Indianapolis, IN     JOEL SCHIFF
    Indianapolis, IN

    IN THE INDIANA TAX COURT _____________________________________________________________________

GREAT AMERICAN LINES, INC.,                                                           )
    Petitioner,                                                                            )
    v.                                                                                     )   Cause No. 49T10-9512-TA-136
INDIANA DEPARTMENT OF STATE                                                                )
REVENUE,                                                                                   )
    Respondent.                                                                            )    


December 28, 2000

    Petitioner Great American Lines, Inc. (Great American) appeals the final determination of the Respondent Indiana Department of State Revenue (Department) denying Great American’s requested refund of motor carrier fuel taxes and surtaxes (collectively fuel tax), see Ind. Code Ann. §§ 6-6-4.1-1 to –27 (West 2000), for the 1990-1992 tax years. In this original tax appeal, Great American presents the following issue: Whether the Department applied an invalid auditing methodology by using a miles-per-gallon (mpg) ratio “ceiling” and thereby excluding some sample vehicles in determining the average mpg ratio for the leased vehicles in Great American’s fleet.

    Great American is a for-hire authorized motor carrier that has its primary business facilities in Pittsburgh, Pennsylvania. Great American operates its fleet of commercial vehicles throughout several states, including Indiana. See footnote The Department conducted three audits of Great American—an original audit and two supplemental audits. The Department’s original audit separated Great American’s fleet into two categories: (1) owned vehicles and (2) leased vehicles. The original audit separated all leased vehicle miles from Great American’s total miles. The leased vehicle miles were subjected to the 4.0 mpg ratio authorized by Ind. Code Ann. § 6-6-4.1-9 (West 2000) (presumption). See footnote The Department applied the presumption because Great American “did not retain any Ohio fuel receipts for the leased vehicles.”See footnote (Pet’r Ex. 1 at 10.)
    Following the original audit, the Department, on December 14, 1993, issued Great American a proposed assessment of $246,106.48 in fuel tax, interest and penalty. (Pet’r Ex. 1 at 1.) Great American protested the use of the presumption and the assessment of a penalty. The Department conducted a hearing on the protest on July 28, 1994 and issued its first letter of finding on October 14, 1994. The first letter of finding sustained in part and denied in part Great American’s protest with regard to use of the presumption. Specifically, the Department determined:
[The protest] is sustained to the extent that some additional fuel receipts were provided and it is agreed that a 4 MPG presumption should not be applied in this case. However, due to the lack of complete records, the remainder of the protest should be denied. A supplemental audit will be performed in which the leased vehicles’ MPG figure will be adjusted based on the best information available for the leased vehicles. The adjustments will be made according to reasonable criteria to be set by the Department.

