• Indiana: DOR Ruling Clarifies State Tax Nexus Issue (Or Does It?)
  • February 10, 2014
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • The Indiana DOR recently issued Revenue Ruling #2013-03 IT (the “Ruling”) addressing whether a taxpayer’s (Taxpayer) storage of its clients' advertising catalogs at theTaxpayer's Indiana facilities creates nexus such that the taxpayer's clients will have an income tax filing and reporting requirement in Indiana. Stated differently, the Ruling addresses whether a vendor’s presence and activities in the state, if such activities are limited to only the storage and distribution of store catalogs by a third-party vendor, may create income tax nexus for its clients.

    The facts of the Ruling are as follows:

    • Taxpayer is located in Indiana
    • Out-of-state retailers store catalogs at Taxpayer’s facilities in Indiana for some period of time prior to distribution
    • The Taxpayer distributes, from Indiana, the out-of-state retailer’s catalogs to recipients throughout the United States, including recipients located in Indiana

    Under Indiana Code 6-3-2-1(a), a tax is generally imposed on the adjusted gross income of every nonresident person on the part of their adjusted gross income derived from sources within Indiana. For corporations and nonresident persons, “adjusted gross income from sources within Indiana” means:

    1. Income from real or tangible personal property located in this state;
    2. Income from doing business in this state;
    3. Income from a trade or profession conducted in this state; 
    4. Compensation for labor or services rendered within this state; and
    5. Income from stocks, bonds, notes, bank deposits, patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other intellectual property to the extent that the income is apportioned to Indiana under this section or if the income is allocated to Indiana or considered to be derived from sources within Indiana under this section. Indiana Code 6-3-2-2(a).

    The DOR then focused on the second part of the meaning of “adjusted gross income from sources within Indiana” and “doing business” in the state. The DOR noted that while “doing business” is not defined under the statute, the Indiana Administrative Code defines it under 45 I.A.C. 3-1-1-38.

    Sec. 38. Doing Business. For apportionment purposes, a taxpayer is “doing business” in a state if it operates a business enterprise or activity in such state including, but not limited to:

    1. Maintenance of an office or other place of business in the state
    2. Maintenance of an inventory of merchandise or material for sale distribution, or manufacture, or consigned goods
    3. Sale or distribution of merchandise to customers in the state directly from company-owned or operated vehicles where title to the goods passes at the time of sale or distribution
    4. Rendering services to customers in the state
    5. Ownership, rental or operation of a business or of property (real or personal) in the state
    6. Acceptance of orders in the state
    7. Any other act in such state which exceeds mere solicitation of orders so as to give the state nexus under P.L. 86-272 to tax its net income

    The DOR focused on the only business activity in the state of Taxpayer’s clients - the storage and presence of the clients’ catalogs. In reviewing these activities, the DOR reasoned that the mere presence of the catalogs in the state do not, in and of themselves, generate any income for the Taxpayer, nor does the presence of the catalogs constitute “doing business” under the Indiana Administrative Code’s definition. Based on these facts and analysis, Taxpayer’s clients do not appear to have adjusted gross income derived from sources within Indiana. As such, the DOR concluded, the clients do not have any Indiana income tax filing requirement from the presence of their catalogs in the state.

    The DOR came to a similar conclusion (that there was insufficient nexus) for sales tax purposes in Revenue Ruling #2013-08 ST under the same facts.