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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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 Final Order Denying Refund.

Funding Company did not provide sufficient documentation to show that it was not a financial institution. Therefore, the Department correctly denied Company's refund request.

I. Financial Institutions Tax–Refund.

Authority: IC § 6-5.5-1-17; IC § 6-5.5-3-1; IC § 6-8.1-5-1; Fresenius USA Marketing, Inc. v. Indiana Dep't of State Revenue, 56 N.E.3d 734 (Ind. Tax Ct. 2016); 45 IAC 17-2-1; 45 IAC 17-2-4; Letter of Findings 18-20130319.

Taxpayer protests its refund denial.

Taxpayer is a business that has subsidiaries in Indiana and is incorporated outside Indiana. Taxpayer was filing in Indiana as a financial institution. Taxpayer determined that it was incorrectly filing its tax returns and requested a refund of Financial Institutions Tax ("FIT") for tax periods ending May 29, 2011, through May 26, 2013. The Indiana Department of Revenue ("Department") determined that Taxpayer had been properly filing as a financial institution. The Department denied Taxpayer's refund request and determined that it also owed FIT for the tax year 2014. The Department therefore issued proposed assessments for FIT for 2014. Taxpayer protests the refund denial of FIT, stating that it does not have nexus with Indiana and has never conducted the business of a financial institution in Indiana. Therefore, Taxpayer protests, it is not subject to Indiana FIT. An administrative hearing was held and this Final Order Denying Refund results. A corresponding Letter of Findings 18-20160506 for the 2014 assessment is issued separately. Further facts will be supplied as necessary.

I. Financial Institutions Tax–Refund.

Taxpayer protests the Department's denial of its FIT refund claim. Taxpayer, a funding company, provides its related affiliates with receivables factoring services. Taxpayer filed as a financial institution for 2010-2014. Taxpayer has now filed amended returns seeking a refund of FIT for tax years 2010-2013. Taxpayer has elected to be treated as a C-corporation for income tax purposes and is included in its parent's consolidated federal return. The Department determined that Taxpayer's factoring agreements are the economic equivalent of short term loans by Taxpayer to its affiliates. The Indiana FIT statute states that a taxpayer will be taxed as a Financial Institution if over 80 percent of their income is either "loans arising in factoring or any other transaction with a comparable economic effect." IC § 6-5.5-1-17(d)(2)(A)(vii-viii). Taxpayer's sole business purpose is to buy its related entities' receivables at a discount and collect the receivables from customers. Thus, the issue under review is whether Taxpayer's factoring services are "loans arising in factoring," therefore, requiring Taxpayer to continue filing as a financial institution. The Department notes that the burden of proving a proposed assessment wrong rests with the person against whom the proposed assessment is made, as provided by IC § 6-8.1-5-1(c).

During the refund process, the Department reviewed Taxpayer's factoring agreements with affiliates and determined that, based on the terms and language of the contracts, the parties were clearly involved in the factoring of extensions of credit. Taxpayer states that the function of a contract or agreement is controlling rather than the use of certain words or the contracts when determining any resulting legal and tax implications thereof.

The Department refers to IC § 6-5.5-3-1, which states:

The next relevant statute is IC § 6-5.5-1-17, which states:

Next, the Department refers to 45 IAC 17-2-1, which states:

Finally, the Department refers to 45 IAC 17-2-4, which states:

The Department based the denial on the language in IC § 6-5.5-1-17(d)(2)(A)(vii-viii), "loans arising in factoring; and any other transaction with a comparable economic effect" if found applied to these transactions. In Taxpayer's factoring agreements with its related affiliates, "receivables" are defined as "indebtedness and other obligations owed (at the time it arises, and before giving effect to any transfer or conveyance contemplated hereunder) to Originator [affiliate], whether constituting an account, chattel paper, instrument or general intangible, arising in connection with the provision of goods by originator and includes, without limitation, the obligation to pay any finance charges with respect thereto." The Department determined that this clause shows that the receivables are in fact loans, and that Taxpayer is factoring loans, and therefore a financial institution as described under IC § 6-5.5-1-17(d)(2)(A)(vii).

The Department also references another clause in the agreement that states "If [] notwithstanding the intention of the parties expressed in clause 2.1C, the conveyance by the Originator to the [Taxpayer] hereunder shall be characterized as a secured loan and not a sale, this Agreement shall constitute a security agreement under the UCC and other applicable law." Thus, the Department determined that the agreement means if the transaction is treated as a loan by a jurisdiction, the factoring agreement will constitute a security agreement under UCC. The Department's implication is that some jurisdictions could deem these transactions to be secured loans, therefore buttressing the Department's finding that the transactions are "loans arising in factoring."

Even if, for the sake of argument, the Department's position stated above is not sufficiently convincing, other documentation in the protest file shows that Taxpayer is actually acquiring lines/extensions of credit. This documentation consists of invoices and agreements between the affiliates and the affiliates' customers. The documentation includes signed agreements that either extend or give customers a line of credit. A letter even states that the affiliate would like to "extend more generous credit terms." The letter is clearly an extension of credit signed by the affiliate and the customer. These are the "factoring" accounts that Taxpayer is purchasing, thus, Taxpayer is purchasing extensions of credit. Therefore under IC § 6-5.5-1-17 Taxpayer is conducting the business of a financial institution. In addition, Taxpayer failed to meet its burden of showing the initial transactions are not lines of credit, nor has Taxpayer shown that the character of the transactions changed from a lines of credit to an account receivables once sold by the affiliates.

Taxpayer also argues that it relied on Letter of Findings 18-20130319 (February 2014), 20140430 Ind. Reg. 045140129NRA ("LOF"). Thus, Taxpayer argued that according to Fresenius USA Marketing, Inc. v. Indiana Dep't of State Revenue, 56 N.E.3d 734 (Ind. Tax Ct. 2016), Taxpayer properly relied on the previous LOF and therefore is entitled to the same treatment as the previous LOF's taxpayer.

Taxpayer is mistaken. Taxpayer's facts are distinguishable from those of the referenced LOF's taxpayer in that the LOF states that "There is no evidence in the protest file which indicates that Taxpayer was extending any kind of credit or loans or that it was purchasing accounts which were extensions of credit or loans." Letter of Findings 18-20130319. In this case, Taxpayer has agreements between affiliates and affiliates' customers that clearly state the agreements are extensions of credit. As stated in the referenced LOF, no evidence existed to determine that the taxpayer was subject to FIT. Contrary to that fact, in this instance there are documents in the protest file that confirms Taxpayer is operating as a financial institution and is subject to FIT.

Based on the above reasoning, Taxpayer is a financial institution, and Taxpayer's refund request is denied.

Taxpayer's protest is denied.