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 This document is effective as of its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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 § 6-8.1-5-1; Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); MBNA America Bank, N.A. v. Indiana Dep't of Revenue, 895 N.E.2d 140 (Ind. Tax 2008); 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); Mason Metals Company, Inc. v. Ind. Dep't of State Revenue, 590 N.E.2d 672 (Ind. Tax Ct. 1992); 45 IAC 17-2-4; Black's Law Dictionary (9th ed. 2009); Letter of Findings 18-20130319 (February 2014).

Taxpayer protests the assessment of financial institutions tax.

Taxpayer is a business incorporated outside Indiana. Taxpayer was filing in Indiana as a financial institution. Taxpayer determined that it was incorrectly filing as a financial institution 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 further determined that it owed Financial Institutions Tax ("FIT") for the tax year 2014. The Department therefore issued a proposed assessment of FIT for 2014. Taxpayer protested the imposition of FIT for 2014, stating that it is not subject to FIT, does not have nexus with Indiana, and has never conducted the business of a financial institution in Indiana. Letter of Findings 18-20160506 ("LOF") was issued denying Taxpayer's protest but sustaining Taxpayer's protest of penalty. Taxpayer requested a rehearing, which was granted. An administrative rehearing was held and this Supplemental Letter of Findings results. A corresponding Supplemental Final Order Denying Refund 18-20170811R 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 ("Affiliate") with receivables factoring services. Affiliate sells goods to customers, including Indiana customers, creating an accounts receivables account. Taxpayer then buys the accounts receivables from Affiliate at a discount. Taxpayer then collects upon the accounts receivables from customers.

Taxpayer originally filed as a financial institution for 2010-2014. Taxpayer then filed amended returns seeking a refund of FIT for tax years 2010-2013 and has elected to be treated as a C-corporation for income tax purposes. Taxpayer 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).

The LOF determined that Taxpayer had properly filed its original returns as a financial institution and the Department's subsequent assessment was correct. On rehearing, Taxpayer argues that it is not subject to FIT because accounts receivables are not loans, Taxpayer does not meet the 80 percent rule for corporations operating as a financial institution, and there is no nexus between Taxpayer and Indiana. This decision will first determine whether the protested transactions meet the activity statutorily determined to be the activity of a financial institution. Next this decision will determine whether Taxpayer meets the 80 percent threshold for financial institutions. Finally, the Department will determine whether Taxpayer has nexus to Indiana for FIT purposes.

Indiana defines taxpayers conducting activity of a financial institution under, IC § 6-5.5-1-17, which states:

The Department's audit report determined that Taxpayer was a financial institution acquiring and servicing accounts receivables, and the accounts receivables at issue were "loans arising in factoring." The statute does not define "loans arising in factoring" therefore the Department looks to the plain meaning of the phrase within the statute. Of relevance here, "Loan" is defined in Black's Law Dictionary 1019 (9th ed. 2009) ("Black's") as: "1. An act of lending; a grant of something for temporary use. 2. A thing lent for the borrower's temporary use; esp., a sum of money lent at interest." Next, "Factoring" is defined as: "The buying of accounts receivable at a discount." Id. at 671. In addition, Blacks defines "arise" as, "to originate; to stem from." Id. at 122. Finally, "in" is defined as "under or based on the law of." Id. at 827.

In this case, Taxpayer is not lending money to enable the factoring of receivables nor is it borrowing from an Indiana source to purchase the receivables, therefore Taxpayer does not meet the definition of "loans arising in factoring."

Taxpayer also protests that its activities do not meet the definitions of qualifying activities listed in IC § 6-5.5-1-17. Specifically, Taxpayer argues that it does not meet the requirements of FIT because the accounts receivables do not have the economic equivalence of loans; the originating receivables do not have the economic equivalence of an extension of credit for some customers; and in this case indebtedness does not mean loan as defined in the statute.

Taxpayer cites to a previous decision issued by the Department, Letter of Findings 18-20130319 (February 2014), 20140430 Ind. Reg. 045140129NRA ("LOF2") to support its position that accounts receivables are not loans. LOF2 defines receivables and loans and determined that by definition these two activities were not the same. LOF2 also determined that taxpayer was not subject to FIT because it did not factor loans and determined that by definition the receivables at issue in that instance were not loans. In addition LOF2 looked to the function of the transactions and determined that the protested transactions in that particular case did not function as loans and therefore that taxpayer was not subject to FIT.

Because Taxpayer and Affiliate have a factoring agreement in which "receivables" is defined, the Department will look to that agreed upon definition rather than Black's. Taxpayer's factoring agreement defines "receivables" as:

Since Taxpayer does not define "indebtedness," the Department looks again to Black's to flush out the plain meaning of the word. "Indebtedness" means "1. The condition or state of owing money 2. Something owed; a debt." 836.

The Indiana Tax Court has stated that the Department and taxpayers must look to the function of a transaction rather than the mere definition of it. In Mason Metals Company, Inc. v. Ind. Dep't of State Revenue, 590 N.E.2d 672 (Ind. Tax Ct. 1992), where it provided:

In this case, the Department looks to the function of the transactions between Taxpayer and Affiliates in order to determine the FIT implications of those transactions. In regards to the function of the transactions, Taxpayer discusses that the accounts receivables are collected from customers in one payment by due date or within ten days after the due date, and in some cases Taxpayer has the ability to collect interest on late payments. Taxpayer distinguishes accounts receivables from loans in that loans are paid over a longer term period and in multiple payments.

