NOTICE: IC § 6-8.1-3-3.5 and IC § 4-22-7-7 require the publication of this document in the Indiana Register. This document provides the general public with information about the Department's official position concerning a specific set of facts and issues. This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register. The "Holding" section of this document is provided for the convenience of the reader and is not part of the analysis contained in this Letter of Findings.

For-profit Higher Education Institutions were required to include tuition payments - which were paid by the Indiana students who attended Institutions' online courses only - in their numerator of the sales factor in reporting their Indiana corporate income tax. Institutions' online revenue was Indiana source income subject to Indiana income tax.

I. Corporate Income Tax - Sourcing of Sales of Services.

Authority: IC § 6-3-1-20; IC § 6-3-2-1; IC § 6-3-2-2; IC § 6-8.1-5-1; IC § 6-8.1-5-4; Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64 (Ind. 2009); Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Indiana Dep't of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Sherwin-Williams Co. v. Indiana Dep't. of State Revenue, 673 N.E.2d 849 (Ind. Tax Ct. 1996); 45 IAC 3.1-1-29; 45 IAC 3.1-1-38; 45 IAC 3.1-1-52; 45 IAC 3.1-1-55; Letter of Findings 02-20130359 (September 11, 2014).

Taxpayers disagree with the audit's assessment that the audit adjusted their numerator of sales factor - sourcing sales of services rendered in Indiana - to apportion their online revenue for Indiana corporate income tax purposes.

II. Tax Administration - Underpayment Penalty.

Authority: IC § 6-3-4-4.1; IC § 6-8.1-10-2.1.

Taxpayers state that they are entitled to an abatement of the underpayment penalty.

Taxpayers are three (3) related for-profit higher education institutions that "provide career-oriented educational services." Taxpayers' course programs include, but are not limited to, science, healthcare, technology, business, management, finance, accounting and the arts. Taxpayers maintain various "brick and mortar" campuses in Indiana and outside of Indiana. Taxpayers offer courses on their campuses where students attend in person and work with instructors in classrooms on campus. In addition, Taxpayers offer courses online. The online students, regardless of the students' locations, receive Taxpayers' instructions by electronic means using their own computers at times and places of the students' choices.

The Indiana Department of Revenue ("Department") audited all three Taxpayers' records. One Taxpayer was audited for the tax years ending 6/30/2011 and 6/30/2012. The remaining two Taxpayers were audited for the tax years ending 6/30/2010, 6/30/2011, and 6/30/2012. The audit made various adjustments, which resulted in additional tax liabilities for all three Taxpayers and all tax years at issue.

Taxpayers timely protested the Department's adjustment. Taxpayers' representatives primarily object to the audit adjustment concerning the tuition payments received from online students, who reside in Indiana during those tax years. A hearing was held. This Letter of Findings ensues. Additional facts will be provided as necessary.

I. Corporate Income Tax - Sourcing of Sales of Services.

The Department's audit adjusted Taxpayers' sales factor. The audit determined Taxpayers incorrectly excluded revenue they received from online students who resided in Indiana in their numerator of the sales factor–one factor in apportioning Taxpayers' Indiana income tax for the tax years at issue. The audit determined that Taxpayers should have included their "sales of online courses taken by Indiana students." The audit adjustment resulted in additional Indiana income tax.

Taxpayers disagreed with the audit's adjustment concerning numerator of the sales factor. Taxpayers stated as follows:

Indiana mandates that every person who is subject to a listed Indiana tax must keep books and records, including all source documents, "so that the department can determine the amount, if any, of the person's liability for that tax by reviewing those books and records." IC § 6-8.1-5-4(a). "If the [D]epartment reasonably believes that a person has not reported the proper amount of tax due, the [D]epartment shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the [D]epartment." IC § 6-8.1-5-1(a). All tax assessments are prima facie evidence that the Department's claim for the unpaid tax is valid; the taxpayer bears the burden of proving that any assessment is incorrect. IC § 6-8.1-5-1(c); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012). "Each assessment and each tax year stands alone." Miller Brewing Co. v. Indiana Dep't of State Revenue, 903 N.E.2d 64, 69 (Ind. 2009). Thus, the taxpayer is required to provide documentation explaining and supporting its challenge that the Department's assessment is wrong. Poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dep't of Local Gov't Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dep't of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). Also, "all statutes are presumptively constitutional." Indiana Dep't of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579, 587 (Ind. 2014) (citing UACC Midwest, Inc. v. Indiana Dep't of State Rev. 629 N.E.2d 1295, 1299 (Ind. Tax Ct. 1994)). When an agency is charged with enforcing a statute, the jurisprudence defers to the agency's reasonable interpretation of that statute "over an equally reasonable interpretation by another party." Caterpillar, Inc., 15 N.E.3d at 583.

Indiana imposes a tax on the adjusted gross income tax of every corporation that conducts business in Indiana or has income derived from Indiana. IC § 6-3-2-1(b); IC § 6-3-2-2. Under 45 IAC 3.1-1-38, a taxpayer is "'doing business' in a state if it operates a business enterprise or activity in such state including, but not limited to:

To compute the income subject to Indiana corporate income tax, Indiana adopts a multistep process to calculate a corporate taxpayer's taxable Indiana adjusted gross income. Caterpillar, Inc., 15 N.E.3d at 581. "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." Sherwin-Williams Co. v. Indiana Dep't. of State Revenue, 673 N.E.2d 849, 851 (Ind. Tax Ct. 1996).

