ATTORNEYS FOR PETITIONER: ATTORNEYS FOR RESPONDENT:
RANDAL J. KALTENMARK CURTIS T. HILL, JR.
ZIA MOLLABASHY INDIANA ATTORNEY GENERAL
BARNES & THORNBURG LLP WINSTON LIN
Indianapolis, IN PARVINDER K. NIJJAR
DEPUTY ATTORNEYS GENERAL
JENNY A. AUSTIN Indianapolis, IN
THEODORE R. BOTS
BAKER & MCKENZIE LLP FILED
Chicago, IL Nov 30 2017, 3:08 pm
CLERK
SCOTT L. BRANDMAN Indiana Supreme Court
Court of Appeals
BAKER & MCKENZIE LLP and Tax Court
New York, NY
______________________________________________________________________
IN THE
INDIANA TAX COURT
______________________________________________________________________
THE UNIVERSITY OF PHOENIX, INC., )
)
Petitioner, )
)
v. ) Cause No. 49T10-1411-TA-00065
)
INDIANA DEPARTMENT OF STATE )
REVENUE, )
)
Respondent. )
______________________________________________________________________
ON APPEAL FROM A FINAL DETERMINATION OF
THE INDIANA DEPARTMENT OF STATE REVENUE
FOR PUBLICATION
NOVEMBER 30, 2017
WENTWORTH, J.
The University of Phoenix, Inc. challenges the Indiana Department of State
Revenue’s assessments of adjusted gross income tax (AGIT) for the 2009, 2010, and
2011 tax years. The question is whether the University’s online campus revenue can be
sourced to Indiana based on a student’s Indiana billing address. The Court finds that it
cannot.
FACTS AND PROCEDURAL HISTORY
The University, a wholly-owned subsidiary of Apollo Education Group, Inc., is a
private, accredited education service provider headquartered in Phoenix, Arizona.
(Second Stip. of Facts (“Second Stip.”) ¶¶ 1, 4, 35.) The University’s educational model
is directed toward students attempting to balance the demands of taking college classes
with the demands of work and/or family life. (Trial Tr. at 32-33, 35-36, 80-81, 114-15.)
The University offers associate’s, bachelor’s, master’s, and doctoral courses and degrees
in a variety of fields at both its online campus and its ground campus locations throughout
the United States. (Second Stip. ¶ 34; Trial Tr. at 31.)
Online campus students participate in academic activities online, such as class
meetings and study groups, discussions with instructors or fellow students, online
research, accessing course materials, paying for courses, getting grades, and requesting
transcripts. (Second Stip. ¶ 37.) In addition, online campus students are permitted to
access facilities and resources at the ground campus locations. (Second Stip. ¶ 38.)
During the years at issue, the University’s online campus offered classes year-
round to students in “sections” that were newly launched weekly. (Second Stip. ¶ 41.)
Students could access the sections at any time or location. (Trial Tr. at 35-36.) Online
campus associate degree class sections are nine weeks long, and students enroll in one
or two courses at a time. (Second Stip. ¶ 40.) The other online class sections are five to
eight weeks long, and students complete them one at a time - sequentially rather than
concurrently. (Second Stip. ¶ 40.) Students pay for each course as they attend them.
2
(Second Stip. ¶ 42.)
The University’s online educational services fall within four general categories: the
online eCampus platform, online faculty instruction, curriculum development, and
graduation assistance. (See generally Second Stip. ¶¶ 37, 48, 67, 72; Trial Tr. at 233-
34; Pet’r Trial Ex. 1 at 4.) First, the University’s eCampus provided a web-based platform
for students to access its educational services online. (Second Stip. ¶¶ 37, 39.) The
eCampus platform contained student resources and the online classroom environment –
where students attended class, participated in discussions and projects, communicated
with faculty, turned in assignments, and reviewed grades. (Second Stip. ¶¶ 37, 39.) The
eCampus platform was developed and maintained from locations in Arizona, Washington,
and California, but during 2011, one individual performed services related to the eCampus
from Indiana. (Second Stip. ¶ 20, Ex. S at 13; Trial Tr. at 460-61.)
