STATE TAX DEVELOPMENTS

Francina A. Dlouhy Baker & Daniels LLP , IN 317-237-1210 [email protected]

I. United States Supreme Court Decisions

A. MeadWestvaco Corp. v. Illinois Department of Revenue, 06-1413, 2008 US Lexis 3473 (April 15, 2008). The United States Supreme Court ruled that Illinois could not tax a portion of the capital gain from the taxpayer's sale of its separate division, Lexis/Nexis. The Court found that in order to tax a non-domiciliary corporation for activities that occur outside of a taxing state, the test is whether "intrastate and extra-state activities formed part of a single unitary business." The Supreme Court criticized the state court for its application of the "operational purpose" test, which it said improperly expanded upon decisions of the Supreme Court that certain assets can be a part of a unitary business if they serve an operational, as opposed to investment, function.

B. Department of Revenue v. Davis, 06-666, May 19, 2008, held that Kentucky's scheme for taxing interest on municipal bonds does not violate the Commerce Clause. Kentucky taxed income from other states' bonds, while exempting in income from Kentucky bonds. The Court held that the Commerce Clause was not offended by such treatment, because there is an exception to the Commerce Clause that allows states that go beyond mere regulation and actually participate in the market to exercise the right to favor their own citizens. While the Commerce Clause is driven by concerns about economic protectionism, the Court held there is a basic distinction between states as market participants and states as market regulators.

II.

A. Case Law

1. Riverboat Development, Inc. v. Ind. Dep't of State Revenue, Cause No. 49T10-0506-TA-52, held that because all of the income of Riverboat Development, Inc. ("RDI"), a Kentucky S-Corp, was from its minority membership in RDI/Caesars Riverboat Casino LLC ("Caesars"), the income was not adjusted gross income derived from sources in Indiana, and thus adjusted gross income tax ("AGIT") did not have to be withheld from income passed through to nonresident shareholders. RDI's only

Copyright 2008 by Baker & Daniels LLP. These materials are intended for general information purposes only and are not to be considered legal or tax advice. The information herein should not be acted upon without appropriate professional advice.

business during the period in question, 1998-02, was as a minority member of Caesars LLC. During the period, RDI had between 33 and 59 shareholders, no more than 3 of which were Indiana residents. IC § 6-3-14-3 requires that an S-Corp withhold tax from any nonresident shareholder's share of the corporation's taxable income. "Taxable income" is the adjusted gross income derived from sources within Indiana. IC § 6-3-2-1(b). As the result of an audit, the Department proposed assessments of $2.3M in withholding tax, reasoning that RDI derived its income from operation of a riverboat in Indiana, and thus had taxable income for which tax should have been withheld with respect to income passing to RDI's shareholders. Citing IC § 23-18-6-2 and Rhoade v. Indiana Dep't of Revenue, 774 N.E.2d 1044 (Ind. Tax Ct. 2002), the Court observed that the interest of a member in a LLC constitutes intangible personal property. RDI's receipts from its interest in Caesars LLC are treated as receipts in the form of dividends from investments, which are attributable to Indiana if the taxpayer's commercial domicile is in Indiana. Because RDI is not commercially domiciled in Indiana, and the income RDI received was solely as a result of its membership interest in Caesars LLC, RDI's income was not adjusted gross income derived from sources within Indiana. Therefore, RDI was not subject to withholding obligations under IC § 6-3-4-13 for income passed through to its nonresident shareholders.

2. In Miller Brewing Co. v. Indiana Department of State Revenue (Miller II), No. 49T10-0607-TA-69, slip op. (Ind. Tax Ct. June 8, 2007), the court held that its decision in Miller Brewing Co. v. Indiana Department of State Revenue (Miller I), 831 N.E.2d 859 (Ind. Tax Ct. 2005) did not preclude the Department from litigating the issue of whether sales of products that were transported by customer-arranged common carriers to Indiana customers were to be included in Miller Brewing Company's ("Miller's") sales factor numerator for the purposes of determining Miller's adjusted gross income tax (AGIT) liability. In Miller II, Miller appealed the final determination of the Department to deny its claims for a refund of the Indiana AGIT it paid during the 1997-1999 tax years. While the protest in Miller II was pending, the Tax Court issued its opinion in Miller I, which addressed Miller's AGIT liability for the 1994-1996 tax years and granted Miller a refund for those years. Miller argued that, given the court's determination in Miller I, issue preclusion barred the Department from denying its refund in Miller II. However, the court found that issue preclusion is generally not applicable in revenue cases because "each tax year stands alone." Thus, the court denied Miller's motion for summary judgment in Miller II. Note: the has granted review of this decision and heard oral argument.

