Would’ve, Could’ve, but Didn’t – No Nexus for Taxpayer but related Sci-Fi Gaming Company would have been hit with Indiana income tax and sales tax says Department of Revenue

Right theory, wrong taxpayer – at least according to the Indiana Department of Revenue in a letter of findings (a final determination of a taxpayer’s protest of a proposed assessment) released in February.  In the ruling, a limited liability company (called generically the “Entity”) escaped its proposed assessments for the 2004 to 2009 tax years because it did not exist during that time.  The company was not formed until January of 2010.  Because it did not exist, it had no nexus with the Hoosier State.  But a related company (“Retail Merchant” in the decision, but I will call it “GameCo”) would have been subject to adjusted gross income tax had the Department elected to assess it, the Department concluded.   GameCo is described as a “leader in the Sci-Fi Gaming Industry and mostly sold its games to distributors and retailers.  The games were sold during an Indiana convention every year (presumably “GenCon” – which I understand is a “blast” and not just because people dress up like Han Solo).  And GameCo sent most of its employees to a “retailer summit” hosted in Indiana for several days each year during the audit period. 

Entity argued that neither it nor GameCo had nexus under 15 U.S.C. § 381 (“Public Law 86-272”) for income tax purposes.  Under Public Law 86-272, the Department explained, “a state may not impose an income tax on income derived from business activities within that state unless those activities exceed the mere solicitation of sales.”  The Department quoted a 1981 Indiana Supreme Court decision, where the Court explained:  “We also believe that Congress perceived ‘solicitation’ as embodying ‘sundry activities so long as those activities [are] closely related to the eventual sale of a product.’  Finally, when a corporate representative performs an ‘act of courtesy’ in order to accommodate a customer, he has not ventured beyond the realm of ‘solicitation.'” Citing Indiana Dep’t. of Revenue v. Kimberly-Clark Corp., 416 N.E.2d 1264, 1268 (Ind. 1981) (internal quotes omitted).

According to the Department, Entity did not “elaborate on the particular dimension of trivial non-solicitation contact with a state that purportedly does not establish nexus.”  As noted above, however, that turned out to be irrelevant to the Department’s decision.  A taxpayer cannot be taxed for years it did not exist, the Department reasoned!  But the Department emphasized that GameCo’s Indiana activities – a “large presence” and “significant sales” at the annual convention – exceeded “mere solicitation” and were more than de minimis or trivial non-solicitation activities.   

The Department’s final determination on this income tax assessment can be viewed at http://1.usa.gov/GWD6Tw.  The Department also released a separate ruling finding that Entity did not owe sales tax for the same audit period.  Again, Entity did not exist and made no retail sales.  But the Department observed that, under the U.S. Supreme Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the totality of facts demonstrated that GameCo’s “actions represent a substantial nexus with Indiana.”  That ruling can be viewed at http://1.usa.gov/GYaTWf

There is no indication in the ruling why the Entity was assessed and the Retail Merchant was not.  Perhaps the auditor was too engrossed in a game of Dungeons and Dragons or was befuddled by an elaborate magical spell.

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