(Pet’r Ex. 4 at 2.) In addition, Great American’s protest of the penalty was denied, without explanation. Id.
    Subsequently, the Department conducted its first supplemental audit. The Department thereafter issued a proposed assessment of $234,440.70 in fuel tax, interest and penalty. (Pet’r Ex. 5 at 1.) In this first supplemental audit, the Department determined a calculated mpg for the leased vehicles using two categories of Great American’s leased vehicles. First, the Department analyzed leased vehicles lacking any Ohio activity. According to the Department, “these vehicles were not susceptible to the policy of disregarding the Ohio fuel [purchases].” See footnote (Pet’r Ex. 5 at 14.) Second, the Department allowed Great American to obtain additional information regarding Ohio fuel purchases for leased vehicles having invoices for Ohio activity. In both cases, only vehicles reporting a “reasonable” mpg were used to determine the calculated mpg. Id. The reasonable mpg was “based on the highest MPG that the taxpayer reported for the audit period.” Id. The highest fleet-wide mpg ratio reported by Great American during the audit period was 5.21 mpg; vehicles with a mpg higher than this “ceiling” were discarded from the calculation. (Stipulation, ¶ 6.) The audit assigned Great American’s leased vehicles mpg ratios of 4.0 for 1990, 4.14 for 1991 and 4.11 for 1992. See footnote (Stipulation, ¶ 7.)
    Great American protested this proposed assessment. Per the parties’ agreement, no administrative hearing was conducted. Rather, the Department performed a second supplemental audit. On May 18, 1995, the Department issued its final proposed assessment, calling on Great American to pay $138,688.49 in fuel tax, interest and penalty. (Pet’r Ex. 6 at 1.) Two major adjustments led to this decreased assessment. First, in the second supplemental audit, the Department considered and incorporated vehicles leased to Great American by Valley Transportation, an Ohio-based fleet operator that leased a captive fleet exclusively to Great American. (Stipulation, ¶¶ 3(3), 10.) The audit applied mpg ratios of 5.60 in 1990, 5.66 in 1991 and 5.79 in 1992 to the Valley Transportation vehicles. (Stipulation, ¶ 10.) However, the Department separated the mileage and fuel information pertaining to these vehicles; it refused to consider the information as being representative of the leased vehicle portion of Great American’s fleet.See footnote (Stipulation, ¶ 10.) Second, in addition to the 5.21 mpg ratio ceiling, the Department imposed a “floor” of 3.0 mpg in determining which leased vehicles had a “reasonable” mpg for purposes of calculating a mpg ratio for all of the remaining leased vehicles. (Stipulation, ¶ 11.)
    Great American protested this final proposed assessment, claiming that the Department’s auditing technique was erroneous. The Department conducted a hearing on August 24, 1995. On October 30, 1995, the Department issued its second letter of finding. This letter of finding stated that the “taxpayer’s protest is denied” and explained that the assessment was “consistent with” Ind. Code Ann. § 6-8.1-5-1. (Pet’r Ex. 8 at 1.)
    Great American filed this original tax appeal on December 12, 1995. See footnote The Court conducted a trial on January 10, 1997 and heard oral arguments from the parties on July 7, 1997. Additional facts will be supplied as needed.

Standard of Review

    The Court reviews final determinations of the Department de novo and is bound by neither the evidence presented nor the issues raised at the administrative level. Ind. Code Ann. § 6-8.1-5-1(h) (West 2000); Snyder v. Indiana Dep’t of State Revenue, 723 N.E.2d 487, 488 (Ind. Tax Ct. 2000), review denied.

    The fuel tax is “imposed on the consumption of motor fuel by a carrier in its operations on highways in Indiana.” See footnote Ind. Code Ann. § 6-6-4.1-4(a) (West 2000). In addition, Ind. Code Ann. § 6-6-4.1-4.5(a) (West 2000) imposes an eleven-cent per gallon surcharge tax on motor fuel consumed by carriers operating on Indiana’s highways. See footnote Carriers are obligated to pay these taxes quarterly. Ind. Code Ann. §§ 6-6-4.1-4(a) & 4.5(a) (West 2000). Moreover, they must maintain certain books and records with respect to the motor fuel they purchase and consume. Ind. Code Ann. § 6-8.1-5-4 (West 2000). See footnote
    The Department, if it believes that a taxpayer has not reported the proper amount of fuel tax due, “shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to the department.” Ind. Code Ann. § 6-6-4.1-24(a) (West 2000). The assessment is considered a tax payment not made by the due date and is subject to interest and penalties regarding the nonpayment. Id. The Department must issue a taxpayer notice of its proposed assessment and prescribe a period for payment of the assessment and for protesting the assessment. Ind. Code Ann. § 6-6-4.1-24(b) (West 2000). See footnote Furthermore, per Ind. Code § 6-6-4.1-24(b):
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. If the person files a protest and requires a hearing on the protest, the department shall set the hearing at the department’s earliest convenient time and shall notify the person by United States mail of the time, date, and location of the hearing. See footnote