3. In Welch Packaging Group, Inc. v. Indiana Dept. of State Revenue, No. 49T10-0503-TA-21, slip op. (Ind. Tax Ct. Nov. 13, 2007), Taxpayer

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appealed the Department's assessment of adjusted gross income tax (AGIT) for the 1998 to 2000 tax years. The issue was whether taxpayer's sales to Michigan could be "thrown back" to Indiana for purposes of calculating the numerator of taxpayer's sales factor. Taxpayer claimed that it paid the Michigan Single Business Tax (MSBT) and was therefore "taxable in the state of the purchaser" under IC § 6-3-2-2(e)(2)(B). Accordingly, taxpayer claimed that the sales could not be thrown back to Indiana under IC § 6-3-2-2(e)(2). The Department claimed that the MSBT was a value added tax and therefore was not "franchise tax." Because the MSBT was not a "franchise tax," the Department reasoned, the taxpayer was not "taxable in the state of the purchaser" and thus the Michigan sales should have been thrown back to Indiana. IC § 6-3-2-2(n)(1) provides that a taxpayer is deemed taxable in another state if the taxpayer is subject to, among other things, either a "franchise tax measured by net income" or a "franchise tax for the privilege of doing business." The Court relied upon the plain language of the statute and dictionary definition of "franchise tax" to hold that a "franchise tax" does not have to be measured by income (as argued by the Department) in order to deem the taxpayer as being taxable in Michigan. The Court held, "The MSBT is a franchise tax on the privilege of doing business in Michigan. Accordingly, [taxpayer] was not required to include its Michigan sales in the numerator of its sales factor during the years at issue."

4. Wiles v. Indiana Department of State Revenue, 881 N.E.2d 105 (Ind. Tax Ct. 2008). This case addressed the question whether a person could file a refund claim for taxes mistakenly paid under the state's amnesty program (IC §6-8.1-3-17). In this case, a person who served as chairman of the board of an organization, erroneously believed that the organization had a withholding tax liability. This belief was supported by the fact that the Department had issued notices of proposed assessment to this organization for withholding taxes. The person paid the organization's tax liability pursuant to the amnesty program, but then filed a refund claim arguing that there had been "mutual mistake of fact" with respect to the organization's withholding obligation. The Tax Court, applying the terms of the amnesty statute, concluded that because the Department had issued several proposed assessments the tax at issue was considered due and payable and even though the person had voluntarily paid the tax under the program, that person had agreed to be bound by the terms of the amnesty agreement. That agreement provided that this person would not file a claim for refund.

5. Lacey v. Indiana Department of State Revenue, 2008 Ind. Tax NEXIS 9 (Ind. Tax Ct. 2008) - Not For Publication. Taxpayer, an Indiana resident, argued that the Internal Revenue Code does not apply to Indiana, because Indiana is not included within the definition of the word "state" or "United States" in the Internal Revenue Code. The Tax Court disagreed with that

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argument. This taxpayer also argued that his compensation did not constitute "wages" and therefore was not subject to tax. The Tax Court set this issue for further proceedings.

B. Administrative Developments

1. Letters of Findings and Rulings

a. Capital Contribution From Non-Shareholder. In Supplemental Letter of Findings No. 06-0186 (Jan. 2008), the Department determined whether a non-shareholder's contribution to the taxpayer was a capital contribution exempt from income tax. In order to be a capital contribution, a transfer from a non-shareholder must be made with the purpose of benefiting the general community. U.S. v. Chicago, Burlington, & Quincy R. Co., 412 U.S. 401 (1973). A non-shareholder's transfer may be a capital contribution if the transfer: 1) becomes "a permanent part of the transferee's working capital structure," 2) is not compensation for services, 3) is bargained for, 4) will "foreseeably result in benefit to the transferee in an amount commensurate with its value," and 5) will ordinarily contribute to the production of additional income. Id. at 411.

