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Special Report – Current Issues and Opportunities in Indiana
COST Mid‐West Regional State Tax Seminar
Indianapolis, Indiana
April 16, 2015
Michael A. Grim
Chair, SALT Tax Team
[email protected]
Stephen Royster III
SALT Tax Senior Manager
[email protected]
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Presenters
MICHAEL A. GRIM, Esq.
STEPHEN ROYSTER III, CPA
SALT Tax Senior Manager
Crowe Horwath LLP
3815 River Crossing Pkwy., Ste 300
Indianapolis, IN 46240
(317) 208‐2582 – Phone
(317) 706‐2660 – Fax
[email protected] – E‐mail
www.crowehorwath.com – Web www.BGDLegal.com
Partner and Chair, SALT Tax Team
Bingham Greenebaum Doll LLP 101 South Fifth Street, Suite 3500
Louisville, KY 40202
(502) 587‐3696 – Phone
(502) 540‐2235 – Fax
[email protected] – E‐Mail
www.bgdlegal.com – Web
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Current Issues
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Agenda
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Ongoing Challenges
Legislative Developments
Tax Court Cases
Administrative Developments
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Ongoing Challenges
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Sales sourcing
Filing group determinations
Related member charges and adjustments
Indiana protest and appeal process
Others?
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Legislative Developments
Income Tax
• Reduction in corporation income tax rate:
• Rate for July 1, 2013 to June 30, 2014 of 8% reduced by 0.5% each fiscal year until 6% from July 1, 2017 to June 30, 2018, then by 0.25% per fiscal year until 5.25% from July 1, 2020 to June 30, 2021, then 4.9% thereafter
• Reduction in personal income tax rate:
• Rate for 2015 and 2016 is reduced to 3.3% from current 3.4%
• Rate after 2016 is reduced to 3.23%
Current Legislative Session…
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Legislative Developments
Property Tax
• Counties may exempt new equipment from tax
• Counties may exempt companies with $20,000 or less (cost basis) of
property (eliminates small filers)
• Authorizes up to 20 year abatement of personal property tax to incent
business investment
Financial Institutions Tax
• Rate after December 31, 2013 is reduced by 0.50% for each year until January 1, 2017, when the rate will be 6.5%
• Tax years beginning after December 31, 2018 the rate is reduced by 0.25% for each year until 6% for taxable years beginning after December 31, 2019.
• Tax years beginning after December 31, 2020, the rate is reduced by 0.50% per fiscal year until 5% for taxable years beginning after December 31, 2021 and before January 1, 2023, then 4.9% thereafter.
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Tax Court Cases
Income Tax
Ind. Dep’t of State Revenue v. Caterpillar, Inc.
No. 15 N.E.3d 579 (Ind. 8/25/14)
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Indiana Supreme Court overturned Indiana Tax Court Opinion
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Corporate income taxpayer could not use the foreign source dividend deduction to increase its Indiana net operating losses available for carryover to other tax years
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If the Legislature had intended corporate taxpayers to include every adjustment to AGI in the NOL calculation, it would have said so. Therefore, the tax court clearly erred when it adopted a false symmetry between Indiana AGI and Indiana NOLs.
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The taxpayer also argued that the Indiana tax statutes discriminated against foreign commerce by disallowing the foreign source dividend deduction based on Kraft. The Court rejected this argument
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Tax Court Cases
Sales Tax
Hoosier Roll Shop Services, LLC v. Indiana Dep’t of State Revenue,
No. 49T10‐1104‐TA‐29, 10 N.E.3d 1051, (Ind. Tax Ct.), May 14, 2014
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Holding: “In Rotation Products, [the Tax] Court developed four questions that would assist it in determining whether ‘remanufacturing’ or ‘repairing’ process produces a new product…. Hoosier Roll produces other tangible personal property when it grinds and calibrates its customers’ work rolls”
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Tax Court Cases
Sales Tax
Tannins of Indianapolis, LLC v. Indiana Dep’t of State Revenue
No. 49T10‐1303‐SC‐45, 6 N.E.3d 511, (Ind. Tax Ct.) March 31, 2014
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Holding: “A customer who wants to purchase wine samples tells Tannins the dollar amount to load onto a tasting card. Using a ‘computer head,’ Tannins loads money in the amount desired by the customer onto the tasting card and programs it to operate Tannins’ dispensing equipment. Tannins then charges the customer the amount loaded onto the card plus 9% tax”
“…Tannins’ purchases of tasting cards are not exempt from use tax
under Indiana Code § 6‐2.5‐5‐8(b), the purchase for resale
exemption.”
