Business world: tax add-back ruling anticompetitive for Indiana
We’ve been following for you the saga of PENN Entm’t, Inc. v. Indiana Dep’t of State Revenue, No. 22T-TA-00015, the Indiana Tax Court tax add-back case. After the parties were unable to successfully mediate, Senior Judge John G. Baker granted summary judgment for the Department of Revenue on February 28, while denying PENN Entertainment Inc.’s motion for summary judgment. As we noted, this ruling has attracted significant state-level and national attention for it potential top roil state tax policy . . . and the state economy.
PENN Entertainment, Inc. (formerly Penn National Gaming, Inc.) had challenged the Indiana Department of Revenue’s denial of its tax protest. On its 2015, 2016, and 2017 Indiana adjusted gross income tax returns, PENN reported the value of income taxes it had paid in other states (from California, Delaware, Florida, Illinois, Iowa, Kansas, Maryland, Massachusetts, Maine, Missouri, Mississippi, New Jersey, New Mexico, Nevada, Ohio, Pennsylvania, and West Virginia).
PENN had deducted those payments from its federal income tax returns, and then added the value of those taxes back to its Indiana tax base. Following an audit, the department assessed additional corporate income taxes against PENN for those same tax years, after concluding that PENN should have included in its Indiana tax base the value of certain payments made to other state governments, as required by Indiana Code § 6-3-1-3.5(b).
PENN argued that it does not have to add back those payments, claiming the department misapplied the governing statute. PENN further claimed that adding back the value of the out-of-state payments violated its rights under both the U.S. and the Indiana constitutions. Following an administrative hearing, IDOR eliminated the assessment of penalties, but otherwise denied PENN’s protest. PENN requested a rehearing, which the department denied. On November 16, 2022, PENN then filed an original tax appeal which lingered for more than a year under the former tax court regime before Judge Baker was brought in to preside.
Judge Baker largely relied upon the plain meaning of the statute and determined that the department’s proposed assessments did not violate PENN’s substantive due process rights under Indiana’s Due Course of Law clause, nor did adding back the value of out-of-state payments violate PENN’s rights under the U.S. or Indiana constitutions.
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“In summary, as to the parties’ arguments under the federal and state constitutions, the law is with the Department rather than PENN,” wrote Judge Baker, who determined that “The Department is entitled to judgment as a matter of law.”
PENN’s petition for transfer to the Indiana Supreme Court contends Judge Baker’s decision “misinterpreted the phrase ‘taxes based on or measured by income and levied at the state level by any state,’ as set forth in I.C. § 6-3-1-3.5(b)(3), by adopting the Department’s interpretation and forcing Penn to add back almost [REDACTED] in excise taxes and license fees paid to other states, when the Legislature only intended to add back income taxes – not excise taxes or license fees – and when the Department’s interpretation is inconsistent with multiple rules of statutory construction, the purpose of the add-back statute, the Department’s own regulations, a previous Tax Court decision, and the interpretation of comparable add-back statutes by other states.
Also at issue, according to PENN: “Whether the Department violated Penn’s rights under the U.S. Constitution by adding back almost all out-of-pocket, solely out-of-state, business expenses, and thereby creating a distorted ‘tax base’ that did not fairly apportion Penn’s net income.”
The final issue PENN seeks to have the Court review: “Whether the Department violated Penn’s rights under Article I, Section 12 of the Indiana Constitution by adding back almost {REDACTED] of out-of-pocket, solely out-of-state, business expenses that do not serve a substantial relation to any permissible state objective.”
More specifically, the company explains:
PENN Entertainment, Inc. (f/k/a PENN National Gaming, Inc.) (“Penn”) incurred an almost [REDACTED] loss for federal net income tax purposes for the 2015-2017 calendar years (“Years in Issue”). When computing its Indiana Adjusted Gross Income Tax (“AGIT”) for the Years in Issue, Penn added back the income taxes it paid to other states. Penn filed its Indiana returns for the Years in Issue to reflect that add back, and filed on a consistent basis in other states. The Department audited Penn, and in addition to the income taxes Penn had already added back, the Department added back almost [REDACTED] of excise taxes and license fees Penn paid to other states, determined Indiana’s “fair share” of that purported “net income” was over [REDACTED], and imposed tax on that amount. The Department’s income tax assessment for the Years in Issue exceeded that of all other states in which Penn filed, combined.
The Department claims “income,” as used in this add-back provision of the tax levying statute, means “gross receipts,” and “taxes” includes “excise taxes” as well as “license fees.” By adding back almost [REDACTED] of excise taxes and license fees Penn paid to other states on transactions occurring solely outside Indiana – out-of-pocket payments which were ordinary and necessary business expenses – the Department effectively imposed a form of gross income tax on Penn; taxed the payment of excise taxes on out-of-state transactions; and created an illusory [REDACTED] “net income” tax base.
Ice Miller LLP tax attorney Mark Richards, in PENN’s petition for review, contends that Judge Baker’s ruling “fails to articulate any legitimate interest served by requiring a business to add back excise taxes and license fees. That was not intended by our Legislature, and the Department has no authority to expand the levying statute, let alone without articulating a ‘rational reason’ our Legislature would have intended to add back those payments. Under the Indiana Constitution’s due course of law clause, Penn is entitled to protection from state overreach, and especially so when no legitimate governmental interest is served. This Court should exercise its jurisdiction and reverse to protect Penn’s rights under Indiana’s Constitution.”
