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 This document is effective on its date of publication and remains in effect until the date it is superseded or deleted by the publication of another document in the Indiana Register.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

The Department disagreed with Casino Company's argument that the Department erred in requiring Casino Company to addback taxes measured by income and paid to the states in which Casino Company operated its gaming facilities; the Department disagreed that excise, privilege, or casino license fees - measured by casino income - should not have been added back. In addition, the Department disagreed that the Department's audit erred when it failed to overrule the Indiana Tax Court's Aztar decision requiring the addback of Indiana's Riverboat Wagering Tax.

I. Indiana Corporate Income Tax - Addback of Taxes Paid in Other States.

Authority: U.S. Const. amend. 5; U.S. Const. amend. XIV; U.S. Const. art. I, § 8 cl. 4; IC § 1-1-4-1; IC § 6-3-1-3.5; IC § 6-8.1-5-1; Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Siwinski v. Town of Ogden Dunes, 949 N.E.2d 825 (Ind. 2011); Consolidatation Coal Company v. Indiana Dept. of State Revenue, 583 N.E.2d 1199 (Ind. 1991); State Bd. of Tax Comm'rs v. Jewell Grain Co., 556 N.E.2d 920 (Ind. 1990); Ind. Dep't of State Revenue, Ind. Revenue Bd., Ind. Gross Income Tax Division v. Colpaert Realty Corp., 109 N.E.2d 415 (Ind. 1952); Treasury of Ind. v. Dietzen's Estate, 528 N.E.2d 137 (Ind. 1939); Miles v. Department of Treasury, 199 N.E. 372 (Ind. 1935); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, (Ind. Tax Ct. 2007); Aztar Indiana Gaming Corporation v. Indiana Department of State Revenue 806 N.E.2d 381 (Tax Ct. 2004); Mynsberge v. Indiana Dep't of State Revenue, 716 N.E.2d 629 (Ind. Tax Ct. 1999); Tri-States Double Cola Bottling Co. v. Department of State Revenue, 706 N.E.2d 282 (Ind. Tax Ct. 1999); Jefferson Smurfit Corp. v. Indiana Dep't of State Revenue, 681 N.E.2d 806 (Ind. Tax Ct. 1997); State Bd. of Accounts v. Ind. Univ. Found., 647 N.E.2d 342 (Ind. Ct. App. 1995); Leehaug v. State Bd. of Tax Comm'rs, 583 N.E.2d 211 (Ind. Tax Ct. 1991); Montgomery Ward & Co. v. Gregg, 554 N.E.2d 1145 (Ind. Ct. App. 1990); Fell v. West, 73 N.E. 719 (Ind. App. 1905); VFW Ventures, Inc. v. Surtees, 8 So.3d 983 (Ala. S. Ct. 2008); Surtees v. VFJ Ventures, Inc. 8 So.3d 950 (Ala. Ct. App. 2008); Black's Law Dictionary (9th ed. 2014); Richard Weiss Achieving Uniformity in State Income Taxes: A Worthwhile Goal, 18 Sep J. Multistate Tax'n (September 2008); Henry Campbell Black, A Treatise on the Law of Income Taxation under Federal and State Laws § 1 (1913); Investopedia https://www.investopedia.com/terms/e/excisetax.asp. (Last visited June 27, 2021); Cal. Bus & Prof. Code § 19951; 230 Ill. Comp. Stat. Ann § 10/13(a-3); Kan. Stat. Ann. § 74-8734; 8 M.R.S. § 1036; Mass. Gen. Laws G.L. c. 23K, § 55; Miss. Code § 75-76-177; Mo. Rev. Stat. § 312.822; Nev. Rev. Stat. § 463.370; Ohio Rev. Code Ann. § 5753.02; 4 Pa. Cons. Stat. § 1403; 4 Pa. Cons. Stat. § 13A62; W.Va. Code § 29-22C-26; Letter of Findings 01-20170142 (August 7, 2017); Letter of Findings 04-20140409 (September 24, 2014); American Heritage Dictionary of the English Language (3rd ed. 1996).

Taxpayer argues that the Department erred in assessing additional corporate income tax on the ground that Taxpayer was not required to "add back" taxes paid to other states in which Taxpayer operates casinos and other gambling facilities.

II. Indiana Corporate Income Tax - Penalty.

Authority: IC § 6-3-4-4.1; IC § 6-8.1-5-1; IC § 6-8.1-10-2.1; 45 IAC 15-11-2.