    This original tax appeal challenges the Department’s second final determination. Specifically, Great American challenges the Department’s application of the 5.21 mpg ratio ceiling to its “other” leased vehicles. (Pet’r Reply Br. at 6.) The “other” leased vehicles were those leased vehicles (1) with Ohio invoices for fuel purchases and (2) without miles traveled in Ohio. According to Great American, the Department should have calculated an average mpg ratio for its other leased vehicles by considering the mpg ratios of all sample vehicles, regardless of the individual mpg ratios applicable to the sample vehicles. (Pet’r Reply Br. at 7.) Great American asserts that all the sample vehicles together constitute the “best information” available to the Department. Ind. Code § 6-6-4.1-24(a). Because the Department refused to consider the best information available, Great American contends that the Department’s auditing technique for its second supplemental audit is “fatally flawed.” (Pet’r Reply Br. at 7.) Therefore, Great American argues, the Department’s final determination upholding the second supplemental audit must be reversed.
    By statute, Great American has the burden of proof in this matter. Ind. Code § 6-6-4.1-24(b). See Black’s Law Dictionary 190 (7th ed. 1999) (defining “burden of proof” as a “party’s duty to prove a disputed assertion or charge”). Its burden is two-fold, consisting of both the burden of persuasion and the burden of production. Porter Mem’l Hosp. v. Malak, 484 N.E.2d 54, 58 (Ind. Ct. App. 1985) (noting that “burden of proof” is not a precise term, as it can mean both the burdens of persuasion and production); State v. Huffman, 643 N.E.2d 899, 900 (Ind. 1994) (stating that there are “two senses” of the term “burden of proof,” the burdens of persuasion and production). The burden of persuasion is the taxpayer’s “duty to convince the fact-finder to view the facts in a way that favors that party.” See footnote Black’s Law Dictionary 190 (7th ed. 1999). In contrast, the burden of production, also referred to as the burden of going forward, is the taxpayer’s “duty to introduce enough evidence on an issue to have the issue decided by the fact-finder.” Id. In other words, the taxpayer must submit evidence sufficient to establish a prima facie case, i.e., evidence sufficient to establish a given fact and which if not contradicted will remain sufficient to establish that fact. See Longmire v. Indiana Dep’t of State Revenue, 638 N.E.2d 894, 898 (Ind. Tax Ct. 1994); Canal Square Ltd. Partnership v. State Bd. of Tax Comm’rs, 694 N.E.2d 801, 804 (Ind. Tax Ct. 1998). Cf. Bullock v. Foley Bros. Dry Goods Corp., 802 S.W.2d 835, 839 (Tex. App. 1990) (observing, in challenge to state’s sales and use tax audit, that comptroller’s deficiency determination is prima facie correct and that taxpayer must disprove it with documentation), writ denied. The burden of persuasion does not shift, while the burden of production may shift several times in one case. See Longmire, 638 N.E.2d at 898; Thorntown Tel Co. v. State Bd. of Tax Comm’rs, 629 N.E.2d 962, 965 (Ind. Tax Ct. 1994).
    In this case, Great American has the duty to submit evidence sufficient to prove that the Department’s auditing method was improper because it refused to consider leased vehicles with mpg ratios above its designated ceiling. Great American failed to adequately comply with the Department’s record-keeping requirements, a fact acknowledged by the taxpayer. (Pet’r Reply Br. at 9.) Because Great American’s records were incomplete and insufficient, the Department was permitted to calculate and issue a proposed assessment based upon the information that was provided by the taxpayer. Ind. Code § 6-6-4.1-24(a). In calculating an average mpg ratio for Great American’s other leased vehicles, the Department excluded from consideration sample vehicles with mpg ratios below the 3.0 mpg floor and above the 5.21 mpg ceiling. The Department explained its rationale for establishing this range as follows:
    It was obvious that even with the additional information that many vehicles still had unattainable mpg’s. Typically in an audit, where there are questionable areas, those areas are tested to determine if they contain missing or inaccurate information. In this case, it was not possible to conduct a test because there were [not] mileage or fuel source documents to test. Therefore, to even consider the additional information, a ceiling had to be imposed. . . . Once it was determined by the Department to try to use this information, the line could have been drawn anywhere. However, as the mpg’s became higher, the probability of missing fuel increased. It was decided to consider those vehicles with mpg’s up to the highest reported fleet mpg during the audit period of 5.21. . . .
    Since no testing could be done on these vehicles, it would be imprudent to accept all information provided, knowing that the information is incomplete and has possible timing problems. Therefore, the Department had no alternative but to impose some “reasonable parameters” when trying to accept some portion of the additional information at “face value.” The 3.0-5.21 parameters are considered “reasonable.” It allowed a fluctuation in mpg’s of 2.21 miles per gallon. Anything outside the parameters was considered to have potential time problems or missing information.