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Tax Court Cases
Procedure
Medco Health Solutions, Inc. v. Ind. Dep’t of State Revenue
No. 49T10‐1105‐TA‐35, 9 N.E.3d 263, (Ind. Tax Ct.) May 7, 2014
• Holding: “[A] typically non‐binding letter of advice regarding a
particular transaction that is based on true and accurate facts [is]
binding on the Department, but only to the taxpayer who requested
the letter. Consequently, this…requires a taxpayer to come forward
with specificity in both its factual presentation and its identity for the
Department to be bound. Here, however, a PWC requested the
advisory letters on behalf of the unnamed client, not Medco.
Accordingly, the Department is correct that Medco is not entitled to
relief on this claim.”
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Tax Court Cases
Property Tax
Virginia Garwood v. Indiana Dep’t of State Revenue
No. 82T10‐1208‐TA‐46, (Ind. Tax Ct. Dec 31, 2014)
• The Department seized 240 dogs pursuant to several jeopardy tax warrants and sold them to offset the outstanding liability. Virginia Garwood is seeking a refund of the value of the dogs of $122,650 net the tax due. The Department of Revenue denied the refund request because “a tax payment under Indiana Code § 6‐8.1‐8‐14 cannot be made by providing goods (i.e., animal inventory) or services to the Department.”
Holding: The Indiana Tax Court denied the Department’s motion for summary judgment and held that it could not conclude that the Department properly denied Garwood’s refund claim. www.BGDLegal.com
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Tax Court Cases
Open Records
Orbitz, LLC v. Indiana Dep’t of State Revenue
No. 49T10‐0903‐TA‐2013 Ind. Tax LEXIS 25 (Ind. Tax Ct. Oct. 16, 2013)
• Holding: The court held that contracts between online travel company Orbitz and various hotels are trade secrets under the Indiana Access to Public Records Act and ordered them to be sealed thus protecting them from access by Orbitz’s competitors.
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Administrative Developments
Indiana Tax Credit Summary
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Indiana Information Bulletin No. IT59 (August 2014) describes credits available to Indiana Taxpayers to date, including new credits and eliminating expired and repealed credits
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Administrative Developments
Income Tax Letters of Finding of Note:
Franchise Income:
Letter of Findings No. 02‐20130047, (January 2014)
• Business Income derived from licenses and intangible property or sales of services is a “principle source of business income” from an “income‐
producing activity” that was performed in Indiana; the Taxpayer did not meet its burden that the “cost of performance” rules mandate sourcing this income to other states. Audience‐Factor Method of Apportionment Used:
Letter of Findings No. 02‐20120473, (December 2013)
• Using the “audience factor” method of apportionment would effectuate an equitable apportionment of income and fairly reflect the income derived from Indiana subscribers when used in place of the “cost‐of‐
performance” method. www.BGDLegal.com
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Administrative Developments
Income Tax Letters of Finding of Note(Cont.):
Intangible Expense Addback: • Letter of Findings No. 02‐20130268, (September 2014)
– An Indiana corporate income taxpayer was properly required to add back intercompany interest, royalty expenses, and net operating losses when filing its taxes Financial Institutions Nexus: • Letter of Findings No. 18‐20130319, (April 2014)
– The Department of Revenue could not require a corporation to pay the Indiana financial institutions tax simply because it was purchasing and collecting on its parent company’s accounts receivable
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Administrative Developments
Income Tax Letters of Finding of Note (Cont.):
Leased Employees Excluded from Payroll Factor: • Letter of Findings No. 02‐20130151, April 30, 2014
– An out‐of‐state holding company that owned several limited liability companies (LLCs) did not have to include an Indiana LLC’s leased employees as part of its payroll factor for corporate income tax purposes
Forced Combination: • Letter of Findings No. 02‐20130155, (February 2014)
– The auditor was found to be correct when it required a corporate income taxpayer, a multinational business that sold clothing and fashion accessories, to file a combined return with the taxpayer’s related services subsidiary • Letter of Findings No. 02‐20130427, (May 2014)
– Taxpayer paid 100% of its parent company’s loan which benefited other affiliates. An audit determined that this was distortive and therefore a combination was necessary to properly reflect Indiana source income. The Indiana Department of Revenue agreed with the audit, but instructed the audit division to reconvene on whether Taxpayer’s suggested alternative was reasonable.