Taxpayer maintains that the Department was unjustified in assessing penalties on the amount of the additional tax assessments.

Taxpayer is an out-of-state company in the business of operating gaming, racing, and video gaming facilities. Taxpayer is the owner and operator of gaming, racing, and video gaming operations in multiple states including an Indiana gaming facility.

The Indiana Department of Revenue (Department) conducted an audit review of Taxpayer's federal and Indiana corporate income tax returns. The Department determined that Taxpayer failed to add back taxes "based on income" paid to other states. The Department assessed additional corporate income tax based on the determination that those state taxes should have been added back in determining the amount of Taxpayer's income subject to Indiana tax.

Taxpayer disagreed with the decision and submitted a protest to that effect. An administrative hearing was conducted during which Taxpayer's representative explained the basis for the protest. This Letter of Findings results.

I. Indiana Corporate Income Tax - Addback of Taxes Paid in Other States.

The issue is whether Taxpayer has met its burden of proof necessary to establish that the Department's assessment of additional corporate income tax - based on the addback of taxes paid in other states - was wrong.

During the course of the Department's audit, Taxpayer provided the Department its federal consolidated returns. On those federal returns, Taxpayer "deducted gaming taxes for several casinos and gaming facilities located throughout the United States." However, the audit report noted that in preparing its Indiana returns, Taxpayer "did not add this tax back on the Indiana return[s]."

The audit determined these "other state" taxes should have been added back in determining Taxpayer's Indiana tax liability. The audit cited to IC § 6-3-1-3.5(b) as authority. That provision explains the calculation of Indiana "taxable income" in part:

According to the audit report, Taxpayer "was under the impression that only the Indiana gaming tax was an addback." The Department disagreed concluding that "the law does not limit the addback to Indiana income taxes but requires the addback for all state income taxes." Therefore - and again according to the report - since the other state taxes were "based on income [they] were required to be added back upon audit."

Statutory construction always starts with the "plain and ordinary meaning of the language used." E.g., Leehaug v. State Bd. of Tax Comm'rs, 583 N.E.2d 211, 212 (Ind. Tax Ct. 1991). IC § 1-1-4-1 explains in part:

A technical word has a "peculiar and appropriate meaning in law" if, for example, that word is defined elsewhere in a related code provision. State Bd. of Accounts v. Ind. Univ. Found., 647 N.E.2d 342, 347 (Ind. Ct. App. 1995). Otherwise, "[W]hen a particular construction has not been expressly provided, the legislature intends that words and phrases be given their plain and ordinary meaning." Montgomery Ward & Co. v. Gregg, 554 N.E.2d 1145, 1155 (Ind. Ct. App. 1990). This is particularly true if a word is well understood by the lay public and has been brought into the law from ordinary life experiences, not from legal treatises. Ind. Dep't of State Revenue, Ind. Revenue Bd., Ind. Gross Income Tax Division v. Colpaert Realty Corp., 109 N.E.2d 415, 419 (Ind. 1952).

Only after trying and failing to make sense of the statute utilizing the "plain meaning" rule can a court conclude that the statute is ambiguous and therefore construe the statute. Siwinski v. Town of Ogden Dunes, 949 N.E.2d 825, 828-29 (Ind. 2011); IC § 1-1-4-1. It is well-established that a statute is not ambiguous merely because of a "[s]imple disagreement between the parties." Leehaug v. State Bd. of Tax Comm'rs, 583 N.E.2d 211, 212 (Ind. Tax Ct. 1991) (internal citations omitted). An unambiguous statute must be read to "mean what it plainly expresses, and its plain and obvious meaning may not be enlarged or restricted." Jefferson Smurfit Corp. v. Indiana Dep't of State Revenue, 681 N.E.2d 806, 811 (Ind. Tax Ct. 1997).

Once it is clear that statutory provision is plain on its face, it is the Taxpayer's responsibility to establish that the corporate tax assessments are 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 Dept. of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept. of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007).

With that threshold burden in mind, 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.'" Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Thus, interpretations of Indiana tax law contained within this decision, as well as the preceding audit, shall be entitled to deference.

