Indiana Dept. of State Revenue v. Kroger Co.

• Decision Date: 20 September 1983
• Docket Number: No. 1-283A47,1-283A47
• Citation: 453 N.E.2d 1175
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, Defendant-Appellant, v. The KROGER COMPANY, Plaintiff-Appellee.
• Court: Indiana Appellate Court

Page 1175

453 N.E.2d 1175

INDIANA DEPARTMENT OF STATE REVENUE, Defendant-Appellant, v. The KROGER COMPANY, Plaintiff-Appellee.

No. 1-283A47.

Court of Appeals of Indiana First District.

Sept. 20, 1983.

Linley E. Pearson, Atty. Gen., Wm. Eric Brodt, Deputy Atty. Gen., Indianapolis, for defendant-appellant.

J.B. King, Stephen H. Paul, Baker & Daniels, Indianapolis, for plaintiff-appellee.

RATLIFF, Judge.

STATEMENT OF THE CASE

In an action initiated by the Kroger Company (Kroger), the Johnson County Circuit Court determined Kroger was entitled to a refund of $127,498.52 for gross income taxes paid for the taxable years of 1968 through 1971. The Indiana Department of State Revenue (Department) appeals from this determination. We affirm.

FACTS

In the taxable years in controversy, Kroger was engaged in the retail grocery business in the State of Indiana. During this time Kroger gave Top Value Trading Stamps to its customers whenever they made purchases valuing ten cents or more.

Under an agreement between Kroger and Top Value Enterprises, Inc., Kroger acquired the stamps from Top Value for a fee, distributed them to its customers, who in turn could redeem the stamps for merchandise at one of several Top Value redemption centers located in Indiana. Alternatively, pursuant to state law, ¹ the stamps had a cash redemption value which entitled customers to receive cash from Kroger or Top Value instead of merchandise. ²

In preparing its Indiana Gross Income tax returns for the years in controversy, Kroger excluded from its gross receipts an amount equal to the fee it paid Top Value. Kroger claimed this amount represented a "cash discount" given its customers which under Indiana Code section 6-2-1-1(m) was excludable from its gross receipts for purposes of computing its gross income tax liability.

The Department disallowed the deduction and assessed Kroger for the additional tax liability. Following administrative proceedings in which the assessment was sustained and paid by Kroger, it initiated its action for recovery.

ISSUE

For purposes of clarity, we have rephrased and restated the issues raised by the Department as one.

Did the trial court err in finding the trading stamps given by Kroger to its customers constituted cash discounts?

DISCUSSION AND DECISION

The trial court properly concluded the trading stamps given by Kroger to its customers constituted cash discounts. Consequently, the amount of the fee paid by Kroger to Top Value Enterprises may be excluded from its gross income for the taxable years in controversy.

The provisions found in Indiana Code Secs. 6-2-1-1 through 36 essentially define and implement a gross income tax upon entities doing business in this state. The term "gross income" is defined in part as:

"The term 'gross income,' except as hereinafter otherwise expressly provided, means the gross receipts of the taxpayer received as compensation for personal services, including but not in limitation thereof, wages, bonuses, salaries, fees, commissions, gratuities (including the value of living expenses or rental of quarters furnished to the taxpayer) and the gross receipts of the taxpayer received from trades, businesses, or commerce, including admission fees or charges, and the gross receipts received from the sale, transfer, or exchange of property, tangible or intangible, real or personal, including the sale of capital assets, or from the assignment or sale of rights, all receipts received from the performance of contracts, all receipts received as prizes and premiums, all receipts received from insurance, all amounts received as alimony, damages, or judgments, and all receipts received by reason of the investment of capital, including but not in limitation thereof, interest, discounts, rentals, royalties, dividends, fees, commissions, and receipts received from the surrender, sale, transfer, exchange, redemption of, or distribution upon, stock of corporations or associations, and all other receipts of any kind or character received from any source whatsoever ..."