(Rep’t Br. at 17.)
    Although not applying the term, the Department considered mpg ratios beyond this range to be “outliers.” An “outlier” is a “subject or other unit of analysis that has extreme values on a variable.” W. Paul Vogt, Dictionary of Statistics and Methodology 161 (1993). In other words, “[i]n a series of observations or readings, an outlier is a reading that stands unexpectedly far from most of the other readings in the series.” 2 International Encycolpedia of Statistics 1039 (1978). At trial, Mr. Joseph A. Scheidler, a certified public accountant testifying on behalf of Great American, described outliers as “abnormally high aberrations or abnormally low aberrations [of data within a sample].” (Trial Tr. at 188.) Cf. 61 Pa. Code § 8a.1 (defining “outlier” as a “statistical observation that appears to deviate markedly from other members of the sample from which it came”).
    In determining its proposed assessment, the Department was obligated to select a method of audit reasonably calculated to reflect the taxes due by Great American. See, e.g., Micheli Contracting Corp. v. New York State Tax Comm’n, 486 N.Y.S.2d 448, 450 (N.Y. App. Div. 1985) (citing Ristorante Puglia, LTD. v. Chu, 478 N.Y.S.2d 91, 93 (N.Y. App. Div. 1984). Accord Underwood v. Fairbanks North Star Borough, 674 N.E.2d 785, 788 (Alaska 1983) (quoting W.T. Grant Co. v. Joseph, 159 N.Y.S.2d 150, 155-56 (N.Y. App. Div. 1957)). Here, the taxpayer provided information as to mpg ratios for a sample of its other leased vehicle units during the quarters audited by the Department. (Pet’r Exs. 17-19); (Ex. 15.) The Department disregarded what it basically deemed to be outlier mpg ratios in these samples. (Pet’r Ex. 7); (Resp’t Br., Ex. A.) The Court must therefore consider whether Great American has shown that the Department’s treatment of these alleged outliers is unreasonable.
    Neither party cites authority for the identification or treatment of outliers. Mr. Scheidler did address the issue in his trial testimony. He explained that, in applying a sampling technique, one “cannot arbitrarily eliminate any items within the sample. You need to consider all items that are part of the sample.” (Trial Tr. at 188.) Mr. Scheidler stated that “it is appropriate in some instances to eliminate . . . outliers, . . . [but] there has to be a real logical or factual reason for why those are considered extremes.” (Trial Tr. at 188.) Moreover, according to Mr. Scheidler, one must “treat the high extremes the same as you treat the low extremes.” (Trial Tr. at 188.) However, despite these assertions, there appears to be no standard, generally accepted method for identifying or treating outliers. One recommended method for identifying outliers is the “hingespread” approach; using this method, the difference between the upper and lower hinges (values that are ordinally halfway between the median and the extremes in a sample) serves as the “sample measure of dispersion on the basis of which values may be classified as outliers.” A Handbook for Data Analysis in the Behavior Sciences 358, 362 (Gideon Keren & Charles Lewis, eds., 1993) (citing John W. Tukey, Exploratory Data Analysis (1977)). In 2 International Encycolpedia of Statistics 1040-42 (1978), the author notes that there are at least three ways in which an outlier can occur and that a “different action would be preferred in each case” with respect to addressing or treating the outlier. See footnote
    These are general observations, not concrete rules. The parties have not presented the Court with authoritative explanation as to the nature, identification and treatment of outliers. Without further information, the Court can only speculate as to whether the Department’s identification and treatment of outliers was an improper auditing methodology. See footnote
    Great American has not submitted evidence sufficient to establish a prima facie case as to the invalidity of the State Board’s methodology. Therefore, it has not met its burden of production. Consequently, the Court holds that Great American has not satisfied its burden of proof in this case.


