in the ownership, leasing, and rental of its leased equipment.

C. “Tax Situs”

    Assuming arguendo that the Petitioners did establish an Indiana “business situs” through their ownership of its leased equipment located in Indiana, a “business situs” in this State is insufficient, by itself, to impose tax on a nonresident’s 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 especially true for tangible property, such as that 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. See footnote
    The sole activity by the Petitioners in Indiana is ownership of high technology equipment that is located here pursuant to the lessees’ direction. The critical transaction in this case is the leasing of that equipment. 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 are conducted in Indiana.
    The purpose of a lease is to transfer for consideration certain rights in property, generally use and possession. Indiana Dep’t of State Revenue v. Indianapolis Transit Sys., Inc., 356 N.E.2d 1204, 1209 (Ind. Ct. App. 1976) (internal quotation marks omitted). The Petitioners do not exert control over their lessees’ use or possession of the leased equipment. The decision as to where the equipment is located and used rests with the lessees alone.
    Finally, the Petitioners do not derive their lease income from the use of the leased equipment exclusively in Indiana. Indeed, if the lessees choose to relocate their equipment 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 locate and use their equipment.
    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 equipment) are activities performed by the Petitioners’ lessees. The Court, therefore, finds that the Petitioners’ ownership of equipment 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 Nat’l Leasing, 598 N.E.2d at 645.
    For the reasons stated above, the Court finds that the income the Petitioners have derived from leasing equipment to its customers, which is subsequently located in Indiana, is not income “derived from sources within Indiana.” Accordingly, the Petitioners’ gross income, earned as a result of the leases at issue, is not subject to Indiana’s gross income tax.
Conclusion

    For the foregoing reasons, this Court hereby GRANTS the Petitioners’ motion for partial summary judgment.
SO ORDERED this 18th day of December, 2002.

     _________________________
     Thomas G. Fisher, Judge
Indiana Tax Court

DISTRIBUTION:

Larry J. Stroble
Jennifer A. Dunfee
BARNES & THORNBURG
11 South Meridian Street
Indianapolis, IN 46204

Steve Carter
Attorney General of Indiana
By: Ted J. Holaday
Deputy Attorney General
Indiana Government Center South, Fifth Floor
402 West Washington Street
Indianapolis, IN 46204-2770


Footnote: The Petitioners have also asserted that if this Court determines their gross income is derived from “sources within Indiana,” it must then determine (1) whether the taxation of that income violates the Commerce and Due Process Clauses of the United States Constitution and, if so, (2) whether they are entitled to a sales tax refund on those transactions under Indiana Code § 6-2.5-5-24(b). In response, the Department filed its motion for partial summary judgment with respect to the sales tax refund only. However, because this Court holds that the Petitioners’ gross income is not derived from “sources within Indiana,” it need not reach the Petitioners’ questions. See Indiana Dep’t 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”). To the extent the Department’s cross-motion for partial summary judgment goes to the Petitioners’ sales tax claim, it is rendered moot. See In the Matter of Tina T., 579 N.E.2d 48, 52 (Ind. 1991). Thus, the Court will not rule on the Department’s cross-motion, leaving the resolution of this question for another day.



Footnote: Comdisco, CHG, and CRI are Delaware corporations that maintain their commercial domiciles in Rosemont, Illinois.


Footnote: The office was staffed with both a sales representative (who was responsible for soliciting potential customers) and a sales associate (who was responsible for providing clerical assistance, telephone answering and scheduling services).


Footnote: Prior to October 1992, relocation could be made only with the approval of Comdisco or its Affiliates. It was, however, their practice to approve such relocations on a routine basis. (Petrs’ Br. at 7.) For lease agreements after September 1992, a lessee’s decision to relocate leased equipment did not require any approval by, just written notice to, Comdisco and/or its Affiliates. Written notice was required solely for the purpose of the Petitioners to perfect a security interest in the leased equipment in the state where the equipment was relocated. (Petrs’ Br. at 7.)


Footnote: None of the lock boxes, however, was located in Indiana.

Footnote: The Petitioners do not concede that the Department could impose gross income tax or sales tax on the receipts from the “Class A” lease agreements. Rather, as they correctly explain, “resolution of that issue would require the Court to consider factual evidence beyond the scope of the evidence submitted in support of [their] Motion for Partial Summary Judgment. Therefore, th[at] issue is reserved for future proceedings.” (Petrs’ Br. at 13.)


Footnote: For tax years 1989 through 1991, Comdisco and its Affiliates filed individual income tax returns. Accordingly, the claims for refund filed by Comdisco for tax years 1989 through 1991 relate to amounts paid by Comdisco only, and not by the Affiliates.


Footnote: The claims for refund filed by Comdisco and Affiliates for tax years 1993 through 1996 reflect the fact that they filed consolidated income tax returns during those years.


Footnote: In aggregate, all seven claims for refund of Indiana gross income tax filed by Comdisco and its Affiliates amount to $1,546,172.90.

Footnote:
Comdisco and CHG seek a combined refund of Indiana gross retail tax in the amount of $3,161,388.83.

Footnote: The Petitioners explain that “because the economics of the [l]ease [a]greements were based on certain federal tax assumptions concerning depreciation, the [lessees] agreed that no entity exempt from federal income tax was permitted to use the [l]eased [e]quipment.” (Petrs’ Reply Br. at 8.)


Footnote: A security interest is a “property interest created by agreement or by operation of law to secure performance of an obligation.” Black’s Law Dictionary 1361 (7th ed. 1999). A perfected security interest is a “security interest that has completed the statutory requirements for achieving priority over other security interests that are subject to the same requirements.” Id.


Footnote: In conjunction with this argument, the Department maintains that because the Petitioners require notice of the location/relocation of the equipment, they actively participate in its “ownership, leasing and rental.” The notice merely enables the Petitioners to perfect their security interests in the leased equipment. Furthermore, this Court stated in First National Leasing that despite lease provisions suggesting that the lessor either actively participated in the location of the equipment, consented to its location, or requested notice of its location, if the lessee’s location of equipment is completely independent from the lessor, then the lessor had not establish an Indiana “business situs.” First Nat’l Leasing and Fin. Corp. v. Indiana Dep’t of State Revenue, 598 N.E.2d 640, 644 (Ind. Tax Ct. 1992).


Footnote: Indeed, Indiana determines tax consequences based on the substance, not the form, of a transaction. Bethlehem Steel Corp. v. Indiana Dep’t of State Revenue, 597 N.E.2d 1327, 1331 (Ind. Tax Ct. 1992) (citing Monarch Beverage v. Indiana Dep’t of State Revenue, 589 N.E.25 1209, 1215 (Ind. Tax Ct. 1992) aff’d by 639 N.E.2d 264 (Ind. 1994).

Footnote: The job description states that the Indianapolis marketing associate spent about 40% of its time providing sales assistance; 20% of its time providing customer service and assistance; 20% of its time cultivating and developing customer relationships; 5% of its time in “customer satisfaction”; 5% of its time maintaining customer-related and prospect information; and 10% of its time devoted to “miscellaneous.” (Resp’t Designation of Facts and Evidence in Resp. to Mot. for Partial Summ. J. at 52-53).

Footnote: The “business situs” test that is applied in determining whether or not income from an intangible has an Indiana source is 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, 597 N.E.2d at 1335 (quoting 45 IAC 1-1-51) (repealed 1999) (emphasis added). The term “integral” is defined as “of, relating to, or serving to form a whole: essential to completeness.” Id.