Second, the University provided online classroom instruction taught by faculty
members to the students enrolled in each class section. (Second Stip. ¶¶ 41, 72-74; Trial
Tr. at 180-82, 289-90.) Faculty members were able to teach online course sections from
any location. (Trial Tr. at 181.) During each of the years at issue, the University had
more than 1,500 online campus faculty members located in Arizona while just 293 online
faculty members were located in Indiana in 2009, 354 in 2010, and 350 in 2011. (Second
Stip. ¶ 20, Ex. S at 2-3, 7-8, 12-13.)
Third, the University had a curriculum team that centrally developed the online
curricula to maintain consistency across course sections. (Trial Tr. at 151-56.) The
curriculum development team created each course section’s online classroom and posted
all the course materials online. (Trial Tr. at 172-74.) All the University’s curriculum
3
development activities were performed outside of Indiana, primarily in Arizona, during the
years at issue. (Trial Tr. at 155.)
Finally, the University assigned a graduation team to each student to assist them
in completing their degree program. (Second Stip. ¶ 48; Trial Tr. at 58-59, 86-91.) Each
team included an enrollment representative, an academic advisor, and a financial advisor.
(Second Stip. ¶ 48; Trial Tr. at 58-62, 86-91.) The enrollment representative maintained
contact with a student through their first two courses to help them with classroom
participation, attendance, study habits, and time management. (Second Stip. ¶ 50; Trial
Tr. a t 56-58, 86-87.) The academic advisor helped the student manage program
requirements, policies, and course scheduling. (Second Stip. ¶¶ 57-59; Trial Tr. at
58-59; 84, 90-91.) The financial advisor ensured that the student had access to the
funding necessary to pay the cost of obtaining a degree. (See Second Stip. ¶¶ 63-65;
Trial Tr. at 129-31.) More than 6,000 graduation team members who assisted online
campus students were located in Arizona and only three were located in Indiana in 2009,
one in 2010, and none in 2011. (See Second Stip. ¶ 20, Ex. S at 2-3, 7-8, 12-13; Trial
Tr. at 85-86, 118.)
The University filed Form IT-20 Indiana Corporation Adjusted Gross Income Tax
Returns for each of the years at issue. (Second Stip. ¶¶ 11-16, Exs. O-Q.) In computing
its Indiana adjusted gross income (AGI), the University sourced 100 percent of its
receipts attributable to its Indiana ground campus students to Indiana, but sourced none
of its receipts from its online campus students to Indiana. (Second Stip. ¶¶ 17-18.)
Upon audit, the Department issued its report stating that the University should
have sourced all receipts from online students with an Indiana billing address to Indiana.
4
(Second Stip. ¶¶ 21-25, Ex. T at 4.) Accordingly, the Department issued Proposed
Assessments for additional AGIT liabilities, interest, and penalties. (Second Stip. ¶¶ 22,
24, Ex. U.)
On June 20, 2013, the University protested the Proposed Assessments.
(Second Stip. ¶ 26.) On September 11, 2014, the Department denied the University’s
protest of the additional AGIT assessments, but abated the penalties for each of the
years at issue. (Second Stip. ¶ 29, Ex. V.)
On November 7, 2014, the University filed its original tax appeal. The Court held
the trial from February 28 through March 1, 2017, and heard oral argument on June 22,
2017. Additional facts will be supplied if necessary.
STANDARD OF REVIEW
This Court reviews final determinations of the Department de novo. See IND. CODE
§ 6-8.1-5-1(i) (2017). Accordingly, the Court is not bound by either the evidence or the
issues presented to the Department at the administrative level. See Horseshoe
Hammond, LLC v. Indiana Dep’t of State Revenue, 865 N.E.2d 725, 727 (Ind. Tax Ct.
2007), review denied. “The notice of proposed assessment is prima facie evidence that
the [D]epartment’s claim for the unpaid tax is valid.” I.C. § 6-8.1-5-1(c) (emphasis added).
