Univ. of Phx., Inc. v. Ind. Dep't of State Revenue, Cause No. 49T10–1411–TA–00065

• Decision Date: 30 November 2017
• Docket Number: Cause No. 49T10–1411–TA–00065
• Citation: 88 N.E.3d 805
• Parties: The UNIVERSITY OF PHOENIX, INC., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Indiana Tax Court

88 N.E.3d 805

The UNIVERSITY OF PHOENIX, INC., Petitioner,

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

Cause No. 49T10–1411–TA–00065

Tax Court of Indiana.

Filed November 30, 2017

ATTORNEYS FOR PETITIONER: RANDAL J. KALTENMARK, ZIA MOLLABASHY, BARNES & THORNBURG LLP, Indianapolis, IN, JENNY A. AUSTIN, THEODORE R. BOTS, BAKER & MCKENZIE LLP, Chicago, IL, SCOTT L. BRANDMAN, BAKER & MCKENZIE LLP, New York, NY

ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR., INDIANA ATTORNEY GENERAL, WINSTON LIN, PARVINDER K. NIJJAR, DEPUTY ATTORNEYS GENERAL, Indianapolis, IN

WENTWORTH, J.

The University of Phoenix, Inc. challenges the Indiana Department of State Revenue's assessments of adjusted gross income tax (AGIT) for the 2009, 2010, and 2011 tax years. The question is whether the University's online campus revenue can be sourced to Indiana based on a student's Indiana billing address. The Court finds that it cannot.

FACTS AND PROCEDURAL HISTORY

The University, a wholly-owned subsidiary of Apollo Education Group, Inc., is a private, accredited education service provider headquartered in Phoenix, Arizona. (Second Stip. of Facts ("Second Stip.") ¶¶ 1, 4, 35.) The University's educational model is directed toward students attempting to balance the demands of taking college classes with the demands of work and/or family life. (Trial Tr. at 32 – 33, 35 – 36, 80 – 81, 114–15.) The University offers associate's, bachelor's, master's, and doctoral courses and degrees in a variety of fields at both its online campus and its ground campus locations throughout the United States. (Second Stip. ¶ 34; Trial Tr. at 31.)

Online campus students participate in academic activities online, such as class meetings and study groups, discussions with instructors or fellow students, online research, accessing course materials, paying for courses, getting grades, and requesting transcripts. (Second Stip. ¶ 37.) In addition, online campus students are permitted to access facilities and resources at the ground campus locations. (Second Stip. ¶ 38.)

During the years at issue, the University's online campus offered classes year-round to students in "sections" that were newly launched weekly. (Second Stip. ¶ 41.) Students could access the sections at any time or location. (Trial Tr. at 35 – 36.) Online campus associate degree class sections are nine weeks long, and students enroll in one or two courses at a time. (Second Stip. ¶ 40.) The other online class sections are five to eight weeks long, and students complete them one at a time—sequentially rather than concurrently. (Second Stip. ¶ 40.) Students pay for each course as they attend them. (Second Stip. ¶ 42.)

The University's online educational services fall within four general categories: the online eCampus platform, online faculty instruction, curriculum development, and graduation assistance. (See generally Second Stip. ¶¶ 37, 48, 67, 72; Trial Tr. at 233–34; Pet'r Trial Ex. 1 at 4.) First, the University's eCampus provided a web-based platform for students to access its educational services online. (Second Stip. ¶¶ 37, 39.) The eCampus platform contained student resources and the online classroom environment—where students attended class, participated in discussions and projects, communicated with faculty, turned in assignments, and reviewed grades. (Second Stip. ¶¶ 37, 39.) The eCampus platform was developed and maintained from locations in Arizona, Washington, and California, but during 2011, one individual performed services related to the eCampus from Indiana. (Second Stip. ¶ 20, Ex. S at 13; Trial Tr. at 460–61.)

Second, the University provided online classroom instruction taught by faculty members to the students enrolled in each class section. (Second Stip. ¶¶ 41, 72–74; Trial Tr. at 180–82, 289–90.) Faculty members were able to teach online course sections from any location. (Trial Tr. at 181.) During each of the years at issue, the University had more than 1,500 online campus faculty members located in Arizona while just 293 online faculty members were located in Indiana in 2009, 354 in 2010, and 350 in 2011. (Second Stip. ¶ 20, Ex. S at 2–3, 7–8, 12–13.)

Third, the University had a curriculum team that centrally developed the online curricula to maintain consistency across course sections. (Trial Tr. at 151–56.) The curriculum development team created each course section's online classroom and posted all the course materials online. (Trial Tr. at 172–74.) All the University's curriculum development activities were performed outside of Indiana, primarily in Arizona, during the years at issue. (Trial Tr. at 155.)