Nevertheless, in determining whether a taxpayer has met that burden of proof, the Department bears in mind its own responsibility. [A] tax imposition statutory provision . . . is to be strictly construed against the imposition of tax. See State Bd. of Tax Comm'rs v. Jewell Grain Co., 556 N.E.2d 920, 921 (Ind. 1990); Tri-States Double Cola Bottling Co. v. Department of State Revenue, 706 N.E.2d 282, 285 n.9 (Ind. Tax Ct. 1999). However, the policy of strict construction will not override the plain language of a tax imposition provision. Mynsberge v. Indiana Dep't of State Revenue, 716 N.E.2d 629, 632-33 (Ind. Tax Ct. 1999).

At the same time the Department also bears in mind that "In construing tax statutes a liberal rule of interpretation must be indulged in order to aid the taxing power of the state." Treasury of Ind. v. Dietzen's Estate, 215 Ind. 528, 532, 21 N.E.2d 137, 139 (1939). The statutes of this state relating to the assessment and collection of taxes are liberally construed in favor of the taxing powers. Fell v. West, 73 N.E. 719, 722 (Ind. App. 1905).

Taxpayer challenges the Department's assessment on three grounds which are briefly outlined by Taxpayer as follows:

• [T]he proposed assessments of the foreign excise taxes, license fees, distributions and contract payments violate the purpose of the add-back statute, both in Indiana and in all other states, which is to add back apportioned income taxes.

• "[T]he Auditor's addback of the foreign excise taxes and other non-tax payments would violate the U.S. Constitution in numerous respects." The assessment violates the Commerce Clause and the Due Process Clause because the assessments constitute "not just taxing revenue from transactions already taxed in the Other States, the [Department] is taxing the tax payments themselves made to other jurisdictions . . ." in effect, Indiana here imposes a "tax on a tax" which constitutes "an extraordinary violation of the Commerce Clause."

• The Department's audit "fails to address the erroneous add-back of the Indiana riverboat gaming tax . . . which violates Indiana law." Taxpayer acknowledges the Tax Court's decision contrary to Taxpayer's own view in Aztar Indiana Gaming Corporation v. Indiana Department of Revenue, 806 N.E.2d 381 (Ind. Tax Ct. 2004) (review denied 822 N.E.2d 976) but argues that the Tax Court's Aztar decision "failed to adhere to Indiana Supreme Court precedent and was in erroneous for numerous other reasons . . . ."

This Letter of Finding briefly summarizes Taxpayer's primary arguments as follows: (1) The Department improperly added back excise tax and non-tax payments made in other states; (2) The Department's interpretation and application of IC § 6-3-1-3.5(b) violates both the United States and Indiana's constitution; (3) The Tax Court's Aztar decision was wrongly decided, and the Department's audit failed to correct that wrongly decided decision.

In addition to wrongly adding back "contract payments and fees," Taxpayer maintains that the Department erroneously added back other states' excise and privilege taxes not measured by income. As Taxpayer succinctly puts it:

For simplicity and reference sake, the Department here notes a commonly recognized definition of "excise" taxes. Black's Law Dictionary 1749 (9th ed. 2014) defines excise tax as:

Elsewhere, "excise tax" is defined as:

Black's Law Dictionary defines "income tax" as "[a] tax on an individual's or entity's net income." Id. 159. Black's, in turn, cites to Henry Campbell Black, A Treatise on the Law of Income Taxation under Federal and State Laws § 1, at 1 (1913).

Taxpayer also objects to the Department's decision adding back "fees." Black's Law Dictionary 758 (9th ed. 2014) defines "fees" as "a charge or payment for labor or services [especially] professional Services." American Heritage Dictionary of the English Language 669 (3rd ed. 1996) states in part that a fee is "[a] fixed sum charged, as by an institution or by law, for a privilege." Clearly the term is ambiguous. Standing alone and without context, it is not possible to determine that any cost attributable to the payment of a "fee" should or should not be added back for the purposes of Indiana's addback provision.

Taxpayer points to and relies on its own secondary, contemporaneous documentation to bolster its argument that the Department erred in adding back taxes as it did because neither the Indiana Legislature or the Department ever contemplated that out-of-state excise and other privilege taxes would be subject to the addback provision.

Specifically, Taxpayer challenges the Department's decision adding back the following state taxes in part based on the secondary evidence provided above.

Cal. Bus & Prof. Code § 19951 imposes nonrefundable initial license fees, license renewal fees based on the number of each casinos' gaming tables, and an incremental "annual fee" based on the casino's "gross income." In part, the California statute provides:

. . . .

. . . .

. . . .

. . . .