As a result, “[t]he burden of proving that the proposed assessment is wrong rests with the
person against whom the proposed assessment is made.” I.C. § 6-8.1-5-1(c).
LAW
In Indiana, every corporation is subject to a tax “on [ the] part of the adjusted gross
income derived from sources within Indiana[.]” IND. CODE § 6-3-2-1(b) (2009) (amended
2011). Income derived from Indiana sources is determined by multiplying a
5
corporation’s total business income by an apportionment factor. See IND. CODE § 6-3-
2-2(b) (2009). During the years at issue, Indiana followed a multi-factor apportionment
formula that included a weighted sales factor, a property factor, and a payroll factor.
See I.C. § 6-3-2-2(b).
The sales factor is a fraction that puts the taxpayer’s worldwide gross receipts
during the tax period as the denominator and the taxpayer’s sales sourced to Indiana
during that period as the numerator. See I.C. § 6-3-2-2(e). Receipts from the sales of
other than tangible personal property, like the sales of educational services at issue here,
are sourced to the Indiana numerator if:
(1) the income-producing activity is performed in this state; or
(2) the income-producing activity is performed both within and without
this state and a greater proportion of the income-producing activity
is performed in this state than in any other state, based on costs of
performance.
I.C. § 6-3-2-2(f). Moreover, the Department has explained that
Gross receipts from transactions other than sales of tangible personal
property shall be included in the numerator of the sales factor if the
income-producing activity which gave rise to the receipts is performed
wholly within this state. Except as provided below if the income
producing activity is performed within and without this state such
receipts are attributed to this state if the greater proportion of the
income producing activity is performed here, based on costs of
performance.
The term “income producing activity” means the act or acts directly
engaged in by the taxpayer for the ultimate purpose of obtaining gains
or profit. Such activity does not include activities performed on behalf
of the taxpayer, such as those conducted on its behalf by an
independent contractor. Accordingly, “income producing activity”
includes but is not limited to the following: (1) The rendering of
personal services by employees or the utilization of tangible and
intangible property by the taxpayer in performing a service. (2) The
sale, rental, leasing, or licensing the use of or other use of tangible
personal property. (3) The sale, licensing the use of or other use of
6
intangible personal property.
Income producing activity is deemed performed at the situs of real,
tangible and intangible personal property or the place where personal
services are rendered.
*****
The term “costs of performance” means direct costs determined in a
manner consistent with generally accepted accounting principles and
in accordance with accepted conditions or practices in the trade or
business of the taxpayer.
45 IND. ADMIN. CODE 3.1-1-55 (2009). This case is the first to consider the contours of
the apportionment of service income under Indiana Code § 6-3-2-2(f).
ANALYSIS
The Department’s Proposed Assessments constitute prima facie evidence that the
University’s revenue received from online educational services provided to students with
Indiana billing addresses was correctly sourced to Indiana. See I.C. § 6-8.1-5-1(c). The
University claims, however, that the Department’s Proposed Assessments are incorrect
for three reasons. First, the University asserts that it directly engaged in four “income-
producing activities,” as that term is used in Indiana Code § 6-3-2-2(f). (See Pet’r Post-
Trial Br. (“Pet’r Br.”) at 9, 11, 18, 22 (citing I.C. § 6-3-2-2(f)).) Second, the University
claims that because its income-producing activities were performed both inside and
outside Indiana, the Department’s market-based sourcing method was contrary to the
statutory method required by Indiana Code § 6-3-2-2(f)(2). (See Pet’r Br. at 15-18.)
Finally, the University asserts that its online educational services revenue should not be
sourced to Indiana because a greater proportion of its income-producing activities were
performed outside of the state. (See Pet’r Br. at 18-24.)
