Columbia Sportswear U.S. Corp. v. Ind. Dep't of State Revenue

45 N.E.3d 888

COLUMBIA SPORTSWEAR USA CORPORATION, Petitioner

v.INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10–1104–TA–00032.

Tax Court of Indiana.

Dec. 18, 2015.

Randal J. Kaltenmark, Ziaaddin Mollabashy, Barnes & Thornburg LLP, Indianapolis, IN, Attorneys for Petitioner.

Gregory F. Zoeller, Attorney General of Indiana, Jessica R. Gastineau, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

ORDER ON PARTIES' CROSS–MOTIONS FOR SUMMARY JUDGMENT

WENTWORTH, J.

Columbia Sportswear USA Corporation challenges the Indiana Department of State Revenue's assessment of adjusted gross income tax (AGIT) for the 2005, 2006, and 2007 tax years (the “years at issue”). The matter is currently before the Court on the parties' cross-motions for summary judgment.¹ The dispositive issue is whether the Department's adjustments to Columbia Sportswear's net income for each of the years at issue were proper.² The Court finds that they were not.

FACTS AND PROCEDURAL HISTORY

The following facts are not in dispute. Columbia Sportswear, an Oregon corporation, was formed in October of 2003 to sell and distribute throughout the United States, including Indiana, the sporting/hiking apparel, footwear, and related accessories/equipment (collectively, “Products”) of its parent, Columbia Sportswear Company, Inc. (CSC), and its affiliate, Mountain Hardwear, Inc. (See Second Stipulation of Facts (“Second Stip.”) ¶¶ 3–12; Pet'r Des'g Evid., App. E at 661 ¶¶ 32–34.) CSC engaged an independent accounting firm to conduct a Transfer Pricing Study to determine arm's-length pricing for its and Mountain Hardwear's 2005, 2006, and 2007 sales of the Products to Columbia Sportswear (the “Intercompany Transactions”). (See Second Stip. ¶ 16, Exs. 19–21; Pet'r Des'g Evid., App. F at 879–80 ¶¶ 27, 29.)

During each of the years at issue, Columbia Sportswear filed an Indiana corporate AGIT return on a separate company basis reporting that it was entitled to an overpayment credit. (See First Stipulation of Facts (“First Stip.”) ¶ 1, Exs. 2–4). In August 2008, Columbia Sportswear filed two amended returns that requested a refund of AGIT paid for the 2005 and 2006 tax years only. (See First Stip. ¶ 2, Exs. 6–7.) The Department subsequently audited Columbia Sportswear and determined that it needed to adjust Columbia Sportswear's net income pursuant to Indiana Code § 6–3–2–2(l )(4) and Indiana Code § 6–3–2–2(m) because the Intercompany Transactions had distorted Columbia Sportswear's Indiana source income. (See First Stip. 3–4, Ex. 8 at 7–10.) On September 24, 2010, the Department issued Proposed Assessments for the years at issue to Columbia Sportswear, assessing it with an additional $948,369.69 in AGIT, penalties, and interest. (See First Stip. ¶¶ 5–6, Exs. 9–11.) Columbia Sportswear protested, and after conducting a hearing, the Department issued its final determination upholding the assessments of additional AGIT and interest only. (See First Stip. ¶¶ 7–8, Exs. 12–13.)

On April 28, 2011, Columbia Sportswear initiated an original tax appeal. On March 5, 2013, the Department filed its motion for summary judgment and designated, among other things, the Proposed Assessments as evidence. On April 22, 2013, Columbia Sportswear filed a cross-motion for summary judgment. The Court held a hearing on the parties' motions on July 31, 2013. Additional facts will be supplied as necessary.

STANDARD OF REVIEW

Summary judgment is proper when the designated evidence demonstrates that no genuine issues of material fact exist and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C). When the Department moves for summary judgment, it may make a prima facie case that there is no genuine issue of material fact regarding the validity of an unpaid tax by properly designating its proposed assessments as evidence. Indiana Dep't of

State Revenue v. Rent–A–Center E., Inc.

(RAC II ), 963 N.E.2d 463, 466–67 (Ind.2012). “The burden then shifts to the taxpayer to come forward with sufficient evidence demonstrating that there is, in actuality, a genuine issue of material fact with respect to the unpaid tax[.]” Id. at 467.

LAW

Each corporate taxpayer with Indiana adjusted gross income derived from sources within Indiana is required to report its AGIT liability on a separate company basis. Ind.Code § 6–3–2–1(b) (2005) (amended 2011); see also Kohl's Dep't Stores, Inc. v. Indiana Dep't of State Revenue, 822 N.E.2d 297, 301 (Ind.Tax Ct.2005). The computation of this liability “begins with federal taxable income, to which [the] taxpayer makes expressly enumerated adjustments under Indiana Code § 6–3–1–3.5(b) [.]” Indiana Dep't of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 581 (Ind.2014).