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Administrative Developments
Income Tax Letters of Finding of Note (Cont.):
Throw Back Sales:
• Letter of Findings No. 02‐20130134 (February 2014)
– Taxpayer was required to throw back sales made by member of its
nexus consolidated Indiana group in states with which that
member did not have nexus even though another member of its
group had nexus with that state
Economic Nexus:
• Letter of Findings No. 02‐20140072 (June 2014)
– Taxpayer did not earn money from managing its intellectual
property in Delaware; Taxpayer earned money because it
developed intellectual property, licensed that intellectual property
to its Indiana affiliates, and obtained money from activity that
occurred within Indiana; therefore, Taxpayers had nexus with
Indiana because it had “income from doing business in this state”
.
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Administrative Developments
Income Tax Letters of Finding of Note (Cont.):
Cost of Performance or Market Sourcing:
• Letter of Findings No. 02‐20130402 (February 2015)
– Taxpayer inappropriately used the cost of performance methodology to
source franchise fees it received from Indiana located franchises. The
Department of Revenue determined that the services were rendered in
Indiana because “that Indiana is the location where the franchisees
purchased Taxpayer's services.”
• Letter of Findings No. 02‐20140455 (January 2015)
– Taxpayer is an out of state online educator that used the cost of
performance method to source its receipts to Indiana.
The
auditor/Department of Revenue found that “Taxpayer was subject to
Indiana income tax on money received from its Indiana, online
students because this money was received for providing services to
Indiana customers.”
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Administrative Developments
Sales Tax Letters of Finding of Note:
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Letter of Findings No. 04‐20130101, (September 2014)
– A seller of ATMs and related equipment was liable for Indiana sales tax on sales of maintenance contracts because the contracts provided that the seller was obligated to supply replacement parts when making repairs. Optional maintenance agreements under which repair and replacement parts will be provided are taxable if there is a reasonable expectation that parts will be provided
Letter of Findings No. 04‐20130645, (September 2014)
– A manufacturer of ready‐mix concrete was not liable for Indiana use tax on purchases of a sand dryer and repair parts and diesel fuel used for the sand dryer because the items purchased were essential to and an integral part of the manufacturer’s process of producing concrete in cold weather conditions
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Administrative Developments
Sales Tax Letters of Finding of Note (Cont.):
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Letter of Findings No. 04‐20140003, (September 2014)
– Purchases of safety equipment, tack cloth and wrapping materials by an industrial processor were not subject to Indiana sales and use tax under the manufacturing exemption
Letter of Findings No. 04‐20130631, (August 2014)
– A corporation that repairs, installs, designs and sells vehicle graphics, signs, and banners was liable for Indiana sales tax on design and installation services because the services were sold with tangible personal property as part of a unitary transaction
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Administrative Developments
Sales Tax Letters of Finding of Note (Cont.):
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Letter of Findings No. 04‐20130306, (January 2014)
– Purchases of software and web‐based platforms subject to use tax: Software and web‐based platforms were subject to sales and use tax Letter of Findings No. 04‐20140079, (August 2014)
– A corporation was liable for Indiana use tax on purchases of promotional materials for mailing because it paid one price for both the materials and the services it purchased
Letter of Findings No. 04‐20140106, (July 2014)
– A farmer’s purchases of a rotary cutter and demolition kit were not exempt from Indiana use tax under the agricultural exemption because the equipment is used to control the encroachment of unwanted plants, trees and vines onto tillable land, not in agricultural production
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Tax Professional Standards Statement
This document supports Crowe Horwath’s and Bingham
Greenebaum Doll's marketing of professional services, and is not
written tax advice directed at the particular facts and circumstances
of any person. If you are interested in the subject of this document
we encourage you to contact us or an independent tax advisor to
discuss the potential application to your particular situation.
Nothing herein shall be construed as imposing a limitation on any
person from disclosing the tax treatment or tax structure of any
matter addressed herein. To the extent this document may be
considered to contain written tax advice, any written advice
contained in, forwarded with, or attached to this document is not
intended by Crowe Horwath or Bingham Greenebaum Doll to be
used, and cannot be used, by any person for the purpose of avoiding
penalties that may be imposed under the Internal Revenue Code.
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RIS14
Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member of Crowe Horwath International. © 2015 Crowe Horwath LLP
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Slide 24
RIS14
Added Crowe's disclosure
Royster III, Stephen, 4/8/2015