7
I. Income-Producing Activities
Indiana apportions business income received from performing services based on
the geographic location of the income-producing activities. See I.C. 6-3-2-2(f). If the
income-producing activities are wholly within Indiana, the service income is sourced
entirely to Indiana. I.C. 6-3-2-2(f)(1). If, however, the income-producing activities are
performed both in Indiana and in other states, the service income is sourced entirely to
Indiana only if a greater proportion of them are performed in Indiana than are performed
in any other state. I.C. 6-3-2-2(f)(2). Therefore, deciding which subsection applies first
requires identifying the income-producing activity.
The University asserts that it directly engaged in four identified income-producing
activities. (See Pet’r Br. at 18.) In support, the University presented, among other things,
the testimony of its expert witness in cost accounting, James D. Allen III, and the cost
study he prepared. (See Trial Tr. at 207-13, 227, 231-32, 276-77; Pet’r Trial Ex. 1 at
3, 33-36.) The cost study addressed four questions: (1) what were the University’s
items of income; (2) what were the income-producing activities associated with the
items of income; (3) what were the direct costs incurred in performing those income-
producing activities; and (4) where were those direct costs incurred? (Pet’r Trial Ex. 1
at 4; Trial Tr. at 276.) Accordingly, the cost study identified (1) the University’s income-
producing activities, and (2) the location and costs of performing those income-producing
8
activities for the years at issue.1 (See Pet’r Trial Ex. 1 at 4-5; Trial Tr. at 276-77.)
The cost study defined the University’s income-producing activities as those
activities that directly benefitted a student. (See Trial Tr. at 283-85, 290 (stating that
“the service that [students are] actually paying for is directly associated with the income-
producing activities”).) Accordingly, certain activities, such as information technology,
training, and candidate qualification, were not considered income-producing activities
because they were a step removed from the student attending a class. (See Trial Tr. at
290-295.)
Then, the cost study grouped the University’s activities that directly benefited
students into four categories of income-producing activities: (1) the eCampus platform,
(2) classroom instruction, (3) curriculum development, and (4) the graduation team. (Pet’r
Trial Ex. 1 at 4; Trial Tr. at 233-34.) The cost study identified activities related to the
University’s eCampus and its online classroom instruction as directly benefiting students
because they facilitated interactions and the exchange of information in the online
classroom. (See Pet’r T ria l Ex. 1 at 15, 20; Trial Tr. at 286, 289-90.) Curriculum
development activities directly benefited students because they resulted in the
University’s program content. (See Pet’r Tria l Ex. 1 at 15, 20; Trial Tr. at 287.) Finally,
the graduation team’s activities directly benefited students because they ensured
students were properly enrolled in courses, correctly aligned with their degree
1
Mr. Allen is a partner at BI Solutions Group, LLC, specializing in cost accounting for service
industries. (See Pet’r Trial Ex. 1 at 33-36; Trial Tr. at 207-13, 224-25.) Mr. Allen prepared a
cost study for Apollo to determine where the University delivered its services with respect to all
states or jurisdictions. (See Trial Tr. at 347-48.) Mr. Allen employed an aggregate or
operational-level approach to the cost study upon which the University relies, although he
also provided a cost study using a transactional-level approach in the event the Court
determined Indiana law required that approach. (See Pet’r Trial Ex. 1 at 4; Oral Arg. Tr. at 26-27;
Third Stip. of Facts ¶ 9, Ex. YY.)
9
programs, and had the means to finance the necessary courses for graduation. (See
Pet’r Trial Ex. 1 at 14; Trial Tr. at 287-90.)
The Department, on the other hand, contends that the University’s “only literal and
statutory income-producing activity – [the University] providing the opportunity to attend
a class online in return for payment and an Indiana resident agreeing to do so – was
performed in Indiana.” (See Resp’t Br. at 7). As applied to these facts, the Department
explains that “income-producing activities” are “[t]he indispensable acts . . . that lead to
the production of income [that] occur when an Indiana resident – at home, in a coffee
shop, or in a public library – is presented with the offer to take a class, accepts, and
attends that class.” (See Resp’t Br. at 7-8 (citing 45 I.A.C. 3.1-1-55 (“‘Income[-]producing
activity is deemed performed at . . . the place where personal services are rendered’”)).)