230 Ill. Comp. Stat. Ann § 10/13(a-3) imposes a "privilege tax" on riverboat casino operations. That tax is "based on the adjusted gross receipts received" and measured on a graduated percentage of each casino's receipts. In relevant part, the Illinois statute provides.

. . . .

Kan. Stat. Ann. § 74-8734, in relevant part, imposes a state tax on the gaming facilities' "revenues."

8 M.R.S. § 1036(2) imposes essentially a tax on "net slot machine income." In part, the statute provides:

Mass. Gen. Laws G.L. c. 23K, § 55 imposes a tax on "gross gaming revenues" as follows:

Miss. Code § 75-76-177, in relevant part, imposes a "license fee" which based on a gaming licensee's "gross revenue."

Mo. Rev. Stat. § 312.822 imposes a tax on each casino's adjusted gross income as follows:

NRS § 463.370 imposes a "license" fee based on each casino licensee's "gross revenue." In relevant part, the Nevada statute provides:

. . . .

In addition, the Nevada statute provides that "gross revenue" includes "[a]ll revenue received from any game or gaming device." NRS § 463.370(4).

Ohio's gaming tax is straight-forward. Casinos pay a 33 percent tax on their "gross casino revenue." R.C. 5753.02 states:

Pennsylvania imposes a 34 percent tax on each casino's "daily gross" slot machine revenue. 4 Pa. C.S. § 1403(b) provides:

Pennsylvania saw fit to address income received from casino gaming tables separately. 4 Pa. C.S. § 13A62 provides:

West Virginia taxes casinos 35 percent of each licensee's "adjusted gross receipts" in exchange for "the privilege of holding a license." W.Va. Code § 29-22C-26 provides in part:

Taxpayer explains that it is not challenging the constitutionality of Indiana's addback provision but that the audit's decision applying that provision "would violate the U.S. and Indiana Constitutions." The Department's "misinterpretation and misapplication of the statute resulted in proposed assessments by the Department that violate both Constitutions." Taxpayer reminds the Department that it has issued administrative decisions which address just such constitutional issues. Taxpayer is correct. See Letter of Findings 01-20170142 August 7, 2017), 20171129-IR-045170501NRS (Finding that an assessment of individual income tax did not violate the Due Process Clause); Letter of Findings 04-20140409 (September 24, 2014), 20141126-IR-04514066NRS (Holding that imposing sales tax on the Indiana purchase of a recreational vehicle was not precluded by the U.S. Constitution.)

Taxpayer explains that the Department's application and interpretation of the addback provision violates the U.S. Commerce Clause (U.S. Const. art. I, § 8 cl. 4) because the Department's analysis does not result in a "fair apportionment" of Taxpayer's Indiana income. Taxpayer concludes that the audit's decision "causes Indiana's income tax base and consequently it's apportioned income to be out of all proportion to the 'fair' apportionment of [Taxpayer's] income in violation of the Commerce Clause."

In support of that argument, Taxpayer points to the Indiana Supreme Court's decision in Consolidation Coal Company v. Indiana Department of State Revenue, 583 N.E.2d 1199 (Ind. 1991) in which the court stated:

Taxpayer also argues that the Department's assessment violates the Due Process Clause (U.S. Const. amend. 5; U.S. Const. amend. XIV) which, according to Taxpayer, "requires Indiana's taxing scheme be rationally related to the [T]axpayer's Indiana activities." Taxpayer explains:

Taxpayer argues that the Department's audit failed to correct the Taxpayer's own initial error in adding back Indiana's Riverboat Wagering Tax ("RWT") as otherwise called for in the Indiana Tax Court's decision in Aztar Indiana Gaming Corporation v. Indiana Department of State Revenue 806 N.E.2d 381 (Tax Ct. 2004) (Transfer denied September 28, 2004, 806 N.E.2d 976). In that case, the court found that the sole issue was whether or not the RWT was or was not a tax "based on or measured by income." Id. 383. The court found that although denoted as an "excise tax," the RWT was "not payable unless the privilege of conducting riverboat gambling is exercised and the exercising of those privileges is the occasion for the imposition of the tax." Id. at 386. The court held that however designated, "Aztar's liability calculation is measured by the adjusted gross receipts it receives from its gaming operations." Id. The court concluded that "Aztar's RWT liability is subject to the add-back provision of IC § 6-3-1-3.5(b)(3)."

