UACC Midwest, Inc. v. Indiana Dept. of State Revenue, 49T10-9204-TA-00012

• Decision Date: 03 July 1996
• Docket Number: No. 49T10-9204-TA-00012,49T10-9204-TA-00012
• Court: Indiana Tax Court
• Parties: UACC MIDWEST, INC., successor by merger to Evansville Cable Television, Inc., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE and Kenneth L. Miller, Commissioner of the Indiana Department of State Revenue, Respondents.

Page 232

667 N.E.2d 232

UACC MIDWEST, INC., successor by merger to Evansville Cable Television, Inc., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE and Kenneth L. Miller Commissioner of the Indiana Department of State Revenue, Respondents.

No. 49T10-9204-TA-00012.

Tax Court of Indiana.

July 3, 1996.

John W. Allen, Patrick R. Van Tiflin, Michelle L. Halloran, Howard & Howard Attorneys, P.C., Lansing, MI, for Petitioner.

Pamela Carter, Attorney General of Indiana, Marilyn S. Meighen, Deputy Attorney General, Indianapolis, for Respondent.

FISHER, Judge.

UACC Midwest, Inc. (UACC) appeals a final determination of the Indiana Department of State Revenue (the Department) taxing UACC's gross income under IND.CODE 6-2.1-2-3 at the rate of one and two-tenths percent (1.2%) rather than at the rate of three-tenths of one percent (0.3%).

ISSUES

I. Whether UACC's income is derived from "selling at retail" or "the provision of a service" under the Indiana Gross Income Tax Act.

II. Whether the Indiana Gross Income Tax Act, as applied to cable television operators, is unconstitutional.

III. Whether the Department is entitled to recover the refund it issued to UACC for the calendar year 1990.

FACTS & PROCEDURAL HISTORY

UACC, a Delaware corporation, is a cable television operator with Indiana offices in Anderson and Evansville. As a cable television operator, UACC engages in three primary activities: 1) it provides cable television programming to subscribing viewers for a fee (cable subscriptions); 2) it sells advertising time on cable television; and 3) it produces video programming and advertisements to be shown on cable television. While all three of these activities generate income for UACC, the majority of UACC's income is derived from its cable subscriptions.

This case arose when UACC decided that it had over-reported the amount of gross income tax it owed the State of Indiana. Specifically, after reporting that its gross income was subject to taxation at the rate of 1.2%, UACC decided that its income was actually subject to taxation at the rate of 0.3%. Consequently, UACC filed a series of amended tax returns with the Department seeking refunds of excessive gross income taxes paid for: 1) the period of September 1, 1985 through August 31, 1986; 2) the fiscal year ending August 31, 1987; 3) the shortened calendar year of September 1, 1987 through December 31, 1987; 4) the calendar year 1988; 5) the calendar year 1989; and 6) the calendar year 1990. The Department approved the refunds for the period of September 1, 1985 through August 31, 1986 and the calendar year 1990. The Department denied all other refunds.

On April 8, 1992, UACC filed an appeal with this court in an attempt to secure the refunds that had been denied. The Department filed a counterclaim asserting that it was entitled to reassess UACC for the period of September 1, 1985 through August 31, 1986 and the calendar year 1990. In other words, the Department asserts that it erroneously issued the refunds to UACC for those periods and is therefore entitled to recover them.

After considering a number of preliminary motions, this court determined that it did not have jurisdiction to hear UACC's appeal as it related to the fiscal year ending August 31, 1987, and the shortened calendar year of September 1, 1987 through December 31, 1987, as UACC did not timely file its amended returns for those periods. UACC Midwest, Inc. v. Indiana Dep't of State Revenue, 629 N.E.2d 1295, 1299 (Ind.Tax 1994) (UACC I ). This court also determined that the Department could not recover the refund it issued to UACC for the calendar year 1986. Id. at 1301. Consequently, this court will consider UACC's appeal only as it relates to the calendar year 1988, the calendar year 1989, and the portion of the Department's counterclaim relating to the refund it issued to UACC for the calendar year 1990.

STANDARD OF REVIEW

"The court reviews appeals from the Department de novo." Kenny Kent Chevrolet Co. v. Indiana Dep't of State Revenue, 627 N.E.2d 890, 891 (Ind.Tax 1994). Thus, "the court is bound by neither the issues nor the evidence at the administrative level." Id.