Accordingly, the Department’s definition of “income-producing activities” derives from the
student/buyer’s perspective, focusing on the activities that provide a student the
opportunity to attend an online class in return for the student’s payment for that class.
(See Resp’t Br. at 7). This definition, however, is not consistent with the use of the term
“income-producing activity” in the sourcing statute or its interpretive regulation. See I.C.
§ 6-3-2-2(f); 45 I.A.C. 3.1-1-55.
Indiana Code § 6-3-2-2(f) sources a taxpayer’s revenue to the Indiana numerator
based on the seller’s acts: the performance of acts from the perspective of sales, thus,
the seller, not from the view of the buyer or consumer - to generate income. See I.C. §
6-3-2-2(f). The Department’s regulation takes the same view, stating that the term
“‘income producing activity’ means the act or acts directly engaged in by the taxpayer for
the ultimate purpose of obtaining gains or profit.” 45 I.A.C. 3.1-1-55 (emphasis added).
10
Accordingly, income producing activities are not limited to what those students directly
pay for, as the Department urges, but encompass acts a seller directly engaged in with
the purpose to generate revenue.
It bears stating that the Department did not put forth any probative evidence,
testimony or otherwise, in support of its own claims or to rebut the University’s evidence.
(See Trial Tr. at 486.) See also Miller Pipeline Corp. v. Indiana Dep’t of State Revenue,
52 N.E.3d 973, 979 (Ind. Tax Ct. 2016) (finding the Department failed to rebut the
taxpayer’s evidence where it did not present its own evidence or impeach the taxpayer’s
testimony). Indeed, the Department merely attempted to cast doubt on the reliability of
the University’s evidence in cross-examination and by putting forth alternative legal
standards unsupported by any evidence or full-throated reasoning. The Department’s
lack of evidence in rebuttal together with the compatibility of the University’s identification
of its income-producing activities with the language of the statute and regulation
persuades the Court that the University properly defined its income-producing activities
in this matter.
II. Costs of Performance Sourcing
Second, the University claims that because its income-producing activities were
performed both inside and outside Indiana, the Department’s market-based sourcing
method was contrary to the statutory method required by Indiana Code § 6-3-2-2(f)(2).
(See Pet’r Br. at 15-18.) When income-producing activities are performed both in Indiana
and in other states, the service income is sourced under Indiana Code §6-3-2-2(f)(2),
which sources income from the sale of services entirely to Indiana only if a greater
proportion of the income-producing activities are performed in Indiana than are performed
11
in any other state. See I.C. 6-3-2-2(f)(2). Moreover, the statute deems the location of the
greater proportion of income-producing activities to be where the greater proportion of the
costs of performing the income-producing activities are located. See I.C. § 6-3-2-2(f)(2).
Consequently, the statute requires a cost-based analysis, not a market-based or
customer-based analysis to determine where to source receipts from service income.2
The University’s cost study identified and geographically located the direct costs
the University incurred in performing its four income-producing activities, concluding that
they occurred in Indiana as well as in other states. (See Pet’r Trial Ex. 1 at 5, 30; see
also generally Second Stip. ¶ 20, Ex. S.) The Department provided no evidence in
rebuttal. As a result, the Court is persuaded that the income-producing activities were
performed both in Indiana and in other states, and therefore, the University’s online
educational services income must be sourced under Indiana Code § 6-3-2-2(f)(2).
The Department does not dispute that it used a market-based method to source
the University’s online income to Indiana. (See Oral Arg. Tr. at 28-31, 58-61.) Indeed,
the Department sourced all the receipts from students with Indiana billing addresses to
the Indiana numerator. (Second Stip. ¶¶ 23, 25, Ex. T at 4-6.) Moreover, the
Department did not present facts or argument to show it was entitled to use market-based
sourcing as an alternative apportionment method to the cost-based method required
under Indiana Code § 6-3-2-2(f)(2). See, e.g., I.C. § 6-3-2-2(l) (requiring the party seeking
2
Indiana Code § 6-3-2-2(f) mirrors Section 17 of the Uniform Division of Income for Tax Purposes
Act (“UDITPA”), which sets forth a cost-based method for sourcing service receipts. See, e.g.,
Miller Brewing Co. v. Indiana Dep’t of State Revenue, 903 N.E.2d 64, 71 (Ind. 2009) (noting that
Indiana’s statutory apportionment formula tracks the language of UDITPA). Although some states
have deviated from Section 17 of UDITPA by expressly enacting statutes to source service
receipts under a customer location or market-based method, Indiana has not. See, e.g., ME. REV.