IC § 6-3-2-2 (as in effect for tax years 2009 - 2012), in relevant part, further provides:

IC § 6-3-1-20 (effective until January 1, 2016) states that " 'business income' means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of the taxpayer's regular trade or business operations." See also 45 IAC 3.1-1-29.

To apportion business income for Indiana income tax purposes, Indiana used three factors - property, payroll, and sales - during 2009 and 2010. IC § 6-3-2-2(b)(4). For all taxable years after December 31, 2010, Indiana adopts single sales factor. IC § 6-3-2-2(b)(5).

"The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the taxable year, and the denominator of which is the total sales of the taxpayer everywhere during the taxable year. Sales include receipts from intangible property and receipts from the sale or exchange of intangible property." IC § 6-3-2-2(e). "The numerator of the sales factor generally includes gross receipts from sales attributable to this state, and includes all interest income, service charges, carrying charges, or time-price differential charges incidental to such sales. . . ." 45 IAC 3.1-1-52.

IC § 6-3-2-2(f) states:

In this instance, Taxpayers claimed that they should be entitled to "source[] the revenue from online educational services based on the location where the greater proportion of the course development and production costs were incurred." Taxpayers asserted that the costs were incurred in Illinois. Taxpayers argued that they sourced the revenue from online educational services to Illinois because the costs at issue were "at the corporate headquarters in [] Illinois, or the online center in [] Illinois." Taxpayers simply relied on the assertion of their location of their headquarters. Taxpayers did not provide any supporting documentation to support their position of what and where costs were incurred, much less whether they were direct or indirect costs. During the administrative hearing Taxpayers explained that they did not intend to provide any documents to support their protest. Rather, they asserted the costs of performance standard should apply and if the standard applies, the costs at issue were incurred in Illinois. Taxpayers stated that they did not conduct any costs of performance study and therefore did not have one.

Upon review, however, Taxpayers are mistaken on their interpretation of Indiana law. As mentioned earlier, in addition to the statutory requirement of maintaining adequate records, Taxpayers also bear the burden of proof to demonstrate that the Department's proposed assessment was not correct. IC § 6-8.1-5-1(c), IC § 6-8.1-5-4(a). The audit determined that "[t]he revenue received from the Indiana sales transactions constitutes Indiana source income." Specifically, the audit noted, in relevant part, as follow:

Accordingly, Taxpayers' income at issue does not derive from - however necessary - their activities in their course development and production outside of Indiana. Taxpayers' income tax issue results from Taxpayers' ability to deliver and render their services to the students residing in Indiana by means of online courses and the Indiana students who pay for the services performed in Indiana. The course development and production, standing alone, do not have value unless Taxpayers take steps to ensure that the Indiana students attend the online courses, namely receive the educational services for which they pay. Thus, the income at issue, that Taxpayers classify as revenue from online courses, is attributable to Indiana and subject to Indiana income tax because the income producing activity is performed in Indiana. See also Letter of Findings 02-20130359 (September 11, 2014), 20141126 Ind. Reg. 045140456NRA. In other words, Taxpayers' income producing activity is their sales of their online courses, including giving class instructions to their Indiana students. 45 IAC 3.1-1-55. Taxpayers' income producing activity of online courses is deemed rendered in Indiana when the Indiana students attend the online courses.

The Department is charged with enforcing Indiana tax law. Under Indiana Supreme Court law, the Department's reasonable interpretation of that statute "over an equally reasonable interpretation by another party." Caterpillar, Inc., 15 N.E.3d at 583. Taxpayers objected to the audit determination. Taxpayers however did not offer any documents to support their assertion. Given the totality of circumstances, in the absence of other supporting documentation, the Department is not able to agree that Taxpayers met their burden to demonstrate that the Department's assessments are not correct and that the "cost of performance" rules mandate Taxpayers to source all their online revenue, which were paid by the Indiana students, to Illinois.

Taxpayers' protest is respectfully denied.

II. Tax Administration - Underpayment Penalty.

It should be noted that the audit waived the ten percent negligence penalty. The Department however determined that Taxpayers failed to make sufficient estimated payments of adjusted gross income tax pursuant to IC § 6-3-4-4.1. The Department thus imposed an underpayment penalty for tax years at issue. Taxpayers requested that the Department exercise its discretion and abate the penalty.

IC § 6-3-4-4.1, in relevant part, states:

IC § 6-8.1-10-2.1(d) states that "[i]f a person subject to the penalty imposed under this section can show that the failure to . . . pay the full amount of tax shown on the person's return, . . . or pay the deficiency determined by the department was due to reasonable cause and not due to willful neglect, the department shall waive the penalty."

Taxpayers believe that they have "exercised ordinary business care and prudence because [they] calculated [their] Indiana sales factor by sourcing service revenue in accordance with Indiana's statute." Taxpayers claimed that "the income-producing activity is that of the online course development process. This process takes place in Illinois, thus leading to the sourcing of all Indiana online revenue to Illinois. . . ."

Upon review, Taxpayers make a reasonable argument that when they filed their return, they sourced their online revenue based on their interpretation of Indiana law. In addition, the Department did not impose the ten percent negligence penalty after the auditor reviewed Taxpayers' records pursuant to the audit. Rather, the underpayment penalty was imposed due to the deficiency the audit found and the adjustments. In other words, the audit's adjustments increased Taxpayers' taxable income and, as a result, Taxpayers' estimated payments for the tax years became underpaid. Considering all circumstances, the Department is prepared to agree that the underpayment penalty should be abated.

Taxpayers' protest is sustained.

For the reasons discussed above, the underpayment penalty should be abated. Taxpayers' protest of Issue I, however, is respectfully denied.