ATTORNEYS FOR PETITIONERS: ATTORNEYS FOR RESPONDENT:
LARRY J. STROBLE STEVE CARTER
JENNIFER A. DUNFEE ATTORNEY GENERAL OF INDIANA
BARNES & THORNBURG Indianapolis, IN
TED J. HOLADAY
DEPUTY ATTORNEY GENERAL
INDIANA TAX COURT
COMDISCO, INC., AND AFFILIATES, )
v. ) Cause No. 49T10-9903-TA-19
INDIANA DEPARTMENT OF STATE )
ORDER ON CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT
NOT FOR PUBLICATION
December 18, 2002
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?
FACTS AND PROCEDURAL HISTORY
Comdisco, Inc. (Comdisco) is the parent company of an affiliated group of entities
(Affiliates). The Affiliates are Comdiscos 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.
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.
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.
ANALYSIS & OPINION
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.
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
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,
As the basis for its claims, Comdisco asserted that the
gross income it received from the leases at issue was not subject to
Indianas 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.
the Petitioners believed the income it received from the leases at issue was
not subject to Indianas 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.
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
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.
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). Cross-motions for summary judgment do not alter this standard.
Chrysler Fin. Co., LLC v. Indiana Dept of State Revenue, 761 N.E.2d
909, 911 (Ind. Tax Ct. 2002).
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 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 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. (Respt 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.
Dept 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 equipments 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 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.
(Respt 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,
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
Natl Leasing, 598 N.E.2d at 645. Consequently, a security interest, which is
no more of an interest than
is also insufficient to create a business situs.
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 Natl 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.
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.
(Respt Resp. to Mot. for Partial Summ. J. at 15). To support
its argument, the Department offered the Indianapolis marketing associates job responsibilities it received
(Respt 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 Commrs, 629 N.E.2d 959,
961 (Ind. Tax Ct. 1994). However, there is simply not enough to
find that, by way of the Indianapolis offices 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 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 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
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 Dept 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 Natl 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 Indianas gross income tax.
For the foregoing reasons, this Court hereby GRANTS the Petitioners motion for partial
SO ORDERED this 18th day of December, 2002.
Thomas G. Fisher, Judge
Larry J. Stroble
Jennifer A. Dunfee
BARNES & THORNBURG
11 South Meridian Street
Indianapolis, IN 46204
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
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 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).
To the extent the Departments 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 Departments cross-motion, leaving the resolution
of this question for another day.
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 lessees 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.
Comdisco and CHG seek a combined refund of Indiana gross retail
tax in the amount of $3,161,388.83.
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.)
A security interest is a property interest created by agreement or
by operation of law to secure performance of an obligation.
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.
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
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 lessees location of equipment is completely
independent from the lessor, then the lessor had not establish an Indiana business
situs. First Natl Leasing and Fin. Corp. v. Indiana Dept of State
Revenue, 598 N.E.2d 640, 644 (Ind. Tax Ct. 1992).
Indeed, Indiana determines tax consequences based on the substance, not the
form, of a transaction. Bethlehem Steel Corp. v. Indiana Dept of State
Revenue, 597 N.E.2d 1327, 1331 (Ind. Tax Ct. 1992) (citing Monarch Beverage v.
Indiana Dept of State Revenue, 589 N.E.25 1209, 1215 (Ind. Tax Ct. 1992)
affd by 639 N.E.2d 264 (Ind. 1994).
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.
of Facts and Evidence in Resp. to Mot. for Partial Summ. J. at
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.