Wabash, Inc. v. Dept. of State Revenue
| Citation | 729 N.E.2d 620 |
| Decision Date | 01 June 2000 |
| Docket Number | No. 49T10-9603-TA-27.,49T10-9603-TA-27. |
| Parties | WABASH, INC., Petitioner, v. DEPARTMENT OF STATE REVENUE, Respondent. |
| Court | Tax Court of Indiana |
Larry J. Stroble, Barnes & Thornburg, Indianapolis, Indiana, Attorney for Petitioner.
Karen M. Freeman-Wilson, Attorney General of Indiana, Indianapolis, Indiana, Attorney for Respondent.
The petitioner, Wabash Inc. (Wabash) appeals from a final determination of the Department of State Revenue (Department), finding that Wabash erroneously included Wabash's parent company, Kearney-National Inc. (KN), on its consolidated tax return for the 1990 tax year. In its original tax appeal, Wabash disagrees with the Department's final determination and asks this Court to reverse it. The Department also raises an additional issue: whether the apportionment method used by Wabash to calculate its taxes was correct.1 For the reasons explained below, the Court finds in favor of Wabash on both issues and reverses the Department's final determination.
Wabash is a manufacturing corporation located in Wabash, Indiana. Wabash is also a wholly-owned subsidiary of Kearney-National Holdings II (KNH II), a Delaware corporation doing business in Indiana. In turn, KNH II is a wholly-owned subsidiary of Kearney-National Holdings (KNH), a Delaware holding company of KN that possessed no Indiana connections. The above-named companies were all contained under the corporate umbrella of KN, which is headquartered in White Plains, New York.
In 1989, KN considered the acquisition of the Coto Corporation (Coto), a competitor of KN's located in Rhode Island. In furtherance of this acquisition, KN selected Michael Carper (Carper), the general manager of Wabash, to participate in an acquisition study in the fall of 1989 to examine the benefits that Coto could bring to KN. Following completion of the study, KN acquired Coto as of February 1, 1990. Following the merger, all of Wabash's operations moved to Coto's plant in Rhode Island. KN engaged Carper to coordinate the move of Wabash's plant, personnel and machinery to Coto's plant in Rhode Island because of his involvement in the acquisition study. On January 1, 1990, Carper became a full-time employee of KN while working at the Wabash plant until his voluntary departure in July or August of 1990.2
Thereafter, Wabash filed its Indiana adjusted gross income and supplemental net income tax return for the 1990 tax year as a consolidated return (return).3 See IND. CODE ANN. § 6-3-4-14 (West 1989). The return listed Wabash, KNH II, KNH and KN as corporations.4 Following an audit of Wabash, the Department subsequently issued a proposed notice of assessment on March 4, 1994, which determined that KN had erroneously been included in Wabash's 1990 tax return. Wabash appealed this ruling, which the Department upheld in a letter of finding on January 29, 1996. (Pet'r Ex. 4.) Wabash then filed this original tax appeal on March 26, 1996. The Court held a trial in this matter on April 23, 1997 and oral arguments from both parties were heard on October 22, 1997. Additional facts will be supplied where necessary.
The Court reviews findings of the Department de novo and is bound by neither the evidence nor the issues raised at the administrative level. See IND.CODE ANN. § 6-8.1-5-1(h) (West 2000); see also Uniden America Corp. v. Department of State Revenue, 718 N.E.2d 821, 824 (Ind. Tax Ct.1999)
.
Wabash contends that Carper's activities on behalf of itself and KN were enough to generate Indiana-sourced income, thus allowing KN's inclusion on Wabash's 1990 return. The Department argues, however, that Carper's activities were not substantial enough to generate sufficient Indiana-sourced income that would permit KN's inclusion.5 IND.CODE ANN. § 6-3-4-14 (West 2000) states that several companies may file a consolidated return as long as each company has adjusted gross income derived from Indiana sources. IND.CODE ANN. § 6-3-2-2 (West 2000) lists the Indiana sources from which Indiana-sourced income can be derived. Among the enumerated sources are:
See id.
