Indiana Dept. of State Revenue v. J. C. Penney Co., Inc.

• Decision Date: 02 December 1980
• Docket Number: No. 2-378A109,2-378A109
• Citation: 412 N.E.2d 1246
• Parties: INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant), v. J. C. PENNEY COMPANY, INC., Appellee (Plaintiff).
• Court: Indiana Appellate Court

Page 1246

412 N.E.2d 1246

INDIANA DEPARTMENT OF STATE REVENUE, Appellant (Defendant), v. J. C. PENNEY COMPANY, INC., Appellee (Plaintiff).

No. 2-378A109.

Court of Appeals of Indiana, Second District.

Dec. 2, 1980.

Theodore L. Sendak, Atty. Gen., Charles D. Rodgers, Deputy Atty. Gen., Indianapolis, for appellant.

Lester M. Ponder, Michael R. Fruehwald, Barnes, Hickam, Pantzer & Boyd, Indianapolis, Robert S. Gorin, Michael Pearl, New York City, for appellee.

SULLIVAN, Judge.

J. C. Penney, Inc., (Penney) is a Delaware corporation with its principal place of business in New York. The Indiana State Department of Revenue (Department) assessed gross income taxes against Penney for receipts from direct mail catalog sales and service charges on credit sales. Penney sought a refund for taxes for the taxable period from January 31, 1968 through January 31, 1972. The trial court allowed the refund and the Department appeals.

The Department asserts as error the following conclusions of law:

1. The income at issue was not derived from activities inside Indiana and therefore was not subject to tax under I.C. 6-2-1-2 (Burns Code Ed. 1978);

2. The imposition of a tax on the income at issue is barred by the due process clause of the U.S. Constitution; and

3. An assessment of penalties against Penney for negligence or intentional disregard of law was not justified under I.C. 6-2-1-16 (Burns Code Ed. 1978).

The Department contends that Penney's activities did fall within the ambit of I.C. 6-2-1-2 which reads in pertinent part as follows:

"There is hereby imposed a tax upon the receipt of gross income, measured by the amount or volume of gross income, and in the amount to be determined by such application of rates on such gross income as hereinafter provided. Such tax shall be levied ... upon the receipt of gross income derived from activities or businesses or any other source within the state of Indiana ...."

In support of this contention, the Department points to several of Penney's business activities, namely that Penney maintains both retail and warehouse facilities in Indiana and Penney conducts advertising campaigns through the mass media. However, Penney supports the refund by showing that the particular transactions at issue are dissociated from the local business and are interstate in nature.

The facts in this case are not in dispute. When the error complained of on appeal is the correctness of the trial court's application of the law, the reviewing court must take the facts as found in the court below. Farmers Mutual Insurance Co. v. Wolfe (1968) 142 Ind.App. 206, 212, 233 N.E.2d 690, 693. This is particularly true where, as here, a transcript of evidence concerning facts in addition to those stipulated could not be prepared, and the Department failed to follow the procedures set forth in Appellate Rule 7.2(A) (3)(c). Registration & Management Corp. v. City of Hammond (3d Dist. 1972) 151 Ind.App. 471, 280 N.E.2d 327. The threshold question is whether the trial court, under the circumstances of this case, was correct in concluding as a matter of law that Penney's activities were interstate.

The meaning of "doing business within the state" was discussed by our court in Indiana Department of State Revenue v. Convenient Industries of America, Inc. (2d Dist. 1973) 157 Ind.App. 179, 299 N.E.2d 641. There the court stated:

"The activities contemplated by the statute must be more than minimal. See Herff Jones Co. v. State Tax Commissioner (1967) 247 Or. 404, 430 P.2d 998. If it were otherwise, the statute itself would promote cumulative tax burdens upon interstate commerce contrary to the Constitution. We deem our statute to have the constitutional restrictions embraced within it which mandates our interpretation. See IC 1971, 6-2-1-7, Ind.Ann.Stat. § 64-2606(a) (Burns 1972 Supp.). In this connection, the derivation of the income must be attributable to activity within the state as opposed to the person from whom the income is received. Oxnard v. Murphy (1963) 19 A.D.2d 138, 241 N.Y.S.2d 333; Avery Corp. v. Fugate (1954) 129 Colo. 595, 272 P.2d 652." 299 N.E.2d at 645.

We will deal with the direct mail catalog sales and the credit service charges separately.

DIRECT MAIL SALES

Income from the sales resulting from orders placed by Indiana customers at local catalog desks (desk sales) was reported and the tax thereon paid without protest. Accordingly, the taxation of desk sales is not in dispute. Rather, the contested transaction is the direct mail sale. Such orders are mailed directly from Indiana customers to the catalog center in Wisconsin. The orders are accepted in Wisconsin and the shipment is made from the center directly to the customer. The only contacts between Indiana retail stores and the direct mail sales from Wisconsin were:

1. 20% of Penney's catalogs were available at stores during a limited period of time, and

2. on rare occasions, where a customer was dissatisfied and refused to contact Wisconsin, adjustment or repair was arranged at the Indiana retail store.

