January 2006 Volume 13 Number 2 State Tax Return Sales Of Products Transported Into Indiana By Common Carrier Arranged By Buyer Are Not Indiana Sales For Indiana Corporate Income Tax Apportionment Purposes: Miller Brewing Company V. Indiana Department Of State Revenue (Ind. Tax Ct.) David Horan Kirk Lyda Dallas Dallas (214) 969-4548 (214) 969-5013 The Indiana Tax Court recently ruled in favor of a taxpayer, Miller Brewing Company ( Miller ), in a case that is notable both for its holding on the proper calculation of the sales factor for the Indiana adjusted gross income tax and supplemental net income tax ( income tax ) as well as its treatment of an unusual request for rehearing by the State s Attorney General s Office. Miller Brewing Co. v. Indiana Dep t of State Revenue, 831 N.E.2d 859 (Ind. Tax. Ct. July 27, 2005), motion denied, 836 N.E.2d 498 (Ind. Tax. Ct. 2005). As to the substantive issue, the Court held that sales of products from outside of Indiana and transported into Indiana by common carrier arranged by the buyer were not Indiana-sourced sales. From a procedural standpoint, the Court refused to entertain the untimely arguments to the contrary made by the Indiana Department of State Revenue ( Department ) following the original issuance of the decision. Miller Seeks Refund of Income Tax on Sales to Indiana Customers of Products Transported into Indiana by a Common Carrier Arranged by the Customer Miller filed an appeal in the Indiana Tax Court after the Department denied its claims for refund of income tax paid during the 1994-1996 tax years. The refund claims involved taxes attributable to sales of products to Miller s Indiana customers who themselves arranged for a common carrier to transport the products into Indiana from outside the state ( sales at issue ). Miller filed a motion for summary judgment based on the following undisputed facts, arguing that the sales at issue were not Indiana sales. Miller, a Wisconsin corporation headquartered in Milwaukee, sold its products to customers in various states, including Indiana. Customers submitted purchase orders to Miller in Milwaukee, where Miller produced the products and prepared them for pick-up at one of its breweries outside of Indiana. Miller s customers transferred the products from the breweries to their destination by one of three means: (1) picking up the products themselves using their own trucks; (2) arranging for a third-party common carrier to pick up the products and transport them; or (3) having Miller arrange for a common carrier to transport the products at the customer s expense. Since possession 1
and title transferred to the customers at the breweries, the decision on how to transport the products rested with the customer. Miller filed corporate income tax returns for 1994-1996 in which it sourced all sales to its Indiana customers as Indiana sales, no matter the means of transporting the products. Miller then filed amended returns requesting refund of taxes paid attributable to sales in which its customers either picked up the products with their own trucks or arranged for a common carrier. The Department granted the refund for sales in which customers used their own trucks but denied the refund for the sales in which the customers arranged for the common carrier. Sales of Tangible Personal Property Shipped or Delivered to a Purchaser in Indiana are Indiana-Sourced Sales The legal issue in the case turned on the proper application of Indiana s corporate income tax apportionment formula. During the years 1994-1996, Indiana taxed a corporation s adjusted gross income derived from sources within Indiana as determined by an apportionment formula, which multiplied a corporation s business income by a fraction, the numerator of which was a property factor plus a payroll factor plus a sales factor and the denominator of which was three. Ind. Code Ann. 6-3-2-1(a), 6-3-2-2(b) (West 1995). In this case, Miller s tax liability for income from the sales at issue turned on the sales factor of the apportionment formula, which sourced sales to Indiana if the property is delivered or shipped to a purchaser, other than the United States government, within this state, regardless of the f.o.b. point or other conditions of the sale[.... ] Id. 6-3-2-2(e) (emphasis added). The Department s regulations provide further guidance as to what constitutes an instate sale of tangible personal property. In particular, the regulations outline two examples of scenarios in which a transaction is considered either an in-state or out-ofstate sale. Ind. Admin. Code tit. 45, r. 3.1-1-53(1), (7) (1996). Under the first example, [p]roperty shall be deemed to be delivered or shipped to a purchaser within this state if the recipient is located in this state, even though the property is ordered from outside this state. Id. 3.1-1-53(1). The second example indicates that sales are not in this state if the purchaser picks up the goods at an out-of-state location and brings them back into Indiana in his own conveyance. Id. 3.1-1-53(7). The Tax Court Holds that the Products were not Shipped into Indiana and were Delivered to the Customers Outside of Indiana, and were thus not Indiana Sales Focusing on the first example, the Department argued that the products transported to Indiana by common carriers arranged by the customers were shipped and delivered to a customer in Indiana and therefore Indiana sales. The Tax Court disagreed and granted Miller s summary judgment motion on its refund claims, holding that the sales at issue were not made in Indiana because the products were neither shipped nor delivered to a purchaser in Indiana. 2