Although on its original returns, Taxpayer added back the RWT, the Department's audit did not challenge that addback. Because of this purported error, Taxpayer now states that it has "filed protective amended returns for the 'Years at Issue' to correct its erroneous addback of the Indiana RWT and [the] understatement of its net operating losses carryforwards."

This Letter of Findings' analysis begins with a plain statement of the law at issue. IC § 6-3-1-3.5(b)(3) provides.

Taxpayer's most basic argument is that the Department added back expenses and costs other than those "taxes based on or measured by income . . ." such as out-of-state excise taxes. The Department finds the Indiana Supreme Court's explanation in Miles v. Dept. of Treasury, 199 N.E. 372 (Ind. 1935) instructive. In that case, the court considered whether a tax constituted a property tax or a non-property tax.

Indiana, and numerous other states have imposed taxes described as excise taxes, franchise taxes, or taxes imposed on the simple privilege of doing business in the state.

. . . .

However, the Indiana statute says nothing about these developmental distinctions; it simply requires the addback of taxes "based on or measured by income" and the Department finds nothing ambiguous or peculiar in the provision. The Department concludes that IC § 6-3-1-3.5(b)(3) "needs no interpretation." Caterpillar, 988 N.E.2d at 1271. The Department finds the provision unambiguous and requires that the statute be read to "mean what it plainly expresses, and [that] its plain and obvious meaning may not be enlarged or restricted." Jefferson Smurfit, 681 N.E.2d at 811. Whether denoted as a state excise tax, state fee, or state privilege tax, if the tax is "measured by income" it's subject to the IC § 6-3-1-3.5(b)(3) addback requirement. While the Department and Taxpayer may disagree on this point, that disagreement does not necessarily render IC § 6-3-1-3.5(b)(3) ambiguous.

Taxpayer is correct when it points out that "[A] tax imposition statutory provision . . . . is to be strictly construed against the imposition of tax." Jewell Grain, 556 N.E.2d at 921; Tri-State Double Cola, 706 N.E.2d at 285 n.9. However, even a "strict reading" of IC § 6-3-1-3.5(b)(3) does not lead to the conclusion Taxpayer here seeks.

Indiana's and most other state's basic corporate tax structure can be fairly summarized as followed

When a taxpayer calculates its federal taxable income, it is entitled to deduct state and local taxes pursuant to I.R.C. § 164. However, in calculating its Indiana adjusted income, taxpayer begins with federal taxable income as defined under I.R.C. § 63 but is thereafter required to make certain adjustments. IC § 6-3-1-3.5(b).

One of these adjustments is found at IC § 6-3-1-3.5(b)(3) which requires that the taxpayer "[a]dd an amount equal to any deduction or deductions allowed or allowable pursuant to Section 63 of the Internal Revenue Code for taxes based on or measured by income and levied at the state level by any state of the United States." (Emphasis added). Taxpayer is entitled to deduct state and local income taxes when calculating its federal adjusted income; it may not do so for Indiana income tax purposes and must addback taxes paid to other states which are based on income. IC § 6-3-1-3.5(b) means what says and says what it means.

If it is a tax "based on or measured by income," Taxpayer must add back that amount when computing its Indiana liability. Whether the states denotes that tax as an excise tax, a privilege tax, or casino table fee, the statute pays no mind to these artifacts of the tax's origin or the manner in which the state chose to label the tax; if the tax is "based on or measured by income," Indiana law requires that the tax be added back.

As such, the initial license fees, renewal fees, and the "incremental" annual fee under Cal. Bus. & Prof. Code § 19951 are added back for purposes of determining Taxpayer's Indiana tax because the fees are based on the California Casinos' "gross income." The "privilege tax" imposed under 230 Ill. Comp. Stat. Ann. § 10/13(a-3) is added back for purposes of determining Taxpayer's Indiana tax because the tax is "based on the adjusted gross receipts . . . of each casino's receipts." The state tax imposed on Kansas casinos imposed under Kansas Statutes Ann. § 748734 is added back for purposes of determining Taxpayer's Indiana tax because the tax is measured and imposed on each facility's revenues.

Each of the other taxes cited above including Maine, Massachusetts, Mississippi, Missouri, Nevada, Ohio, Pennsylvania, and West Virginia are likewise added back under IC § 6-3-1-3.5(b) because those taxes are based on "gross income," "adjusted gross receipts," gaming "revenues," "gross gaming revenues," "net slot machine income," "gross revenue," "gross casino revenues," "daily gross slot machine revenue," "daily gross table game revenue," or "adjusted gross receipts." In other words, each of these states impose a tax "based on or measured by income and levied at the state level . . . ." IC § 6-3-13.5(b)(3).