    For the aforementioned reasons, the Court AFFIRMS the Department’s final determination.

Footnote: According to Great American, “In any given quarter, [its] fleet included approximately 50 to 60 owned vehicles, about 400 vehicles operated under ‘permanent’ or long-term leases, and approximately 1,000 vehicles operated under trip leases.” (Pet’r Br. at 4.) Trip leases are “leases for one trip only.” (Trial Tr. at 24.)

Footnote: Section 6-6-4.1-9 states: “If there are no records showing the number of miles actually operated per gallon of motor fuel and if [ Ind. Code Ann. § 6-6-4.1-11(c) (West 2000)] is inapplicable, it is presumed for purposes of this chapter that one (1) gallon of motor fuel is consumed for every four (4) miles traveled.”

Footnote: Fuel receipts from Great American’s Ohio activities were needed, because the statutory formula used to calculate the fuel tax takes into consideration the “total amount of motor fuel consumed in [the carrier’s] entire operations within and without Indiana.” Ind. Code Ann. § 6-6-4.1-4(b) (2000). See also Bulkmatic Transp. Co. v. Department of State Revenue, 715 N.E.2d 26, 28 (Ind. Tax Ct. 1999) (describing Indiana’s “straightforward apportionment formula” for calculating the fuel tax).

Footnote: Great American explained, as follows, why it generally lacked Ohio fuel receipts for its leased vehicles: “The reason why Ohio fuel purchase receipts were not collected from vehicle lessors [i.e., owners/operators or independent contractors, see Trial Tr. at 24-25] was that, for purposes of Ohio fuel tax liability, the lessors were responsible for reporting their own fuel and mileage activity and therefore did not turn in Ohio fuel purchase receipts to Great American.” (Pet’r Br. at 6.) Thus, Great American “did not report [fuel and mileage activity] to Ohio, other than for [its] own vehicles.” (Trial Tr. at 28) (testimony of Mr. John Reilly, Director of Quality Assurance and Auditing for Great American.)

Footnote: The 4.0 mpg ratio figure was used in 1990 because the audited mpg ratio resulted in less than the statutory presumption. (Pet’r Ex. 5 at 14.)

Footnote: According to the Department, the Valley Transportation vehicles were not representative of Great American’s fleet in part because they were newer and well maintained. (Resp’t Br. at 9.) In a letter dated December 1, 1993, Great American stated that these vehicles were “a little newer and more fuel efficient” than those in the rest of its fleet but that, nevertheless, the vehicles were “very representative of [Great American’s] operation.” (Resp’t Ex. 4 at 1.) .

Footnote: Following the denial of its protest, Great American paid the Department $143,592.98 in fuel tax, interest and penalty. (Stipulation, ¶ 13.) On the same date it filed this original tax appeal, Great American also filed a claim for refund with the Department. (Stipulation, ¶ 13.) The Department denied the refund on January 29, 1996. (Stipulation, ¶ 13.) Denial of this refund is not an issue before the Court in this case.

A “carrier” is “a person who operates or causes to be operated a commercial motor vehicle on any highway in Indiana.” Ind. Code Ann. § 6-6-4.1-1(a) (West 2000). Per Ind. Code Ann. § 6-6-4.1-1(b), a “commercial motor vehicle” subject to the fuel tax is any vehicle listed in Ind. Code Ann. § 6-6-4.1-2(a) (West 2000) and not excluded in Ind. Code Ann. § 6-6-4.1-2(b) (West 2000). In addition, Ind. Code Ann. § 6-6-4.1-3(a) (West 2000) states that commercial motor vehicles leased to a carrier are subject to the fuel tax “to the same extent and in the same manner as commercial motor vehicles owned by the carrier.” As subsection 3(b) clarifies, the lessor of commercial vehicles may be considered the carrier with respect to the operations of the leased vehicles if the lessor “supplies or pays for the motor fuel consumed by the vehicles” or “makes rental or other changes calculated to include the cost of the motor fuel consumed by the vehicles.”