The Court held that the first example quoted above is limited to shipments and does not apply to deliveries such as the deliveries in issue in Miller. The Court looked to Black s Law Dictionary definitions of to ship and shipper and determined that the products at issue were, as a matter of law, not shipped. The Court noted that a shipper is only one who ships goods to another or contracts with a carrier to transport goods to another and that a shipper cannot be the owner of the cargo shipped. The Court reasoned that Miller was not the shipper because the customer not Miller contracted with the common carrier to transport the products. Likewise, the customers were not shippers because they owned the products and could not, by definition, ship the products to themselves. Finally, the Court held that common carriers are not shippers, because a shipper, by definition, contracts with the carrier and is not itself the carrier. Since the goods were not shipped, the first example could not apply. The Court agreed with Miller that the products in the sales at issue were delivered to customers at the breweries outside of Indiana. The Court reasoned that the common carriers, arranged by the customers, were acting as the customers agents and accepted delivery from Miller for the customers. Accordingly, looking to the second example from the Department s regulations, the Court noted that the transportation of the products was the same as if the customers brought the products back to Indiana using their own trucks. The Tax Court therefore held that the products were effectively brought by the customers back to Indiana in [their] own conveyance under circumstances analogous to those analyzed by the Indiana Supreme Court s decision interpreting the phrase in his own conveyance in Indiana Department of Revenue v. Bendix Aviation Corporation, 143 N.E.2d 91 (Ind. 1957). The Tax Court rejected the Department s argument that Miller failed to factually establish an agency relationship because the Court held that the Indiana Supreme Court s analysis in Bendix rendered such a factual analysis unnecessary. The Department s Plea for Rehearing Based on Inexperience and Ignorance Falls on Deaf Ears The case took an unusual turn when the Department petitioned the Tax Court for rehearing of the summary judgment order. The Court summarily denied the Department s request. The Court first explained that, in cases protesting the Department s final determinations, the Tax Court acts as a trial court. A petition for rehearing is therefore inappropriate because the proper method to challenge a trial court s judgment is a motion to correct error under Indiana Trial Rule 59. The Court treated the petition as such a motion, noting that a motion to correct error cannot be used to raise errors that existed at trial but to which the party did not object. Rather, the motion may only raise newly discovered material evidence that could not, with reasonable diligence, have been discovered and produced at trial, or raise claims that a jury verdict is excessive or inadequate. The Court then held that none of the Department s three claims of error fit within the two categories of errors subject to correction: (1) that the Court failed to interpret Indiana 3
Code 6-3-2-2(e)(1) as mandating a destination rule instead of a place-of-delivery rule for the designation of in-state, taxable sales; (2) that the Court s decision will cause absurd consequences and violate the United States Constitution s dormant Commerce Clause; and (3) that Indiana Administrative Code title 45, rule 3.1-1-53(7) requires the inclusion of income from sales in which a purchaser hires a common carrier to pick up products. The Department admitted that it had not raised the first two arguments in its original briefing or at oral argument on the summary judgment motion. However, the Department attempted to justify the omissions by pointing to the alleged ignorance and inexperience of its attorneys handling the original briefing and argument. The Tax Court quickly dismissed these explanations, noting that a motion to correct error is not a vehicle for raising new arguments that the party did not previously raise due to a lack of research or preparation and not due to any hardship in discovering the arguments. The Tax Court further rebuked the Department, stating: The error the Department asserts is not the Court s. The Court committed no error and the Court will not correct the errors of the Department or its counsel. The Court also rejected the Department s third argument because it was clearly disposed of by the Court s decision in this case. The Court concluded that it did not commit