By Taxpayer's own definition of "receivables," the underlying transaction is the act of owing money. As a matter of functionality, IC § 6-5.5-1-17 does not limit the action to what is listed but rather encompasses actions that have a "comparable economic effect" to loans, installment obligations, secured or unsecured consumer or commercial loans, etc. All the actions listed in the statute have the economic effect of owing and lending money. The economic effect of loaning money is the same as the accounts receivables in this case. The originating transaction begins when a customer creates an accounts receivable with Affiliate. The accounts receivable are entered on Affiliate's balance sheet as an asset which it will credit when cash is debited after customer pays down the receivable. Thus, the Department determines that the accounts receivables in this case have the same economic effect of loans resulting in Taxpayer being subject to FIT.

In addition, Taxpayer states that under the definition of account receivable and loan as cited in LOF2 those definitions must be applied consistently to all taxpayers according to Fresenius USA Marketing, Inc. v. Indiana Dep't of Revenue, 56 N.E. 3d 734 (Ind. Tax 2016). Thus, Taxpayer believes this supports their position that these transactions are not loans and therefore Taxpayer is not subject to FIT. While the Department may be bound by a previous decision's definition, Taxpayer itself contractually presented different defined factors, as noted above. Therefore the definitions relied on in LOF2 are not applicable in this case.

The LOF stated that "A letter [between customer and Affiliate] even states that affiliate would like to 'extend more generous credit terms.' The letter is clearly extension of credit signed by the affiliate and the customer." Taxpayer, in its rehearing request, explained these are not extensions of credit in the "traditional sense." Taxpayer described the credit limit was for the purchase of goods, meaning the customer cannot get more product than the "limit" until either the invoice is paid or customer makes some cash payments. Taxpayer referred to this as a volume agreement. Taxpayer goes on to state:

According to Black's, credit means:

Under this definition, it seems that, on its face, "extensions of credit" and "letters of credit" are synonymous. However, as stated above the Department must look to the function of the transactions to determine if the underlying transactions meet the criteria of FIT. Here, Affiliate puts a limit on which a customer can draw upon something of value, in this case the item of value is produce rather than cash. Therefore, the activity takes on the form of a "line of credit" in the "traditional sense." Based on the letter of agreement, Affiliate gives customers an extension to which it can draw upon something of value, in this case produce. Customers then must eventually pay the amount due to Affiliate. Taxpayer then purchases these agreements from Affiliate. Thus, Taxpayer is acquiring and servicing extensions of credit from Affiliate. Furthermore, Taxpayer cannot rely on LOF2 because in that case there was no evidence that, LOF2 taxpayer was issuing or purchasing extensions of credit; as stated above, Taxpayer in this case is acquiring and servicing extensions of credit and is the economic equivalent of loans. Thus, Taxpayer's activity falls under IC § 6-5.5-1-17 making Taxpayer subject to FIT.

Taxpayer states there was no discussion in the previous decision regarding a distinction between the definition of "indebtedness" as in factoring agreements and the definition of "loans" as used in the statute. Taxpayer argues that a loan is a subset of indebtedness i.e. all loans are evidence of indebtedness but not all evidence of indebtedness are loans. Taxpayer requests the Department address this protest. As stated above in subsection A)1), the Department determines that the accounts receivables in this case have the same economic effect of loans, thus, the accounts receivable in the instant case fall under the definitions in IC § 6-5.5-1-17.

Taxpayer argues that even if the accounts receivables are considered to be "loans" for purposes of FIT, its income does not meet or exceed the required 80 percent threshold. IC § 6-5.5-1-17(d)(2) states that a corporation's activities are subject to FIT if 80 percent of the corporation's gross income is derived from one of the listed activities. Taxpayer states:

Taxpayer however, is mistaken. IC § 6-5.5-1-17(d)(2)(A) states that a corporation's business activity is subject to FIT if 80 percent or more of its gross income includes "the making acquiring, selling, or servicing loans or extensions of credit." Emphasis added. Thus, because the discount includes servicing the loan Taxpayer clearly meets the statute's 80 percent requirement. Taxpayer is properly determined to be subject to FIT.

Taxpayer next argues that it does not have nexus with Indiana. The actual economic effect of the factoring transaction is Taxpayer purchasing receivables from affiliate at a discount in which both Taxpayer and affiliate are located outside Indiana.

IC § 6-5.5-4-6 states:

Furthermore, the Indiana Tax Court concluded in MBNA America Bank, N.A. v. Indiana Dep't of Revenue ("MBNA"), that "economic presence is sufficient to establish the substantial nexus requirement. . . [in addition] MBNA's confidential FIT returns reported significant gross receipts attributable to its Indiana customers." 895 N.E.2d 140, 144 (Ind. Tax 2008). Thus, during the years at issue, MBNA had a substantial "nexus with Indiana for purposes of the FIT." Id.

In this case, the originating account receivables meet the economic equivalent of a loan and the receipts are sourced to where the "loan" originated. In this case, the origination point is in Indiana. Taxpayer is purchasing account receivables that have Indiana customers as a party, and Taxpayer is collecting payments from Indiana customers. Therefore based on IC § 6-5.5-4-6 and MBNA, Taxpayer has sufficient economic nexus to subject it to Indiana FIT.

As stated in A), Taxpayer's accounts receivables are considered to have the comparable economic equivalence of "loans" for FIT purposes. As stated in B), Taxpayer does meet the 80 percent threshold required by IC § 6-5.5-1-17. Finally, as stated in C), Taxpayer has nexus in Indiana requiring it to file in Indiana. Based on the above discussion Taxpayer has not met its burden under IC § 6-8.1-5-1(c). Consequently Taxpayer is subject to FIT as outlined in IC § 6-5.5-1-17. This case is particularly fact sensitive thus the position relayed within this document pertains only to this case and its specific set of facts.

Taxpayer's protest is denied.

July 25, 2018.