PENN contends that “The Department’s Proposed Assessments reflect that for the Years in Issue, Indiana seeks to collect an aggregate add back that is, at its lowest, 139 times greater than any Other State, and at its highest, 597 times greater than any Other State (it shows the match, but the numbers are all redacted). “Similarly, the Department’s Proposed Assessments reflected that for the Years in Issue, the Department’s add backs are anywhere from 1,512 times to infinitely greater than Penn’s adjusted gross income (‘AGI’) before the add-back adjustment (again, we’re not privy to the specific details).
So, what are the implications of the Tax Court ruling in plain English? Here’s how the plaintiff below explains the impact:
Penn respectfully submits the Decision upholding the Department’s actions misinterpreted the tax levying statute, and this misinterpretation also caused the Act, as applied, to violate Penn’s rights under the U.S. and Indiana Constitutions. The Decision adversely impacts not just Penn, and not just the gaming industry, but all corporations doing business in Indiana, and puts Indiana at a competitive disadvantage with other states which only add back income taxes when calculating their state income tax shares. This Court should grant review and reverse.
This point is driven home by The Tax Foundation; the Council on State Taxation; the Indiana Chamber of Commerce; and the Indiana Legal Foundation, Inc. joining the matter as amici curiae. The Council on State Taxation and Tax Foundation file a joint brief led by Mark Loyd of Dentons Bingham Greenebaum LLP.
The brief contends that Supreme Court “review is needed to clarify the application of Indiana’s Add-back Provision for other states income taxes paid by multijurisdictional corporations.” The brief adds, “If this Court fails to take this case, amici fear that the Department will cherry pick and administratively expand the taxes and fees imposed by other states that are subject to the Add-back Provision. The lack of clear guidance will broadly impact all Indiana taxpayers, not just those engaged in the gaming industry.”
Amici suggest that “This Court should clarify what is an ‘income’ tax imposed by another state and address the fallout from Consolidation Coal Co. v. Indiana Department of State Revenue, 583 N.E.2d. 1199 (Ind. 1991), which is contrary to the text of I.C. § 6-3-1-3.5(b)(3). Several states impose state-level gross receipts taxes, excise taxes, and fees that are not based on net income on corporations subject to Indiana’s Adjusted Gross Income Tax (‘AGIT’) such that while the starting basis for the AGIT is IRC § 63, the full scope of the State law requiring the addition of other states’ income taxes imposed at the state level is far from clear.”
Amici also argue that “A proper statutory construction review is needed to address whether gaming excise taxes and fees are added back under the AGIT.”
Their bottom line: The Supreme Court should “provide guidance that the Add-back Provision is limited to income tax payments consistent with the MTC Tax Compact definition of an ‘income tax.’ ”
The Indiana Legal Foundation and the Indiana Chamber of Commerce submit a second amicus brief, this one authored by Randal J. Kaltenmark of Barnes & Thornburg LLP. This brief the risk at issue involves which state taxes must be added back to Indiana adjusted gross income to determine the Indiana adjusted gross income tax liability of a business.
When computing their Indiana adjusted gross incomes, Indiana businesses are subject to the statutory directive to addback amounts for state-level taxes based on or measured by income that they deducted from federal taxable income. I.C. § 6-3-1-3.5(b)(3) (the ‘addback statute’). The purpose of the addback statute is to put taxpayers subject only to Indiana adjusted gross income tax on equal footing with taxpayers subject to that tax and equivalent net corporate income taxes in other states.
In this case, the Indiana Tax Court held that the out-of-state gaming taxes as well as license fees based on income or measured by income must be added back for purposes of the addback provision. PENN Entertainment, Inc. (f/k/a PENN National Gaming, Inc.) v. Indiana Dep’t of State Revenue, 230 N.E. 3d 385, 395 (Ind. Tax Ct. 2024) (the ‘Decision’) ….
ILF and the Chamber recognize that the Decision’s holding rests on its view that the particular gaming taxes and license fees at issue were based on or measured by income for purposes of the addback provision. Id. ILF and the Chamber respectfully submit that some language in the Decision is mistaken or potentially misleading, and warrants correction and clarification.”
More specifically, according to the Chamber and ILF, the Tax Court decision’s “singular focus on income blurs the lines of cost categories such that they cease to exist altogether. But it would be extraordinarily burdensome – and would advance no statutory or other purpose – to require Indiana businesses to addback all taxes and fees rather than just those taxes that substitute for taxes on net income. For some Indiana taxpayers, as in the case here, adding back all taxes and fees measured by income would turn the Indiana adjusted gross income tax into a tax on gross income. Adding back fees and taxes to such a degree that such taxpayers are paying income tax even though they experienced an actual net loss for the year is not a result intended by our legislature.”
“Further,” the Chamber and ILF contend, “adding back all taxes as well as fees measured by income not only burdens Indiana businesses, but also threatens the public interest by creating significant headwinds for Indiana’s economic development initiatives, which involve efforts to create a favorable business tax climate in Indiana. Adding back all taxes and fees measured by income, as the Decision suggests, is contrary to the addback provisions of most states thereby making Indiana an outlier relative to those states. This unwanted distinction imperils Indiana’s favorable tax ranking among those states.”
Their bottom line: “the Court should clarify that the measure of a tax is not the sole categorical condition for determining whether a tax is subject to add back.”
On June 19, the Supreme Court ranted a request from the Office of the Attorney General for additional time to file its response, enlarging the due date from June 27 to July 29.