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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

Funding Company did not provide sufficient documentation to show that it was not a financial institution. Therefore, the Department correctly assessed Financial Institution Tax.

I. Financial Institutions Tax–Assessment.

Authority: IC § 6-5.5-1-17; IC § 6-5.5-3-1; IC § 6-8.1-5-1; Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 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 (February 2014).

Taxpayer protests the assessment of financial institutions tax.

II. Tax Administration–Penalty and Interest.

Authority: IC § 6-5.5-7-1; IC § 6-8.1-10-1; IC § 6-8.1-10-2.1; 45 IAC 15-11-2.

Taxpayer protests the imposition of penalty and interest.

Taxpayer is a business that has subsidiaries in Indiana and is incorporated outside Indiana. Taxpayer was filing in Indiana as a financial institution; it determined that it was incorrectly filing as one and requested a refund for tax periods ending May 29, 2011, through May 26, 2013. The Indiana Department of Revenue ("Department") determined that Taxpayer was properly filing as a financial institution. The Department denied Taxpayer's refund request and determined that it did owe Financial Institutions Tax ("FIT") for the tax year 2014. The Department therefore issued a proposed assessment for FIT for 2014. Taxpayer protests the imposition 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 Letter of Findings results. A corresponding Final Order Denying Refund 18-2016505R is issued separately. Further facts will be supplied as necessary.

I. Financial Institutions Tax–Assessment.

As a threshold issue, it is the Taxpayer's responsibility to establish that the existing tax assessment is incorrect. As stated in IC § 6-8.1-5-1(c), "The notice of proposed assessment is prima facie evidence that the department's claim for the unpaid tax is valid. The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." Indiana Dep't of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dep't of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department's position is wrong. Further, "[W]hen [courts] examine a statute that an agency is 'charged with enforcing. . . [courts] defer to the agency's reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.'" Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, all interpretations of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

Taxpayer protests the Department's assessment of FIT. 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 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 then collect from the 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.

During the audit, the Department reviewed Taxpayer's factoring agreements with affiliates and determined based on the terms and language of the contracts, that the parties were clearly involved in factoring extensions of credit. Taxpayer states that the function of a contract or agreement is controlling rather than the use of certain words or phrases in such a contract or agreement when determining any resulting legal and tax implications thereof. Taxpayer provided the contracts and provided a theoretical example of how it is accounting for the factoring of receivables in its books.

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:

Taxpayer argues that the function of the contract was to buy receivables, and it is the function of the contract that rules rather than certain words or phrases. 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" finding it applied to these transactions. In Taxpayer's factoring agreements with its related affiliate, "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, is in the business of 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 demonstrates 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 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 lines of credit to an account receivable 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.

Taxpayer provided documentation showing that it is in fact buying its affiliates' extensions of credit. Therefore according to IC § 6-5.5-1-17 and 45 IAC 17-2-4 Taxpayer is a financial institution. Based on the reasons above Taxpayer has not met its burden under IC § 6-8.1-5-1(c) to show the Department's assessment incorrect.

Taxpayer's protest is denied.

II. Tax Administration–Penalty and Interest.

Taxpayer protests the imposition of penalty and interest. The penalty was assessed under IC § 6-5.5-7-1(b) stating that, "The penalty for an underpayment of tax on a quarterly return shall only be assessed on the difference between the actual amount paid by the taxpayer on the quarterly return and the lesser of: (1) twenty percent (20[percent]) of the taxpayer's final tax liability for the taxable year or (2) twenty-five percent (25[percent]) of the taxpayer's final tax liability for the taxpayer's previous taxable year." In addition, Indiana imposes interest on overdue tax pursuant to IC § 6-8.1-10-1(a), which states:

IC § 6-8.1-10-2.1(d) allows the Department to waive the penalty upon a showing that the failure to pay the deficiency was based on "reasonable cause and not due to willful neglect." Departmental regulation 45 IAC 15-11-2(c) requires that in order to establish "reasonable cause," the taxpayer must demonstrate that it "exercised ordinary business care and prudence in carrying out or failing to carry out a duty giving rise to the penalty imposed . . . ."

Under IC § 6-8.1-5-1(c), "The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." An assessment - including the penalty - is presumptively valid.

Taxpayer indicated that it relied on a previously issued Letter of Findings. Taxpayer has shown reasonable cause in this case and the penalty is waived. However, IC § 6-8.1-10-1(e) does not allow the Department to waive the interest in this instance. As discussed in Issue I, Taxpayer owes the underlying tax and therefore continues to owe the assessed interest.

Taxpayer's protest is sustained in part and denied in part.

As stated in Issue I Taxpayer is required to file as a financial institution and its protest on the FIT assessment is denied. As stated in Issue II Taxpayer's protest of penalty is sustained and its protest of interest is denied.