The trial court found: "Activities within the State of Indiana related to direct mail catalog sales were minimal and incidental and fell short of the degree of activity contemplated by the Indiana Gross Income Tax Act."

Many Indiana cases have tackled the problem of distinguishing income derived from activities within a state from that between states. After examining the totality of circumstances, the Supreme Court has upheld the tax where the interstate aspect was merely incidental. See, e. g., Department of Treasury v. Allied Mills, Inc. (1942) 220 Ind. 340, 42 N.E.2d 34, aff'd per curiam, 318 U.S. 740, 63 S.Ct. 666, 87 L.Ed. 1120 (sales by Indiana corporation to Indiana customers to whom deliveries were made from plants in Illinois pursuant to orders taken in Indiana); Indiana Department of State Revenue v. Bendix Aviation Corp. (1957) 237 Ind. 98, 143 N.E.2d 91, dismissed for want of federal question (1958) 355 U.S. 607, 78 S.Ct. 539, 2 L.Ed.2d 524 (sale and manufacture in Indiana of articles for the United States Government); Holland Furnace Co. v. Department of Treasury (7th Cir. 1943) 133 F.2d 212, cert. denied, 320 U.S. 746, 64 S.Ct. 49, 88 L.Ed. 443 (contract by out-of-state corporation to furnish and install furnace in Indiana with labor and materials furnished at specified places in Indiana.)

On the other hand, taxation has been disallowed where the transaction, viewed as a whole, is clearly interstate in character. Thus, when an Ohio corporation contracted to ship a furnace to an Indiana customer, the transaction was labeled interstate:

"The facts as found by the trial court show that the only work performed in Indiana was the putting together of the parts of the furnaces, and the installation and adjustment thereof. There is no evidence that the furnaces were made, built, fabricated, created or brought into existence in Indiana. For the reasons above stated, the transactions here involved are clearly sales of personal chattels in interstate commerce and the installation and reassembling where required, were inherently a part of, and a necessary incident to, the sale." Gross Income Tax Division v. Surface Combustion Corp. (1953) 232 Ind. 100, 129, 111 N.E.2d 50, 62, cert. denied, 346 U.S. 829 (74 S.Ct. 51, 98 L.Ed. 353).

And, in Gross Income Tax Division v. Warner Bros. Pictures Distributing Corp. (1954) 233 Ind. 345, 118 N.E.2d 117, cert. denied, 348 U.S. 857, 75 S.Ct. 82, 99 L.Ed. 675, the court held that a license agreement between a film exchange and an Indiana exhibitor was interstate commerce. There, a New York based film distribution corporation, via its Chicago branch, obtained applications for certain films from Indiana exhibitors. Films were then shipped from the Chicago office to the exhibitor in exchange for a license fee. Indiana sought to tax those gross receipts of the corporation which were derived from the Indiana licensees. In refusing to allow the tax, the court explained:

"As we understand it, the State relies for reversal on the contention that appellee's film has reached its final destination at the exhibitor's place of business; that appellee is there engaged in a local Indiana business; that at this place the film of the appellee loses its interstate character and acquires a purely local one. With this contention we cannot agree.

We cannot see that appellee in the instant case, by reserving to itself the right of visitation on the exhibitor for purposes of determining its rightful license fee, has thus become engaged in the local exhibition of the film which it has licensed to the exhibitor. Nor can we see that the license agreement, providing for a percentage of the exhibitor's admission price as the license fee, changes the character of the transaction." 118 N.E.2d at 118-19.

In Department of Treasury v. International Harvester Co. (1943) 221 Ind. 416, 47 N.E.2d 150, aff'd on other grounds, (1944) 322 U.S. 340, 64 S.Ct. 1019, 88 L.Ed. 1313, our Indiana Supreme Court construed the predecessor of the current I.C. 6-2-1-2. In that case, International Harvester was a foreign corporation authorized to do business in Indiana. The company protested the levy of Indiana Gross Income Taxes upon the sales to Indiana customers where orders were solicited and accepted outside Indiana. Both shipment and payment occurred out of state. Based on such circumstances, the court found, "We cannot say that income so received by the appellees was 'derived from sources within the state of Indiana.' " 47 N.E.2d at 152. This same problem was addressed by our courts in Gross Income Tax Division v. Owens-Corning Fiberglas Corp. (1969) 253 Ind. 102, 251 N.E.2d 818. There, various types of business transactions occurred at an Indianapolis branch office. At issue, however, were sales by Owens-Corning to National Homes in Lafayette, Indiana. These particular sales were handled directly by the Ohio home office. All...