Reynolds Metals Co. v. Indiana Dept. of State Revenue, Gross Income Tax Division

• Citation: 433 N.E.2d 1
• Decision Date: 16 March 1982
• Docket Number: No. 1-779A201,1-779A201
• Parties: REYNOLDS METALS COMPANY, Plaintiff-Appellant, v. INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, Defendant-Appellee.
• Court: Court of Appeals of Indiana

Page 1

433 N.E.2d 1

REYNOLDS METALS COMPANY, Plaintiff-Appellant, v. INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, Defendant-Appellee.

No. 1-779A201.

Court of Appeals of Indiana, First District.

March 16, 1982.

Richard E. Deer, Larry J. Stroble, Barnes, Hickam, Pantzer & Boyd, Indianapolis, for plaintiff-appellant.

Linley E. Pearson, Atty. Gen., Herbert L. Allison, Ted J. Holaday, Deputy Attys. Gen., Indianapolis, for appellees.

NEAL, Judge.

STATEMENT OF THE CASE

This is an appeal by the plaintiff-appellant Reynolds Metals Company (Reynolds) from an adverse decision by the Johnson Circuit Court in its suit for refund of gross income taxes paid under protest to the defendant-appellee Indiana Department of State Revenue, Gross Income Tax Division (Department) for the audit period encompassing the years 1969, 1970, 1971, and 1972. Reynolds had reported $34,965,212 as gross income subject to taxation, and paid $174,826 in taxes thereon. Thereafter, following an audit, the Department assessed Reynolds an additional tax of $404,305, including interest. Reynolds filed a protest, and, after hearing thereon, an amended additional assessment was issued by the Department for $302,180 in taxes, $86,970 in interest, and $30,218 in penalties, or a total additional assessment of $419,368. Reynolds paid that amount, and upon the Department's denial of the claim for refund, filed this suit. At issue is the Department's contention that $95,401,228 of gross income is subject to tax. Reynolds claims that only $33,371,919 is taxable. The dispute concerns primarily the manner in which the interstate commerce exemption from gross income, authorized by Ind. Code 6-2-1-7(a), ¹ is to be determined.

STATEMENT OF THE FACTS

Reynolds, a Delaware Corporation with its principal office in Richmond, Virginia, is a primary producer of aluminum, and its business includes the mining of bauxite, the production of aluminum ingot, and the fabrication of semi-raw products, aluminum sheet, plate, wire, rod, bar, and extruded material. Reynolds has plants and business facilities throughout the United States and in various foreign countries and is organized along divisional lines as follows:

1. Packaging Division: This division manufactures and sells material used by manufacturers for packaging, such as cartons, pouches, cans, and plastics. It has one sales office in Indianapolis, Indiana, and had Indiana destination sales of $11,744,369 during the audit period. This division has no warehouse, factory, or fabricating plant in Indiana. Reynolds claims that only $1,552,207 of the receipts is taxable; the Department claims $11,288,497 is taxable. Herein are included two house accounts, Pretty Pak and Chitwood Paper, over which a dispute exists involving a $167,622 mathematical error.

2. Mill Products Division: This division produces and sells industrial products such as foundry ingot, sheet and plate, extruded material, insulated wire, and rod and bar stock. Though no foundries or manufacturing plants exist in Indiana, this division has sales offices in Ft. Wayne, South Bend, and Indianapolis and employs a total of five salesmen. The Ft. Wayne and South Bend offices are under the control of the Chicago district sales office, and the Indianapolis office is under the control of the Louisville district sales office. Mill Products is by far the largest producer of income, accounting for about 60 percent of Reynolds' total sales. Reynolds' Indiana destination sales for this division during the audit period were $77,243,898. Reynolds claims that only $29,267,422 should be taxable while the Department claims $70,987,093 is taxable.

3. Architectural and Building Products Division: This division produces aluminum products used in the construction industry, such as roofing, siding, windows, and doors. It maintains a sales office and warehouse in Indianapolis which employ four to five 4. Transhelter Division: This division produces roofing, siding, and paneling for mobile homes in its manufacturing plant in Bourbon, Indiana. Reynolds concedes that all of its $1,204,231 in gross receipts is taxable.

salesmen, warehousemen, and truck drivers to sell to and service contractors. During the audit period it had total Indiana destination sales of $4,521,593, all of which the Department claims is taxable. Reynolds claims that only $2,350,950 is taxable.