The transfers in this case failed three parts of the Chicago, Burlington test. First, instead of becoming a part of the taxpayer's capital structure, the payments appeared to be returned in large part to the taxpayer's shareholders. Second, the payments were not bargained for, as they were gained as a condition of a contract between the contributor and another entity. Third, the taxpayer did not use the payments to produce additional income, but were used for expenses that benefited the taxpayer's shareholders. Thus, the Department found that the payments were not tax-exempt capital contributions from a non-shareholder.

b. Nexus For Inclusion In Consolidated Return. In Letter of Findings No. 07-0425 (April 2008), the taxpayer protested the Department's determination that one of the taxpayer's subsidiaries did not have sufficient nexus with Indiana to be included in the taxpayer's consolidated return. Affiliated groups of corporations may make consolidated returns, provided that the companies included in the returns have adjusted gross income from sources within Indiana. IC § 6-3-4-14. Indiana may not collect income tax from a non-resident company that has no business activity within Indiana beyond the solicitation of sales. See 15 U.S.C. § 381. Looking at the taxpayer's activities within Indiana as a whole, the Department determined that the subsidiary company had a non-sales business

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presence in Indiana. In particular, the subsidiary conducted non- sales activities in Indiana for 27 days in 2004 and for 25 days in 2005. The Department concluded that the subsidiary's non-sales connection to Indiana was sufficient to justify the subsidiary's inclusion on the taxpayer's consolidated return.

c. Utility Tax On Water Company. In Letter of Findings No. 07-0444 (May 2008), the Department determined whether a water company was exempt from utility tax. Gross receipts received by certain entities, including a "nonprofit corporation formed solely for the purpose of supplying water to the public," are exempt from state utility tax. IC § 6-2.3-4-3. The Department rejected the taxpayer's claim that it was a nonprofit corporation formed solely for the purpose of supplying water to the public. Although the taxpayer demonstrated that it was formed for the purpose of providing a public water supply, the Department found that the taxpayer failed to produce evidence that it was a nonprofit corporation. Thus, the Department determined that the taxpayer was a political subdivision required to pay utility tax.

d. Denial Of Royalty Expense Deduction. In Letter of Findings No. 06-0169 (Jan. 2007), the Department determined that the taxpayer was not allowed to deduct royalty expense payments it made to a holding company that owned intellectual property. The Department noted that IC § 6-3-2-2(l) states that if the article's allocation or apportionment provisions do not fairly represent the taxpayer's Indiana income, the Department may require the exclusion or inclusion of additional factors or the use of another method to allocate or apportion the income. The Department found that, although it accepted the taxpayer's apportionment method, the royalty deduction modified the sales factor so that it no longer fairly represented the taxpayer's income. The Department determined that denying the deduction properly corrected this distortion.

e. Forced Combination Overturned. In Letter of Findings No. 05-0519 (Jan. 2007), the Department determined that its decision to force the taxpayer to file a combined return was incorrect. The taxpayer's retail stores had sold credit card accounts to some of the taxpayer's other subsidiaries. The Department initially argued that these sales resulted in an understatement of Indiana source income, which warranted the combined filing method. See IC § 6-3-2-2(l). However, the taxpayer presented evidence demonstrating that the credit card transactions were made at arm's-length and that there were legitimate business reasons for the transactions. The Department found that this evidence rebutted

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the Department's rationale for requiring the combined return and sustained the taxpayer's protest.

f. No Throwback Of Sales. In Supplemental Letter of Findings No. 05-0237 (Mar. 2007), the Department determined that sales that the taxpayer made to out-of-state customers in fourteen states should not have been included in its Indiana throwback calculation. The taxpayer showed that it was subject to net income tax in thirteen of the states to which it shipped its products. It also demonstrated that the fourteenth state to which it shipped its products had jurisdiction to subject the taxpayer to a net income tax, whether or not it actually did so.

g. Nexus From Licensing Intangibles. In Letter of Findings No. 06-0033 (May 2007), the Department determined that the taxpayer had sufficient nexus to subject it to Indiana income taxation. The taxpayer was a Delaware corporation whose Illinois subsidiary owned a manufacturing plant in Indiana. The subsidiary paid the taxpayer royalties for the plant's use of the taxpayer's intellectual property. The taxpayer argued that because it did not have any offices, employees or property in Indiana, it did not have nexus with the state. However, the Department found that because the taxpayer derived income from the use of intangibles in Indiana, it had the requisite nexus and was subject to corporate income tax in Indiana.