any error in deciding Miller s motion based on the Department s own regulation and an Indiana Supreme Court decision and stated that it will not give the Department a second bite at the apple to convince it otherwise. Implications & Lessons Lesson #1: Not All States Think Alike! The first lesson to be drawn is that taxpayers should closely examine the laws of all of the states in which they are doing business since there can be fairly subtle differences in the law from state to state. The Indiana Tax Court s decision in Miller illustrates this point. The Court s holding -- that goods delivered to a common carrier arranged by the buyer for shipment to Indiana does not result in Indiana sales -- is an interesting interpretation of an apportionment statute that has been widely adopted in other states under the Uniform Division of Income for Tax Purposes Act ( UDITPA ). While Indiana may not have adopted UDITPA in its entirety, the Indiana apportionment statute in issue in Miller is identical to the sales factor under UDITPA. See UDITPA Art. IV, 16(a). Moreover, the first example from the Indiana regulation quoted above is identical to the corresponding example in the UDITPA regulations. See Multistate Tax Commission Apportionment and Allocation Regulation IV.16(a)(2). Other States and courts have concluded that under a UDITPA-like sales factor, sales of tangible personal property delivered to a common carrier hired by the buyer for shipment out of the state in question are sourced to the state in which the buyer ultimately receives the goods, not to the state in which the seller provides the goods to the common carrier. See, e.g., Hellerstein and Hellerstein, State Taxation, 9.18[1][a], FNs 702 & 703 and the cases cited therein. This so-called ultimate-destination rule rather than the place-of-delivery rule appears to be the majority view. Id. Nevertheless, as indicated by the Tax Court in 4
Miller, Indiana law appears to differ from the laws of some other states in that the second example in the Indiana regulation quoted above has no express corresponding provision in the UDITPA regulations, and the Indiana Supreme Court in Bendix previously held that a common carrier may be treated as the agent of the buyer. Lesson #2: Don t Save the Best for Last! The case also presents a harsh lesson for taxing authorities and taxpayers alike: when the Tax Court is acting as a trial court, the Court will not entertain arguments presented for the first time after the Court has already finally ruled on a refund claim. The Tax Court requires that each party marshal all of its factual and legal arguments when the case is first presented for decision. Any errors in presenting arguments at the proper time will be treated as the party s, not the Court s, and the Court will not permit a doover after it has issued its judgment regardless of the legal merit of the arguments that the party failed to present in the first instance. Despite the waiver issue, the Department has appealed the Tax Court s decision. The second lesson is not confined solely to the Indiana Tax Court in particular or to trial courts in general. Courts in other states, including appellate courts, have similarly refused to entertain arguments that were not timely raised before the trial judge, as the authors can personally attest (on the good side of the line). See, e.g., Rylander v. Bandag Licensing Corp., 18 S.W.3d 296 (Tex. App.--Austin 2000, pet. denied) (Court of Appeals refused to entertain the Comptroller s Geoffrey nexus argument because, in part, the argument was not raised at trial). Indeed, in the instant case, Indiana appellate courts will likely, consistent with precedent, hold that the Department cannot raise its new arguments on appeal because the Department waived the arguments by presenting them for the first time in a motion to correct error. See Yater v. Hancock County Bd. of Health, 677 N.E.2d 526, 530 (Ind. Ct. App. 1997) (holding that a party s vagueness challenge, which was raised for the first time in a motion to correct error, has come too late in these proceedings and is therefore waived on appeal because [a] party may not raise an issue or argue a different theory of recovery on appeal that was not presented first to the trial court and may not raise an issue for the first time in his motion to correct error ). The lesson to be drawn is don t keep that ace up your sleeve too long. This article is reprinted from the State Tax Return, a Jones Day monthly newsletter reporting on recent developments in state and local tax. Requests for a subscription to the State Tax Return or permission to reproduce this publication, in whole or in part, or comments and suggestions should be sent to Susan Ervien (214/969-3694 or shervien@jonesday.com) in Jones Day s Dallas Office, 2727 N. Harwood Street, Dallas, TX 75201. Jones Day 2006. All Rights Reserved. No portion of the article may be reproduced or used without express permission. Because of its generality, the information contained herein should not be construed as legal advice on any specific facts and circumstances. The contents are intended for general information purposes only. 5