STAT. ANN. tit. 36, § 5211(16-A) (2017); MICH. COMP. LAWS § 208.1305(2)(a) (2017).
12
alternative apportionment to demonstrate that sourcing income under I.C. 6-3-2-2(f)(2)
does not fairly reflect the taxpayer’s business conducted in Indiana and that the
alternative sourcing method is reasonable). As a result, the Department’s market-based
sourcing method used to calculate the Proposed Assessments is contrary to the explicit
direction in Indiana’s sourcing statute.3 See I.C. § 6-3-2-2(f)(2).
III. The Greater Proportion of Income-Producing Activities
Finally, the University asserts that none of its online educational services income
should be sourced to Indiana because a greater proportion of its income-producing
activities were performed outside of the state. (See Pet’r Br. at 18-24 (citing I.C. § 6-3-2-
2(f)(2)).) Indiana Code § 6-3-2-2(f)(2) provides an “all-or-nothing” method for sourcing
service income: if the greater proportion of the costs of performing the income-producing
activities are performed within Indiana, all the service income is attributed here. See I.C.
§ 6-3-2-2(f)(2). Moreover, if the greater proportion of the costs are incurred outside the
state, none of the income is attributed to Indiana. See I.C. § 6-3-2-2(f)(2).
The University’s cost study identified and geographically located the direct costs
the University incurred in performing its four income-producing activities as follows: in
2009, costs of $410,381,000 in Arizona versus $4,796,000 in Indiana; in 2010, costs of
$492,300,000 in Arizona versus $5,128,000 in Indiana; and in 2011, costs of
3
The University has additionally claimed that the Department read Indiana Code § 6-3-2-2(f) in a
manner that uses market-based sourcing for out-of-state taxpayers and cost-based sourcing for
in-state taxpayers, violating the Due Process and Commerce Clauses of the United States
Constitution and the Equal Protection provisions of the United States and Indiana Constitutions.
(See Pet’r Post-Trial Br. (“Pet’r Br.”) at 17-18.) Given the Court’s holding on the requirements of
Indiana Code § 6-3-2-2(f), the Court does not address the University’s claim.
13
$478,645,000 in Arizona versus $6,226,000 in Indiana.4 (See Pet’r Trial Ex. 1 at 5, 30.)
It therefore concluded that the greater proportion of the University’s costs of performing
its four income-producing activities were incurred in Arizona. (See Pet’r Trial Ex. 1
at 5, 30; Trial Tr. at 235.)
The Department claims that the University’s identification and location of the costs
it incurred to perform its income-producing activities is unreliable and thus fatal to its
position because the cost study was based on an operational-level approach rather than
a transaction-by-transaction approach. (See Resp’t Br. at 3-10; Oral Arg. Tr. at 57, 60-
62, 64-66.) In preparing the cost study, the University does not dispute that Mr. Allen
employed an aggregate or operational-level approach, which looked at the operations
of the University across its national platform. (See Pet’r Trial Ex. 1 at 4; Trial Tr. at
347-48, 352.) The Department specifically maintains that the University’s cost study
instead should have identified the income-producing activities and determined their
associated direct costs on a transaction-by-transaction basis – looking at each transaction
that produced income. (See Resp’t Br. at 3-6 (citing AT&T Corp. v. Dep’t of Revenue,
358 P.3d 973 (Or. 2015); Cable One, Inc. v. Idaho State Tax Comm’n, 337 P.3d 595
(Idaho 2014)).)