h. Non-Business Expenses. In Letter of Findings No. 07-0391 (Dec. 2007), the Department found that the taxpayer had wrongly classified an interest expense deduction for its parent as a non-business expense resulting in a non-business loss. The Department reclassified this interest expense deduction as a business expense. Taxpayer argued that it classified the expense as non-business on its income tax return because it was relying upon a letter it received from the Commissioner in 1985, claiming that the letter was a "Departmental Ruling" that interprets a listed tax and requires the Department to follow the "removal of expired rules" procedure in IC § 6-8.1-3-3. The Department disagreed that the letter was a "Departmental Ruling" and interpreted the letter as merely giving taxpayer the choice to report its income using the "modified stacked method," meaning that it could combine its parent's one-hundred percent allocated Indiana income with its two subsidiaries' apportioned Indiana income. The Department also noted that taxpayer had not followed the 1985 letter, as it had apportioned its parent's Indiana source income since 1990 and concluded that since taxpayer's Indiana source income should be apportioned, any Indiana source business income or expense

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(including the interest expense deduction at issue) is subject to apportionment. See also Supplemental LOF issued April 2008 upholding this decision.

i. Separate Accounting Imposed By Department. In Letter of Findings No. 04-0262 (Dec. 2007), the Department determined that the taxpayer's inclusion of its parent corporation in its consolidated return did not fairly reflect taxpayer's income derived from sources in Indiana and removed the parent from the consolidated group. Taxpayer presented evidence of the parent having employees in Indiana and income derived from sources within Indiana. However, the Department responded that nexus was not at issue. Instead, the Department stated that it was justified in requiring separate accounting of the parent's Indiana activities because of the distortion that the inclusion of the parent company caused. Taxpayer responded that since it operates as a unitary business, the Department cannot order separate accounting. The Department indicated that Indiana courts have found that separate accounting may be required in order to "fairly represent" a taxpayer's Indiana adjusted gross income and denied taxpayer's protest.

j. Exclusion Of Extraordinary Gain From Sales Factor. Letter of Findings No. 07-0313 (Jan. 2008), held that a taxpayer could not exclude from its sales factor the receipts from the receipts from the sale of Indiana property on the grounds that sale was an extraordinary transaction and its inclusion in the sales factor distorted the amount of its income sourced to Indiana. The Department reasoned that the sale of the property was 100% taxable in Indiana and that Indiana had a right to include the receipts in the sales factor.

k. Denominator Adjustments. Letter of Findings No. 07-0126 (Dec. 2007). The Department had adjusted the taxpayer's sales factor numerator to a higher amount as reported on the company's sales tax returns. The taxpayer protested this adjustment on the grounds that if the Department was going to adjust the numerator, it also had to adjust the denominator. The taxpayer's protest on this issue was sustained.

l. Royalty Deductions Allowed. Letter of Findings No. 06-0511 (Jan. 2008). A taxpayer that was engaged in the printing industry and which paid royalty fees to a related entity located out-of-state for the use of trademarks and other intellectual property successfully challenged an auditor's attempt to addback royalty and interest expense. According to the Department's ruling, the taxpayer provided evidence that the out-of-state affiliate was an

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operating company that actively promoted and preserved the intellectual property. It also noted that the out-of-state affiliate used the royalty payments, along with royalty payments it received from other affiliates, in its own business. It was also important to the Department that the affiliate did not loan the royalties back to the taxpayer and did not dividend the royalties back to the taxpayer. Accordingly, the Department found that even though the royalty expenses significantly reduced the amount of income subject to Indiana taxes, there was no evidence that this constituted a "abusive tax avoidance scheme" so that the claimed expenses did not fairly reflect Indiana source income.

m. Royalty Deductions Allowed. Letter of Findings No. 07-0062 (Feb. 2008). The taxpayer was successful in protesting the auditor's proposal to disallow royalty expenses paid to its management company. The management company licensed intangible property to taxpayer but also provided accounting, finance, marketing and other functions to the taxpayer. Because there was "no circular flow of monies" concerning the royalty payments made by taxpayer to the management company, the Department sustained the taxpayer's protest.

But see Letter of Findings No. 06-0411 (Jan. 2008) where a taxpayer's deduction of royalty fees paid to a related entity for the use of trademarks was disallowed.

n. Gain From Deemed Asset Sale Is Business Income. Letter of Findings No. 06-0187 (Feb. 2007) held that the gain from a deemed sale of assets was business income because the taxpayer had claimed expenses and depreciation related to the assets sold as business expenses in Indiana, reducing the business income allocable to Indiana in previous years. Moreover, the business was part of the taxpayer's (and the parent company's) overall business. The Department ruled expressly on Jim Beam Brands v. Franchise Tax Board and Hoescht Celanese Corp. v. Franchise Tax Board, both California decisions, in this letter of findings.