Indiana Code Sec. 6-2-1-1(m). However, gross income does not include, and hence a taxpayer may exclude therefrom in computing the tax due, the amount of any "cash discount allowed and taken on sales ..." Id. It is this exclusionary language which gives rise to the present controversy.

In describing the nature and scope of the gross income tax our supreme court has stated:

"It is a tax upon total receipts without deductions of any sort.... The purpose of the Gross Income Tax was to levy a tax upon the receipts of all sums coming into the hands of the taxpayer, without regard as to whether or not he may have suffered an actual loss in the transaction."

The Department of Treasury of Indiana v. Crowder, (1938) 214 Ind. 252, 256, 15 N.E.2d 89, 91-92. However, "to constitute gross income a transaction must come clearly within the statutory provisions, providing for such income. In case of doubt the statutes will be construed against the state and in favor of the taxpayer." Walgreen Co. v. Gross Income Tax Division, (1947) 225 Ind. 418, 420, 75 N.E.2d 784, 785 (emphasis supplied); see also Indiana State Board of Tax Commissioners v. Ropp, (1983) Ind.App., 446 N.E.2d 20, 24; Indiana Department of State Revenue v. Food Marketing Corp., (1980) Ind.App., 403 N.E.2d 1093, 1096, trans. denied; Indiana Department of State Revenue, Gross Income Tax Division v. Colpaert Realty Corp., (1952) 231 Ind. 463, 468-69, 109 N.E.2d 415, 418; Department of Treasury of Indiana v. Muessel, (1941) 218 Ind. 250, 254-55, 32 N.E.2d 596, 597. Moreover, because the trial court rendered special findings pursuant to Indiana Rules of Procedure, Trial Rule 52(A), we may not disturb its judgment unless it is clearly erroneous. Trial Rule 52(A); Boffo v. Boone County Board of Zoning Appeals, (1981) Ind.App., 421 N.E.2d 1119, 1131, trans. denied; Bird v. Delaware Muncie Metropolitan Plan Commission, (1981) Ind.App., 416 N.E.2d 482, 486; Central Indiana Carpenters Welfare Fund v. Ellis, (1980) Ind.App., 412 N.E.2d 865, 868.

Despite our limited standard of review and the rule of statutory construction favoring Kroger, the Department contends the trading stamps cannot be viewed as cash discounts, but rather, must be seen as a cost of doing business. Specifically, the Department urges us to find that the distribution of the stamps was merely an advertising ploy which in no way resulted in a cash discount to Kroger customers. Thus, the Department argues, Kroger should not be permitted to exclude the amount it paid for the stamps from its gross income.

While we have reached a contrary conclusion, we must concede the issue is complex and that both parties have made compelling arguments. Indeed, as the Illinois Supreme Court has noted: "Human ingenuity, understandably enough, functions at its optimum whenever tax problems are concerned." Leslie Car Wash Corp. v. Department of Revenue, (1978) 69 Ill.2d 488, 14 Ill.Dec. 457, 372 N.E.2d 653, 655. Nevertheless, we believe the weight of authority and an analysis of the nature of the trading stamps supports Kroger's position.

We have never addressed the precise issue now before us. The Indiana case most closely analogous is Indiana Department of State Revenue v. Marsh Supermarkets, Inc., (1980) Ind.App., 412 N.E.2d 261. The taxpayer in that case, like Kroger, was engaged in the retail grocery business. In the course of its business it distributed coupons to its customers which entitled them to discounts on certain designated items. Additionally, the taxpayer itself received discounts from its suppliers when it sold a minimum quantity of certain promotional products. These latter discounts took the form of a rebate on the price paid by the taxpayer for the suppliers' products. In both instances, the taxpayer claimed the amount of the discounts should not be subject to taxation generally, and more specifically, the sales and gross income taxes respectively .

Ruling for the taxpayer on both counts, we held that both the...