5. Consumer Division: This division sells products, particularly Reynolds Wrap, an aluminum foil, to distributors for retail. While this division has no sales offices, plants, or warehouses located in Indiana, it employs salesmen who work out of their homes. There are three salesmen in Indianapolis, one in Ft. Wayne, and one in Evansville. This division had Indiana destination sales during the audit period totaling $7,515,907, of which the Department claims $5,792,989 is taxable. Reynolds claims all should be exempt.

6. Electrical Division: This division produces insulated wire and cable for use as an electrical conductor, principally the type used by utilities in construction of high voltage transmission lines. This division had no sales offices, plants, or salesmen based in Indiana during the audit period. It had Indiana destination sales during the audit period of $1,626,836, all of which Reynolds claims are exempt. The Department claims $107,814 is taxable.

7. Alumina/Chemicals Division: This division produces oxide of aluminum and bauxite useful in filters, abrasives, and paper whitening, and has no Indiana sales offices, plants, or salesmen based in Indiana. The Indiana destination sales during the audit period totalled $444,690, all of which Reynolds claims is exempt, while the Department claims $90,384 is taxable.

8. Reynolds Aluminum Supply Company ("RASCO"): This division is a sales organization for the mill products division and the architectural division. It has no plant, warehouse, sales offices, or salesmen in Indiana. During the audit period it had total Indiana destination sales of $2,039,547, all which Reynolds claims is exempt; the Department claims all is taxable.

9. Foreign: This division had Indiana destination sales totaling $583,472, of which the Department claims $538,317 is taxable; Reynolds claims all is exempt.

10. Henderson Farms: This is a customer, and not a division, and is not located in Indiana, but Kentucky. Sales credited to this account total $59,619, all of which Reynolds claims is exempt, while the Department claims $12,118 is taxable.

Each division maintained a separate sales organization, but the activities of all Reynolds Indiana-based salesmen, regardless of division, were very similar. The sales offices and salesmen had telephones, credit cards, company cars, brief cases, and expense reimbursement, all furnished by Reynolds. Equipped with catalogs, samples, and sales information, they called upon customers regularly, new and old, solicited new accounts, and serviced old ones. They expedited shipments, heard complaints, adjusted claims, and assisted customers in preparing orders. Generally, the northern Indiana sales forces reported to the Chicago district office, and those in southern Indiana reported to the Louisville district office. Salesmen were in regular contact with the respective district offices by means of teletype, telephone, or letter. They assisted, occasionally, in establishing a customer's credit, and even assisted in collecting overdue accounts. They solicited and received aid, including technical assistance, from the district offices and from the regional level. They did not, however, approve credit, accept or write orders, or bill or receive payment, as these were functions of district or regional offices or the individual manufacturing plant itself. Numerous instances existed in the total sales organization where Indiana customers were serviced totally from outside of Indiana, even at the executive level. These latter so-called "house accounts" were negotiated between top-level Reynolds executives and executives of large companies operating nationwide. These accounts were serviced totally from Reynolds prepared the sections of its Indiana tax returns for the audit period relative to the interstate commerce exemptions at issue in accordance with a three-factor apportionment formula authorized by Ind. Code 6-3-2-2(b) of the Adjusted Gross Income Tax Act. ² That apportionment formula is not expressly authorized in the Gross Income Tax Act, Ind. Code 6-3-2-1 et seq. The formula was suggested for possible application in gross income taxation in Indiana Department of Revenue, Gross Income Tax Division v. P. F. Goodrich Corp., (1973) 260 Ind. 41, 292 N.E.2d 247. That case involved the extent to which the proceeds of an out-of-state sale of a corporate asset were to be considered as taxable gross income to the Indiana corporate taxpayer. The three-factor apportionment formula utilized by Reynolds to compute its exemption considers Reynolds' in-state and out-of-state property, payroll, and sales. Utilizing computerized data amassed at its computer center in Richmond, Reynolds' total world-wide property was compared to Reynolds' Indiana property, and a percentage ascertained; Reynolds total world-wide sales were compared to Indiana destination sales and a percentage ascertained; likewise Reynolds' total payroll everywhere was compared to Reynolds' Indiana-based payroll and a percentage ascertained. The average of these three percentages was arrived at by totaling them and dividing by three to arrive at an apportionment factor. Reynolds then applied this factor to its Indiana sales to determine the amount of its taxable gross income. Reynolds did not undertake to associate and identify the actual activities in Indiana that produced the income, or identify the activities that should be exempt. The Department refused to accept the three-factor apportionment formula to determine interstate commerce exemptions, but demanded that...