C. Updated on Information Bulletins, Directives

1. Information Bulletin No. 39 (Feb. 2008) - Taxation of non-resident individuals.

2. Information Bulletin No. 12 (Dec. 2007) - Corporate income tax.

3. Information Bulletin No. 15 (Sept. 2007) - Extensions of time to file an Indiana corporate income tax return.

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4. Information Bulletin No. 18 (Sept. 2007) - Procedures for an extension of time to file an individual income tax return.

5. Information Bulletin No. 72 (Sept. 2007)- Requirement that S-corporations and partnerships file composite returns on behalf of non-resident shareholders and partners.

6. Commissioner's Directive No. 13 (July 2007) - Claim for refund procedures issued July 2007.

7. Commissioner's Directive No. 18 (May 2008) - Utility receipts tax.

8. Commissioner's Directive No. 34 (Jan. 2007) - Interest on refunds.

D. Legislative Developments In The Income Tax Area

1. Media Production Expenditure Tax Credit (IC § 6-3.1-32). The amount of the credit may not exceed 15% of qualified expenditures for the taxpayer's claim in qualified production expenditures of less than $6 million. Above $6 million of qualified expenditures, the percentage is determined by the IEDC. The annual credits that the IEDC may approve for a tax year for all taxpayers is $5 million.

2. Modification to the Coal Gasification Investment Credit (IC § 6-3.1-29-19) to provide that a taxpayer may agree to use less than 100% of Indiana coal and still qualify for the credit.

3. IC §6-8-12-1 is amended to provide that the NCAA and its affiliates are exempt from taxation in Indiana for all purposes in connection with a Men's or Women's Final Four conducted after December 31, 2011. These events are also exempt from the Marion County admissions tax.

4. IC § 6-3-1-3.5 is amended to provide that the federal economic stimulus payments are excluded from adjusted gross income.

5. IC § 6-3-4-1.5 is amended to provide that a professional return preparer who prepares more than 100 returns in a year is not required to file a return in electronic format if the taxpayer requests that the return not be filed electronically.

6. IC § 6-8.1-8-7 is amended to provide that where a person acting on behalf of the Department makes a good faith effort to collect the Department's levy, that person shall not be liable unless their actions are contrary to the Department's direction or the person acts with deliberate ignorance or disregard for the truth.

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7. The Indiana adjusted gross income tax is updated to incorporate by reference the Internal Revenue Code as in effect on January 1, 2008.

E. Highlights For 2007 Return

1. Addback of Intangible Expenses. IC § 6-3-2-20 requires the addback of intangible expenses and any directly related intangible interest expense that reduces a corporation's taxable income for federal income tax purposes. However, there are several significant exceptions to this addback. This provision is applied to taxable years beginning after June 30, 2006.

2. Phasing in a Single Factor Sales Formula. P.L. 162-2006 phases in a single sales factor to apportion business income. For 2007, the numerator is the sum of the property factor plus the payroll factor, plus the product of the sales factor multiplied by 3 and the denominator is 5. Note too that IC §6-3-2-2 is amended to provide that regardless of the f.o.b. point or other conditions of sales, sales of tangible personal property are in this state if the property is delivered or shipped to a purchaser that is within Indiana.

3. Interest on Refunds Accrued from the Filing Date of the Claim. P.L. 111-2006 provides that the Department will pay accrued interest on an excess tax payment only if the Department does not issue the refund within ninety (90) days of the date that the refund claim is filed. See Information Bulletin No. 64.

4. P.L. 223-2007 provides a qualified patent income exemption. A qualified patent is a utility patent or a plant patent issued after December 31, 2007 from an invention resulting from a development process conducted in Indiana. A qualified taxpayer is an individual corporation with less than 500 employees or a non-profit organization, that is domiciled in Indiana. The total amount of exemptions claimed by a taxpayer in a taxable year may not exceed $5 million. See Information Bulletin No. 104.

III. Indiana Sales And Use Tax

A. Recent Legislation

1. HEA 1001-2008

a. Effective April 1, 2008, the sales and use tax rate is increased from 6% to 7%.

b. The amount of sales and use tax that a retail merchant can retain as compensation for collecting and remitting (the so-called "collection allowance") is reset as follows effective June 30, 2008:

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i. 0.73% if the merchant's annual sales and use tax liability did not exceed $60,000 the previous year.

ii. 0.53% if the merchant's annual sales and use tax liability was greater than $60,000 but did not exceed $600,000 the previous year.

iii. 0.26% if the merchant's annual sales and use tax liability was greater than $600,000 the previous year.