Taxpayer asserts that the addback provision, as implemented by the Department, violates the Due Process Clause and the Commerce Clause. According to Taxpayer, the Department reached outside its borders to interfere with and tax the income earned in other states, tax transactions which occurred entirely outside Indiana, in a decision which violates both Indiana and U.S. Supreme Court's decisions precluding the addback of excise taxes.

In addressing these concerns, the Department turns first to the Alabama Supreme Court's decision in VFW Ventures, Inc. v. Surtees, 8 So.3d 983 (Ala. S. Ct. 2008) upholding in its entirely the court of appeals decision in Surtees v. VFJ Ventures, Inc. 8 So.3d 950 (Ct. of Civil Appeals of Alabama 2008). While not controlling in Indiana, the Department finds the court's reasoning sound and instructive. In that decision, the petitioner challenged the Alabama Department of Revenue's decision requiring petitioner to add back of certain intangible and interest expenses paid to out-of-state management companies in calculating petitioner's own Alabama income tax. Id. at 950. The Alabama statute, Ala. § 40-18-35(b), required that "For purposes of computing its taxable income, a corporation shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued, or incurred to, or in connection directly with one or more direct or indirect transactions, with one or more related members." Id. at 960.

The court concluded that the Alabama addback provision did not violate the Commerce Clause because the addback did not violate that Clause's substantial nexus requirements; the disallowance of the petitioner's expense deduction for the petitioner with nexus did not implicitly impose a tax on the out-of-state management companies. Id. at 979. In addition, the court found that Alabama's corporate income tax was fairly apportioned because the petitioner failed to establish by "clear and cogent evidence" that the addback provision resulted in a tax that was out of proportion or grossly distorted the petitioner's in-state activities. Id.

Closer to home, this Letter of Finding also cites to the Indiana Supreme Court's decision in Consolidation Coal Company v. Indiana Dept. of State Revenue, 583 N.E.2d 1199 (Ind. 1991). The court addressed the issue of whether the West Virginia Business & Occupation Tax was a tax "based on or measured by income" such that it was subject to the add-back provision in IC § 6-3-1-3.5(b)(3). Id. at 1201. The court disagreed with Consolidated's argument that the West Virginia was not an income tax because it did not "allow a deduction for cost of goods sold" and because its income did "not include the recovery of capital investment." Id.

The court cited to Miles, 199 N.E. 372 in which the Indiana Supreme Court found that Indiana's own Gross Income Tax was a tax measured by income in the face of Consolidated's argument that the "tax was a property tax." Id. at 310. In Miles, the court found as follows:

In Consolidated, the court found that the "measured by income" benchmark analysis was straightforward. The court explained:

Despite both Miles' and Consolidated's arguments to the contrary, the court found that both the West Virginia and Indiana's former gross income tax were "measured by income," and that the West Virginia tax should be "added back" in determining Consolidated's taxable income. Id.

In addition to challenging the Department's decision adding back other states' income taxes, Taxpayer argues that the Department's audit erred in failing to overrule the Tax Court's decision in Aztar which found that Indiana's RWT was a tax based on or measured by income. According to Taxpayer, the decision was wrongly decided and the Department overlooked the statutory and constitutional shortcomings of that decision.

The Department must reject Taxpayer's argument. Although the Department has addressed statutory and constitutional questions at both the audit and administrative level, what Taxpayer here suggests would constitute a brazen overreaching of the Department's authority and would constitute an unwarranted interference with the responsibility of and authority of the Indiana judiciary. Even if the Department were to agree that it was within the Department's authority to overturn a decision issued by the Indiana Tax Court and reviewed by this state's Supreme Court and even if the Aztar decision somehow needs the Department's approval, the Department agrees with the Tax Court's decision and reasoning as set out in that decision.

Taxpayer's argument fails at each level of consideration. IC § 6-3-1-3.5(b) contains no ambiguity and requires no elaborate construction. The Department finds that this unambiguous statute must be given its "plain and obvious meaning and may not be enlarged or restricted." Jefferson Smurfit, 681 N.E.2d at 811. The out-of-state's gambling taxes cited here are plainly and obviously being measured by those casinos' "income" and that archaic designations as "fees," "excise taxes," or "privilege taxes" are irrelevant when - after examining the plain meaning of those imposition statutes are "based on or measured by income."