DISCUSSION AND ANALYSIS

I

The Indiana Gross Income Tax Act, IND.CODE 6-2.1-1-1 through 6-2.1-8-10, imposes a tax upon the receipt of: "(1) the entire taxable gross income of a taxpayer who is a resident or a domiciliary of Indiana; and (2) the taxable gross income derived In determining which of the two rates is to be applied, "the type of transaction from which the taxable gross income is received" governs. I.C. 6-2.1-2-2. Specifically, gross income received from the following transactions is taxed at the rate of 0.3%:

from activities or businesses or any other sources within Indiana by a taxpayer who is not a resident or a domiciliary of Indiana." I.C. 6-2.1-2-2. The gross income tax is imposed at one of two rates: 0.3% or 1.2%. I.C. 6-2.1-2-3.

(1) wholesale sales;

(2) display advertising, including outdoor painted and poster display advertising and radio and television media advertising, but not including any sale or rental of tangible property or any personal professional service rendered in connection with such advertising;

(3) the business of dry cleaning and laundering, excluding the operation of coin operated laundry and dry cleaning equipment;

(4) selling at retail;

(5) the business of softening and conditioning water, including the exchange of water softening and conditioning tanks in the ordinary course of business, but not including the preparation of customer's plumbing and other work incident to installing such tanks in the first instance;

(6) the renting or furnishing for periods of less than thirty (30) days any rooms, lodgings, or any other accommodations, including booths, display spaces, and banquet facilities that are located in a place where rooms, lodgings, or any other accommodations are regularly furnished for a consideration; and

(7) the business of commercial printing that results in printed materials, excluding the business of photocopying.

I.C. 6-2.1-2-4 (emphasis added). The 1.2% rate, however, applies to gross income received from:

(1) producing, transmitting, furnishing, wholesaling, or retailing electrical energy;

(2) producing, transporting, furnishing, wholesaling, or retailing artificial gas, natural gas, or a mixture of natural and artificial gas;

(3) operating a steam or electric railway, streetcar line, motor vehicle, steam or motorboat, or any other vehicle for the transportation of freight, express, or passengers for hire;

(4) operating a pipeline for the transportation of any commodity for hire;

(5) operating a telephone or telegraph line;

(6) operating a water or sewerage system;

(7) operating any other utility which is not described in this section;

(8) activities described in sections 3, 4, 5, 6, 7, 8, or 9 of IC 6-2.1-1 that are taxable on a gross earnings basis; and

(9) any activity which is not described in section 4 of this chapter including the provision of services of any character, sales of real estate, rentals (except rentals described in section 4(6) of this chapter), the performance of contracts, and the investment of capital.

I.C. 6-2.1-2-5 (emphasis added).

In the case at bar, UACC claims that its income should have been taxed at the rate of 0.3% rather than 1.2% because it was received in the course of "selling at retail" under I.C. 6-2.1-2-4, and not from "the provision of a service" under I.C. 6-2.1-2-5. In other words, UACC argues that its income is derived from the sale of cable television programming.

The term "selling at retail," as it is used in the Gross Income Tax Act, is defined in I.C. 6-2.1-2-1. It provides in relevant part:

"Selling at retail" means a transaction in which a retail merchant in the ordinary course of his regularly conducted business transfers the ownership of tangible personal property to another, conditionally or otherwise, for consideration if:

(A) the retail merchant had previously acquired that tangible personal property for the purpose of reselling it; and

(B) the transferee acquiring the property does not acquire the tangible personal property for the purpose of making a wholesale sale.

I.C. 6-2.1-2-1(b)(1) (emphasis added). See also 45 I.A.C. 1-1-13. Under this definition, UACC is not "selling at retail" because cable television programming is not tangible personal property. Indeed, cable television programming does not have physical form; it is not capable of being touched. See Black's Law Dictionary 1305-06 (5th ed. 1979). See also Indiana Dep't of State Revenue v. Cable Brazil, Inc., 177 Ind.App. 450, 456-60, 380 N.E.2d 555, 558-61 (1978) (holding that cable television signals are not tangible personal property). Consequently, because UACC's income is not derived from "selling at retail," it is derived from "the provision of a service."

UACC acknowledges that cable television programming is not tangible personal property. Transcript of February 7, 1996 Oral Argument at 28-29. Nevertheless, it attempts to convince the court that its income should be considered received from "selling at retail" for two reasons. First, it states that "cable revenues for gross income tax purposes are subject to reclassification, and are properly characterized as retail receipts, not receipts for services, consistent with the categorization of persons furnishing local cable television service or intrastate cable television service as 'retail merchants' [for purposes] ... of the Indiana Gross Retail Tax Act, I.C. 6-2.5-1-1 et seq." Complaint at 3-6. In other words, UACC argues that because cable television operators are considered "retail merchants" for purposes of the Indiana sales tax, they should be considered "retail merchants" for purposes of the Indiana gross income tax as well. UACC is mistaken.

The court recognizes that under the Indiana Gross Retail Tax Act, cable television operators are considered retail...