2. SEA 233-2008. Various amendments were made to bring Indiana into further conformity with the streamlined sales tax project. New definitions were added for "specified digital products" and "durable medical equipment." An amendment was also made regarding the sourcing of the retail sale of floral products.

3. HEA 1125-2008 expanded the exemption from all taxes, including sales and use tax, to the NCAA and its affiliates in connection with a Men's or Women's Final Four conducted in Indiana after December 31, 2011. HEA 1125 provided that the leasing or renting of an aircraft along with the provision of flight instruction to the lessee during the term of the lease is a retail transaction. This legislation also exempts gambling games sold to taverns.

4. SEA 500-2007

a. Repeals Ind. Code Ann. § 6-2.5-8-10, which required an out-of- state retailer that solicited business from potential customers in Indiana, sold property or services to the state or a state university, or was closely related to another person that maintained a place of business in Indiana or performed any of the listed activities to register as a retail merchant for the purposes of collecting and remitting Indiana sales and use taxes.

b. Specifies that distribution or transmission equipment acquired by a public utility engaged in generating electricity does not qualify for the sales tax exemption for manufacturing equipment that is directly used in the production of other tangible personal property.

c. Specifies that the sales tax exemption for consumables used by restaurants and hotels does not apply to electricity, water, gas, or steam.

d. Permits a retail merchant to verify a public transportation exemption by obtaining the buyer's name; address; and motor carrier number, USDOT number, or other authorized identification number.

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e. Specifies that the department of administration and each purchasing agent for a state educational institution must provide the Department a list of every person who wants to enter into a contract to sell "tangible personal property" to an agency or state educational institution. The code previously required such reporting for every person who wanted to enter into a contract to sell "property or services" to an agency or educational institution.

B. Case Law

1. In Horseshoe Hammond, LLC v. Indiana Department of State Revenue, 865 N.E.2d 725 (Ind. Tax Ct. 2007), the court held that a) Horseshoe did not owe sales tax on the complimentary merchandise it provided to select patrons, and b) Horseshoe did not owe sales or use tax on the components it used to prepare complimentary meals for select patrons. The court noted that because Horseshoe did not receive consideration for the complimentary merchandise and meals, the offerings were not retail transactions subject to sales tax. In making its use tax findings, the court noted that Ind. Code Ann. § 6-2.5-5-20(a) exempts the use of meal components from the use tax. The court further found that, although Horseshoe owed use tax on the other merchandise, its use tax liability was based on the price at which it acquired the merchandise from its suppliers. Thus, Horseshoe was entitled to a refund because it had paid the use tax based on the price by which it would have otherwise sold the merchandise.

2. In Lafayette Square Amoco, Inc., v. Indiana Department of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007), the court upheld the Department's assessment of gross retail tax for oil changes that Lafayette Square Amoco, Inc. (LSA) had performed during the years at issue. The Department auditor attempted to obtain records necessary to calculate the sales tax LSA owed, but LSA did not provide the necessary documentation for the years at issue. Thus, the auditor used an invoice that indicated LSA had not charged any sales tax on one particular oil change to make a Best Information Available (BIA) assessment against LSA for $13,674.23 in unpaid sales tax. LSA protested the assessment and provided the Department with 57 invoices demonstrating it had charged sales tax in those particular oil changes. However, LSA did not provide additional invoices during the Department's supplemental audit, claiming it no longer had the requested records. Thus, the court found that LSA did not meet its burden of proof in contesting the tax liability. The court did give LSA credit for the 57 invoices it submitted to avoid double taxation.

3. Kitchin Hospitality, LLC v. Indiana Dep't of State Revenue, Cause No. 49T10-0604-TA-35, Not For Publication, held that during the years at issue (2004 and 2005) utilities consumed in a hotel's guest rooms qualified

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for exemption from sales tax under IC §6-2.5-5-35(2)(A), an exemption for property used up or otherwise consumed during the occupation of rooms or lodging by a guest. However, utilities consumed in the hotel's common areas did not qualify for exemption

C. Administrative Decisions

1. Sales Tax on Vehicles. In Letter of Findings No. 07-0215 (Jan. 2008), the taxpayer protested the imposition of sales tax on vehicles that were transported out of state immediately following their sales. Prior to July 1, 2004, an automobile was exempt from sales tax if the vehicle was transferred out of Indiana immediately following its delivery. See IC § 6-2.5-5-15, repealed by P.L. 81-2004, Sec. 60. Additionally, the Indiana Administrative Code states that sales tax does not apply to sales of automobiles "delivered in Indiana for immediate transportation" outside of the state. 45 IND. ADMIN. CODE § 2.2-5-21.