Footnote: Section 6-6-4.1-4(a) states that the rate for the motor fuel tax is the “same rate per gallon as the rate per gallon at which special fuel is taxed under IC 6-6-2.5.” “Special fuel” is “all combustible gases and liquids that are: (1) suitable for the generation of power in an internal combustion engine or motor; or (2) used exclusively for heating, industrial, or farm purposes other than for the operation of a motor vehicle.” Ind. Code Ann. § 6-6-2.5-22 (West 2000). Indiana Code Ann. § 6-6-2.5-28(a) (West 2000) imposes a “license tax of sixteen cents ($0.16) per gallon . . . on all special fuel sold or used in producing or generating power for propelling motor vehicles . . . .” Thus, combining the base fuel tax with the surcharge tax, carriers effectively pay twenty-seven cents per gallon on motor fuel consumed in their operations on Indiana’s highways.

Indiana Code Ann. § 6-6-4.1-20 (West 2000) subjects carriers to penalties if they do not properly maintain the books and records required by Ind. Code § 6-8.1-5. Indiana Code Ann. § 6-8.1-5-4(a) states:
Every person subject to a listed tax must keep books and records so that the department can determine the amount, if any, of the person’s liability for that tax by reviewing those books and records. The records referred to in this subsection include all source documents necessary to determine the tax, including invoices, register tapes, receipts, and canceled checks.
Subsection 4(b) generally requires taxpayers to retain their books and records for at least three years after the date that the final payment of the the particular tax liability was due. Subsection 4(d) obligates taxpayers to provide the Department with a copy of any federal tax returns that have been filed, upon the Department’s request. In addition, Ind. Code Ann. § 6-8.1-5-6(a) (West 2000) provides:
If a record or report maintained outside Indiana is required by the department with respect to the administration or collection of the motor carrier fuel tax and surcharge tax under IC 6-6-4.1, the department may require the taxpayer or carrier to make the record or report available at a location in Indiana.

Footnote: The notice, payment and protest requirements are to be issued “under the provisions of the Base State Fuel Tax Agreement entered into by the department pursuant to IC 6-8.1-3-14.” Ind. Code Ann. § 6-6-4.1-24(b) (West 2000).

This language parallels the assessment and protest process provided for by Ind. Code Ann. § 6-8.1-5-1 (West 2000), which was cited by the Department in its second letter of finding. See supra, slip op. at 5.

Footnote: Black’s Law Dictionary 190 (7th ed. 1999) indicates that the term “burden of persuasion is “loosely termed burden of proof.” Some cases have referenced this dual meaning. See, e.g., Peabody Coal Co. v. Ralston, 578 N.E.2d 751, 754 (Ind. Ct. App. 1991) (observing that in criminal cases, the “State carries the ultimate burden of proof, or burden of persuasion”). However, the terms have two distinct meanings, and the Court will apply these meanings accordingly.

Footnote: The three causes are: (1) mistake in reading the data; (2) the wrong specification or expression of values; and (3) the rare deviation from expectation has been observed. 2 International Encycolpedia of Statistics 1041 (1978).

Footnote: The Court does not necessarily approve of the Department’s identification and treatment of the alleged outliers. Its methodology may very well have been invalid. See, e.g., Richard Lempert, Statistics in the Courtroom: Building on Rubinfeld, 85 Colum. L. Rev. 1098, 1104 n.24 (1986) (“Arbitrarily ignoring outliers is no solution to the problems they pose.”); Roger D. Blair & Amanda Kay Esquibel, Yardstick Damages in Lost Profit Cases: An Econometric Approach, 72 Denv. U. L. Rev. 127-28 (1994) (“Any temptation to discard outliers must be resisted because these observations may provide important information and actually improve the reliability of the model.”) Furthermore, perhaps, as Mr. Scheidler stated at trial, all of the vehicles for which Great American provided information constituted a representative sample of its fleet. (Trial Tr. at 206.) Be that as it may, Great American has not submitted evidence or authority proving either the correctness of its method or the invalidity of the State Board’s method.