In addition, the Department finds no indication that the Department's application IC § 6-3-1-3.5(b) violates either Indiana's or the United States Constitution, and there is nothing in the provision which suggests that Indiana is imposing a tax on an out-of-state's own gambling income. The Department finds that Taxpayer has failed to meet its statutory burden, under IC § 6-3-1-3.5(b) of establishing by clear and cogent evidence that the addback provision resulted in an Indiana tax that was out of proportion or distortive of Taxpayer's Indiana's activities.

The addback provision merely stipulates the means by which Indiana measures and then taxes Taxpayer's Indiana casino income. The Department rejects entirely Taxpayer's suggestion that Indiana is taxing "transactions occurring in those [other] states" or that Indiana is taxing casinos "doing business solely in [ ] other states" as a misinterpretation of an addback provision whereby Indiana measures the income of a casino doing business in this state.

Whether that level of taxation is excessive or burdensome is not a question for the Department to determine but is purely a legislative question. Just as it is not for the Department to decide that Indiana's seven percent sales tax is too great or unduly burdensome to its fellow Hoosiers, it is not for the Department to decide that a straightforward addback provision unduly or inequitably burdens Taxpayer's Indiana casino operation.

Nonetheless, Taxpayer suggests that the Department added back costs and charges which constitute "contract costs" and or one-time casino fees. For example, there are certain provisions of California's Bus & Prof. Code which appear to impose on its casinos fees which are entirely unrelated to the casinos' income; Taxpayer has not yet pointed out which of these unrelated one-time fees are or were the subject of its protest. Any of the Department's decisions to addback such fees were incorrect to the limited extent that these fees were not tied to or measured by the out-of-state casinos' income. Governmental fees not measured by or based on income should not have been added back; any governmental fees which are based on or measured by income clearly are subject to Indiana's addback requirement.

However, Taxpayer has not delineated why or how any of these out-of-state expenses fall outside Indiana's addback provision. Therefore, to the extent that Taxpayer can explain clearly which of these charges were not tied to or measured by the out-of-state casinos' income, the Department recognizes its responsibility to correct those specific errors.

The Department finds that Taxpayer's arguments as outlined above are without merit; however, to the extent that Taxpayer clearly and cogently establishes that any of the expenses added back during the audit were not based on or measured by income, the Taxpayer's protest is sustained, and the Department will correct those misapplication of the addback statute.

II. Indiana Corporate Income Tax - Penalty.

The Department assessed Taxpayer "negligence," "late payment," and "underpayment" penalties. Taxpayer challenges each of these penalties as unwarranted and excessive.

Taxpayer objects to the imposition of the ten percent "underpayment penalty."

IC § 6-3-4-4.1(b) imposes on each taxpayer the responsibility to make and pay a "declaration of estimated tax for the taxable years" if the amount of that estimated is more than $1,000. Id.

IC § 6-3-4-4.1(d) imposes a penalty if a taxpayer fails to pay the correct amount of estimated tax.

IC § 6-8.1-10-2.1(a)(3) requires that a ten-percent penalty be imposed if the tax deficiency results from the taxpayer's negligence. IC § 6-8.1-10-2.1(a)(2) requires a ten-percent penalty if the taxpayer "fails to pay the full amount of tax shown on the person's return on or before the due date for the return or payment."

IC § 6-8.1-10-2.1(d) states that, "If 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."

Departmental regulation 45 IAC 15-11-2(b) defines negligence as "the failure to use such reasonable care, caution, or diligence as would be expected of an ordinary reasonable taxpayer." Negligence is to "be determined on a case-by-case basis according to the facts and circumstances of each taxpayer." Id.

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 negligence penalty – is presumptively valid.

As discussed in Part I above, the Department disagrees entirely with Taxpayer's interpretation of Indiana's addback provision. While the Department finds that Taxpayer's interpretation is aggressive and skirts the edge of simple reasonableness, Taxpayer's interpretation does not rise to the level of negligence.

Taxpayer's protest is sustained.

Taxpayer's protest is sustained to the extent that Taxpayer can now clearly establish that the Department erred in adding back non-tax contract costs or one-time operational fees not measured by the out-of-state casino income. Taxpayer's substantive protests challenging the application and implementation of Indiana's addback provision is respectfully denied. The Department agrees that the penalties should be abated.

August 13, 2021