The taxpayer argued that it was entitled to rely on the "delivered in Indiana" language of the regulation. The Department stated, however, that the regulation's language was insufficient to overcome the authority of the Legislature's repeal of former § 6-2.5-5-15. Further, the Department referenced Commissioner's Directive 25, which stated that a purchaser must take possession through a delivery outside of Indiana in order for the sale to be exempt. Because the regulation is less authoritative than the Legislature's repeal of § 6-2.5-5-15 and because Commissioner's Directive 25 explained the new law, the taxpayer's sales of vehicles delivered in Indiana were not tax exempt.

2. Software Services Over The Internet. In Letter of Findings No. 07-0173 (May 2008), the Department determined whether the taxpayer's provision of software services over the Internet was a non-taxable Internet service. The Department found that the taxpayer did not transfer any tangible personal property to its customers. Although customers had to download software in order to receive the taxpayer's services, the software was lost after the service session was completed. Because the taxpayer did not sell or transfer tangible personal property when supplying its services, the taxpayer's services were exempt from sales and use tax.

3. Propane Tanks Taxable. In Letter of Findings No. 07-0653 (April 2008), the Department determined whether a gas company purchased its propane storage tanks for the purposes of renting the tanks to the company's customers such that the tanks were exempt from sales tax. Purchases of tangible personal property are exempt from sales tax if the purchaser acquires the property for resale, rental, or leasing in the ordinary course of its business. IC § 6-2.5-5-8. Generally, a lease agreement exists where there is a transfer of a right to possession of and control over property. Ind.

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Dep't of State Revenue v. Indianapolis Transit Sys., 356 N.E.2d 1204 (Ind. Ct. App. 1976).

The gas company contended that it entered into lease agreements in the normal course of its business, charging customers $1.00 per month to rent a propane tank plus a higher fee for gas delivered to those tanks. The Department reasoned, however, that the company's business is the sale of propane, not the lease of propane tanks. Further, the company did not transfer control and possession of the tanks to the customers. Instead, the company retained the right to enter the tank for refilling and prohibited customers from allowing other gas companies to refill the tanks. Thus, the taxpayer's purchases of propane tanks were subject to sales tax.

4. Sales Over The Internet. In Revenue Ruling No. 2008-01 ST (Feb. 2008), a tax-exempt religious organization asked the Department to determine whether the organization's sales of religious materials over the Internet would be exempt from sales tax. Sales of personal property are exempt from sales tax if "the seller is an organization that is organized and operated exclusively for religious . . . purposes" and its income is not used for the private benefit of any affiliated person. IC § 6-2.5-5-26(b)(1). The Department determined that the organization made its sales of religious materials in the furtherance of the purposes of the organization and did not carry on a proprietary or private business with the sales. Thus, the Department ruled that the sales were exempt from taxation.

5. Calculation Of Interest On Refund. In Letter of Findings No. 07-0204 (Apr. 2008), the Department determined whether the taxpayer was correct in claiming that the payment of its audit-generated refunds should have included interest. Interest on tax refunds begins to accrue ninety days from the date the refund claim is filed. IC § 6-8.1-9-2(c). Prior to January 1, 2007, however, interest began to accrue on a refund ninety days from the later of: 1) the date the tax payment was due, or 2) the date the tax was paid. See P.L. 111-2006, Sec. 10.

The taxpayer claimed that its audit coincided with the change in the law and that the audit was unduly delayed until 2007 by the auditor's illness. The taxpayer further contended that it filed a claim for tax return by submitting a list of items it determined were overpayments to the auditor. The Department rejected both of the taxpayer's arguments. The Department stated that the audit was not unduly delayed and that submitting a list of items to the auditor for consideration does not constitute filing a claim for a refund. Because the accrual of interest can only be initiated by the taxpayer filing a claim for refund, no interest was due on this claim.

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6. In Letter of Findings No. 05-0297 (Feb. 2007), the Department made the following determinations:

a. Maintenance/Service Agreements. The taxpayer did not owe use tax on optional maintenance/service agreements that the taxpayer paid for but then returned because the taxpayer did not purchase and use the agreements.

b. Bariatric Beds. The taxpayer was not entitled to a sales tax exemption for bariatric beds and equipment that were not "prescribed" within the meaning of Ind. Code Ann. § 6-2.5-5-18(b). However, the taxpayer was entitled to an exemption for a therapeutic bariatric bed because the bed was used to alleviate patients' medical conditions and so was "prescribed" within the meaning of Ind. Code Ann. § 6-2.5-5-18(b).

c. Information On Compact Disc. The taxpayer owed use tax on its purchase of information transferred by compact disc. Although the taxpayer argued that what it had purchased was a non-taxable service, the Department determined that the material was to be considered tangible personal property for sales and use tax purposes.