Upon determining its Indiana tax base in this manner, a taxpayer doing business in more than one state must next determine what portion of its adjusted gross income is derived from sources within Indiana. See I.C. § 6–3–2–1(b). This determination requires the taxpayer to apply the applicable allocation and apportionment rules set forth in Indiana Code § 6–3–2–2(a) –(k) (the “Standard Sourcing Rules”). See Ind.Code § 6–3–2–2(a) –(k) (2005) (amended 2006). See also RAC II, 963 N.E.2d at 465. The Standard Sourcing Rules provide that a taxpayer's “business income is apportioned between Indiana and other states using a three-factor formula,³ while [its] nonbusiness income is allocated to Indiana or another state.” See May Dep't Stores Co. v. Indiana Dep't of State Revenue, 749 N.E.2d 651, 656 (Ind.Tax Ct.2001) (footnote added and footnotes omitted). See also I.C. § 6–3–2–2(b) –(k).

In the event that the Department determines, as it has here, that the use of the Standard Sourcing Rules does not fairly reflect the taxpayer's Indiana source income, it may apply one of the alternative allocation and apportionment methods under Indiana Code § 6–3–2–2(l ) through (p) (the “Alternative Apportionment Rules”). See I.C. § 6–3–2–2(l ) –(p). The Department will, however, only

depart from use of the standard [sourcing] formula [ ] if the use of such formula works a hardship or injustice upon the taxpayer, results in an arbitrary division of income, or in other respects does not fairly attribute income to this state or other states. It is anticipated that these situations will arise only in limited and unusual circumstances (which ordinarily will be unique and nonrecurring) when the standard apportionment provisions produce incongruous results.

45 Ind. Admin. Code 3.1–1–62 (2005). See also Twentieth Century–Fox Film Corp. v. Dep't of Revenue, 299 Or. 220, 700 P.2d 1035, 1039 (1985) (stating that “some alternative method must be available to handle the constitutional problem[s] as well as the unusual cases” (citing William J. Pierce, The Uniform Division of Income for State Tax Purposes, 35 Taxes 747, 781 (1957))).

ANALYSIS

Columbia Sportswear, in response to the Department's prima facie case that its assessments are correct, contends that the Department's adjustments were improper because neither Indiana Code § 6–3–2–2(l )(4) nor Indiana Code § 6–3–2–2(m) authorized the Department to increase its net income tax base for purposes of assessing Indiana AGIT.⁴ (See Pet'r Br. Opp'n Resp't Mot. Summ. J. (“Pet'r Br.”) at 6–16.) The Department, on the other hand, claims that both subsections of the statute authorized its adjustments to Columbia Sportswear's net income.⁵ (See, e.g., Resp't Reply Pet'r Resp. Br. (“Resp't Reply Br.”) at 8–9; Hr'g Tr. at 34 –37.)

Indiana Code § 6–3–2–2(l )(4)

The undisputed material facts establish that the Department sought to “adjust the business income [of Columbia Sportswear that would] be apportioned to Indiana ... [to] give a more realistic view of the income and expense figures of the entire [consolidated] group[.]” (First Stip., Ex. 8 at 9.) The Department's adjustments consisted of the following steps:

1) Determining the average net profit ratio of the federal consolidated group for each of the years at issue by dividing the group's gross receipts by its net income;

2) Recalculating Columbia Sportswear's net income for each of the years at issue by multiplying Columbia Sportswear's gross receipts by the Step 1 ratios; and then,

3) Ascertaining the additional amount of Columbia Sportswear's net income to be attributed to Indiana for each of the years at issue by subtracting Columbia Sportswear's federal taxable income as reported on each year's Pro Forma from the applicable amount in Step 2.

(See First Stip., Ex. 8 at 6–9.) Thereafter, the Department did not recalculate Columbia Sportswear's apportionment percentage, but instead, applied the original apportionment percentage from its Indiana AGIT returns to the applicable Step 3 amount. (Compare First Stip., Ex. 2 at 1, line 15(d), Ex. 3 at 1, line 15(d), and Ex. 4 at 1, line 15(d) with Ex. 8 at 12–14.)

The Department maintains that Indiana Code § 6–3–2–2(l )(4) authorized its adjustments because it merely “allocated” back the sales that Columbia Sportswear improperly sent away from Indiana to ensure that the Department had “an accurate starting point” for determining Columbia Sportswear's AGIT liability. (See Hr'g Tr. at 28 –29.) The Department's use of the word “allocated,” however, simply refers to the word's ordinary meaning to distribute or attribute, not to its technical meaning under Indiana Code § 6–3–2–2(l )(4) to divide a taxpayer's tax base among the states in which it does business. Compare Webster's Third New Int'l Dictionary 57 (2002 ed.) (defining “allocate” as “to give (a share of money, land, or responsibility) to a person”) with Hunt Corp. v. Dep't of State Revenue, 709 N.E.2d 766, 772 n. 15 (Ind.Tax Ct.1999) (defining the concepts of allocation and apportionment of the tax base under Indiana Code § 6–3–2–2(l ) ) and Ind.Code § 1–1–4–1(1) (2005) (providing that “[t]echnical words and phrases having a peculiar and appropriate meaning in law shall be understood according to...