Wabash argues that KN meets the "doing business" factor because Carper's activities in Indiana were more than minimal. While the Indiana Code does not define "doing business," IND. ADMIN. CODE tit. 45, r. 3.1-1-38 (1988)(codified in present form at id. (1996)) defines the phrase as:
Wabash argues that KN qualifies under IND. ADMIN. CODE tit. 45 r. 3.1-1-38(7) because Carper's activities on behalf of KN were more than minimal. (Pet'r Reply Br. at 10, 14.) 15 U.S.C. §§ 381-384 (1999) (P.L. 86-272) deals with a state subjecting a foreign corporation to taxation. In particular, section 381(a) states:
No state, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during such taxable year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and
(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person, if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).
Section 381(a) thus exempts foreign corporations from tax where those companies only engage in the mere solicitation of sales. The United States Supreme Court in Wisconsin Department of Revenue v. William Wrigley Jr., 505 U.S. 214, 228-29, 112 S.Ct. 2447, 2456-57, 120 L.Ed.2d 174 (1992) held that P.L. 86-272 only protects the actual solicitation of orders, as well as other activities that serve no independent business function apart from their connection to the solicitation of orders. In Wrigley, Wisconsin sought to tax the Wrigley company for various activities it conducted inside the state related to its chewing gum business. The activities in question, among other things, consisted of the exchange of fresh gum for stale gum, the storing of gum inside Wisconsin and the supplying of gum through agency stock checks. The Court found that P.L. 86-272 contains a de minimis exception if an activity is trivial in nature. See William Wrigley Jr.,505 U.S. at 231-32,112 S.Ct. at 2458,120 L.Ed.2d 174. The Court also stated that a company will lose the protection of P.L. 86-272 if it performs an activity that establishes a nontrivial additional connection with the taxing state. See id., 505 U.S. at 232,112 S.Ct. at 2458,120 L.Ed.2d 174. Despite the fact that Wrigley's Wisconsin sales only accounted for a small percentage of its total sales, the Court found that Wrigley's activities established a nontrivial additional connection with Wisconsin. See id.,505 U.S. at 235,112 S.Ct. at 2460,120 L.Ed.2d 174. The Indiana Supreme Court has stated that particular emphasis should be placed upon the totality of the business activities of a company within Indiana when interpreting P.L. 86-272. See Department of Revenue v. Kimberly-Clark Corp., 275 Ind. 378, 416 N.E.2d 1264, 1268 (1981)
.
In examining the business activities of Wabash, it is helpful to consider how other courts have interpreted P.L. 86-272 as well. In Magnetek Controls, Inc. v. Department of Treasury, 221 Mich.App. 400, 562 N.W.2d 219, 224 (1997), the Michigan Court of Appeals held that the taxpayer exceeded the scope of P.L. 86-272's protection by sending sales managers into Michigan for 10-14 days per year. Similarly, in Brown Group Retail, Inc. v. Franchise Tax Board, 44 Cal.App.4th 823, 836, 52 Cal.Rptr.2d 202, 209 (Cal.Ct.App.1996), the California Court of Appeal held that P.L. 86-272's exception did not apply to a taxpayer who sent two of its employees to help customers with their businesses. In addition to these two courts, the Department has held that a taxpayer did business in Indiana where it sent its employees once or twice a year into the state in order to deliver newspapers. See Rul. IT96-03 (Jan. 7, 1997) (Pet'r Ex. 26.)
In this case, the Department argues that Carper's activities on behalf of KN did not extend beyond the solicitation exception listed in P.L. 86-272.6 Carper's responsibilities during the acquisition of Coto included coordinating the move of Wabash's equipment to Rhode Island, coordinating inventory levels between Wabash and Coto's plants and advising both companies' salesmen and customers about the planned consolidation. (Trial Tr. at 22.) At trial,...
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