7. In Supplemental Letter of Findings No. 05-0411 (Feb. 2007), the Department made the following determinations:

a. Financing Charges. The taxpayer owed sales and use tax for the financing charges associated with its purchase of software and hardware items. In reaching this conclusion, the Department noted that the taxpayer's argument was ambiguous and the records for the transaction in question were unavailable.

b. Boiler Maintenance Contract. The taxpayer owed sales tax for its purchase of a boiler maintenance contract, which included services, chemicals, and equipment. The Department classified the contract as a "unitary transaction" because the contract did not differentiate between the costs of the services and the costs of the chemicals and equipment. Thus, the Department determined that the whole contract was subject to sales and use tax. The Department further noted that while the boiler itself might be exempt because it was used in the direct production of other tangible personal property, the chemicals used in the boiler were not directly involved and so were not exempt. See Ind. Code Ann. § 6-2.5-5-3(b).

8. Medical Supplies. In Letter of Findings No. 06-0197 (Feb. 2007), the Department determined that the surgery packs and trays the taxpayer

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maintained were subject to sales and use tax. The taxpayer was a corporation that operated an outpatient surgical center. Prior to a surgery at the center, a physician would note in writing what packs and trays it would need for the surgery. The taxpayer claimed that the packs and trays should have been exempt from taxation under Ind. Admin. Code tit. 45, r. 2.2-5-28(g), which exempts the sale of prescribed medical supplies to the user of those supplies. The Department rejected the taxpayer's claim that it sold the packs and trays to patients noting a) that the price of the items were included in the fee for the surgery and were not quoted separately; b) that the taxpayer was in the business of providing surgeries, not selling surgical supplies; and c) that the taxpayer was not a registered merchant. Thus, the Department denied the taxpayer's exemption request.

9. Delivery/Handling Costs. In Letter of Findings No. 06-0273 (Apr. 2007), the Department determined that the delivery and handling costs that the taxpayer charged its customers were subject to sales tax. The taxpayer incurred charges, which it passed on to its customers, to have cars delivered from local auctions to the taxpayer's location. The Department noted that the taxpayer had not shown why the charges were not within the purview of Ind. Admin. Code tit. 45, r. 2.2-4-3(a), which states that delivery charges are subject to sales tax if the delivery is made on behalf of the seller of property that is not owned by the buyer. Thus, the Department denied the taxpayer's protest.

10. In Information Bulletin #37 (June 2007), the Department replaced the August 2004 version of the bulletin. The Department changed the bulletin as follows:

a. It removed the list of specific activities that qualify a person as an Indiana Retail Merchant.

b. It added "being closely related to another person that maintains a place of business in Indiana" to the list of activities that do not establish that an out-of-state vendor is engaged in business in Indiana, if such activity is the vendor's only Indiana activity. The Department had previously listed this item in the list of activities that qualify a person as an Indiana Retail Merchant.

c. It modified the amount of time for which an Indiana Registered Retail Merchant's Certificate is valid. According to the current version of the bulletin, the certificate is valid for two years from the date of issue. The Department automatically renews the certificate free of charge if the merchant is current in filing its returns and remitting its sales tax. Previously, the certificate had been permanent.

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d. It added information about how an out-of-state merchant can use the Streamlined Sales & Use Tax Agreement Web site to register to voluntarily collect tax for member states.

11. State Agency. Letter of Findings No. 07-0400 (Dec. 2007) held that a Kentucky state agency was liable for Indiana sales tax on the purchase of a TV tower to be installed within Indiana. The Department ruled that the Kentucky agency did not qualify under any of Indiana's exemptions and could not rely upon an exemption under Kentucky law for Indiana tax purposes.

12. Updated Commissioners Directives and Information Bulletins

a. Commissioners Directive No. 13 (July 2007) sets forth the claim for refund procedures.

b. Departmental Notice No. 26 (Mar. 2008) sets forth when a transaction is considered to have occurred for purposes of applying either the 6% or 7% tax rate.

13. Information Bulletin No. 4 (July 2007) discusses sales to and by Indiana state and local governments as well as the United States government and its agencies and instrumentalities.

June 2008

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