The Department’s argument relies on out-of-state case law based on state-specific
administrative regulations that define an income-producing activity. See AT&T, 358 P.3d
at 975. See also Cable One, 337 P.3d at 599. For example, Oregon’s regulation explains
that “[t]he term ‘income-producing activity’ applies to each separate item of income and
means the transactions and activity directly engaged in by the taxpayer . . . for the ultimate
4
The stated values are the amount of direct costs incurred for all four of the income-producing
activities combined, separated only by year and location. (See Pet’r Trial Ex. 1 at 5, 30.)
14
purpose of obtaining gains or profit.” See AT&T, 358 P.3d at 975 (citation omitted).
Likewise, Idaho’s regulatory language defines an income-producing activity with identical
language to that in Oregon’s regulation. See Cable One, 337 P.3d at 599 (examining
Idaho’s regulation defining income-producing activity). But cf. Boston Prof’l Hockey Ass’n
v. Comm’r of Revenue, 820 N.E.2d 792, 797 (Mass. 2005) (discussing Massachusetts’
regulation defining income-producing activity as “[a] transaction, procedure, or operation
directly engaged in by a taxpayer which results in a separately identifiable item of income”
(citation omitted)).
The Department submits that the plain language of its regulation stating that
“[g]ross receipts from transactions other than sales of tangible personal property shall be
included in the numerator” requires the use of a transaction-by-transaction methodology
just like the Oregon and Idaho regulations. (See Resp’t Br. at 3 (quoting 45 I.A.C. 3.1-1-
55).) Indiana’s regulation, however, does not refer to looking at each separate item of
income; instead, it defines an income-producing activity more broadly as “the act or acts
directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit.”
See 45 I.A.C. 3.1-1-55. To find that a transaction-by-transaction approach is required
merely because the word “transactions” appears in the regulation, would be tantamount
to forcing a square peg into a round hole. Rather, the use of the word “transactions” in
45 IAC 3.1-1-55 describes what type of transactions are subject to the regulation’s
direction, i.e., transactions from sales of other than tangible personal property. See 45
I.A.C. 3.1-1-55. Accordingly, the word “transactions” is used to identify what the regulation
applies to, not how it is to be applied.
In a case of first impression, as we have here, the Court may properly consider the
15
reasoning in cases from other jurisdictions. See Linton v. Davis, 887 N.E.2d 960, 967-68
(Ind. Ct. App. 2008) (using out-of-state case law as guidance when deciding issues of
first impression), trans. denied. Nonetheless, the Court will not read into the law, whether
a statute or a regulation, language that is simply not there. See DeKalb Cnty. E. Cmty.
Sch. Dist. v. Dep’t of Local Gov’t Fin., 930 N.E.2d 1257, 1260 (Ind. Tax Ct. 2010) (“When
the language of a statute is clear and unambiguous, the Court may not expand or contract
the meaning of a statute by reading into it language to correct any supposed omissions
or defects” (citation omitted)); see also State Bd. of Tax Comm’rs v. Two Market Square
Assocs. Ltd. P’ship, 679 N.E.2d 882, 886 (Ind. 1997) (explaining that the Court will not
give weight to an agency’s interpretation of an administrative regulation that is
inconsistent with the language of the regulation itself). Under Indiana’s regulation,
therefore, the University was not required to use a transaction-by-transaction approach
as the basis of its cost study. Accordingly, the University’s cost study is probative
evidence that the Court finds persuasively demonstrates that the greater proportion of the
University’s income-producing activities were performed outside of Indiana.
CONCLUSION
After weighing the evidence and for all the reasons stated above, the Court holds
that the Department erroneously calculated the Proposed Assessments for 2009, 2010,
and 2011 by sourcing the University’s revenue according to the location of its market,
rather than the location of the costs of its income-producing activities as required by
Indiana Code § 6-3-2-2(f)(2). The Court further finds persuasive the University’s
calculation of its Indiana sourced income reported on its original tax returns for the years
at issue. As a result, the Department’s Proposed Assessments are vacated.
16
17