Finally, the University assigned a graduation team to each student to assist them in completing their degree program. (Second Stip. ¶ 48; Trial Tr. at 58 – 59, 86 –91.) Each team included an enrollment representative, an academic advisor, and a financial advisor. (Second Stip. ¶ 48; Trial Tr. at 58 – 62, 86 –91.) The enrollment representative maintained contact with a student through their first two courses to help them with classroom participation, attendance, study habits, and time management. (Second Stip. ¶ 50; Trial Tr. at 56 – 58, 86 –87.) The academic advisor helped the student manage program requirements, policies, and course scheduling. (Second Stip. ¶¶ 57–59; Trial Tr. at 58 – 59 ; 84, 90–91.) The financial advisor ensured that the student had access to the funding necessary to pay the cost of obtaining a degree. (See Second Stip. ¶¶ 63–65; Trial Tr. at 129–31.) More than 6,000 graduation team members who assisted online campus students were located in Arizona and only three were located in Indiana in 2009, one in 2010, and none in 2011. (See Second Stip. ¶ 20, Ex. S at 2–3, 7–8, 12–13; Trial Tr. at 85 – 86, 118.)

The University filed Form IT–20 Indiana Corporation Adjusted Gross Income Tax Returns for each of the years at issue. (Second Stip. ¶¶ 11–16, Exs. O–Q.) In computing its Indiana adjusted gross income (AGI), the University sourced 100 percent of its receipts attributable to its Indiana ground campus students to Indiana, but sourced none of its receipts from its online campus students to Indiana. (Second Stip. ¶¶ 17–18.)

Upon audit, the Department issued its report stating that the University should have sourced all receipts from online students with an Indiana billing address to Indiana. (Second Stip. ¶¶ 21–25, Ex. T at 4.) Accordingly, the Department issued Proposed Assessments for additional AGIT liabilities, interest, and penalties. (Second Stip. ¶¶ 22, 24, Ex. U.)

On June 20, 2013, the University protested the Proposed Assessments. (Second Stip. ¶ 26.) On September 11, 2014, the Department denied the University's protest of the additional AGIT assessments, but abated the penalties for each of the years at issue. (Second Stip. ¶ 29, Ex. V.)

On November 7, 2014, the University filed its original tax appeal. The Court held the trial from February 28 through March 1, 2017, and heard oral argument on June 22, 2017. Additional facts will be supplied if necessary.

STANDARD OF REVIEW

This Court reviews final determinations of the Department de novo. See IND. CODE § 6–8.1–5–1(i) (2017). Accordingly, the Court is not bound by either the evidence or the issues presented to the Department at the administrative level. See Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct. 2007), review denied. "The notice of proposed assessment is prima facie evidence that the [D]epartment's claim for the unpaid tax is valid." I.C. § 6–8.1–5–1(c) (emphasis added). As a result, "[t]he burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made." I.C. § 6–8.1–5–1(c).

LAW

In Indiana, every corporation is subject to a tax "on [the] part of the adjusted gross income derived from sources within Indiana[.]" IND. CODE § 6–3–2–1(b) (2009) (amended 2011). Income derived from Indiana sources is determined by multiplying a corporation's total business income by an apportionment factor. See IND. CODE § 6–3–2–2(b) (2009). During the years at issue, Indiana followed a multi-factor apportionment formula that included a weighted sales factor, a property factor, and a payroll factor. See I.C. § 6–3–2–2(b).

The sales factor is a fraction that puts the taxpayer's worldwide gross receipts during the tax period as the denominator and the taxpayer's sales sourced to Indiana during that period as the numerator. See I.C. § 6–3–2–2(e). Receipts from the sales of other than tangible personal property, like the sales of educational services at issue here, are sourced to the Indiana numerator if:

(1) the income-producing activity is performed in this state; or

(2) the income-producing activity is performed both within and without this state and a greater proportion of the income-producing activity is performed in this state than in any other state, based on costs of performance.

I.C. § 6–3–2–2(f). Moreover, the Department has explained that

Gross receipts from transactions other than sales of tangible personal property shall be included in the numerator of the sales factor if the income-producing activity which gave rise to the receipts is performed wholly within this state. Except as provided below if the income producing activity is performed within and without this state such receipts are attributed to this state if the greater proportion of the income producing activity is performed here, based on costs of performance.

The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit. Such activity does not include activities performed on behalf of the taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, "income producing activity" includes but is not limited to the following: (1) The rendering of personal services by employeesor the utilization of tangible and intangible property by the taxpayer in

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