Indiana: Sales of Information Services Deemed Attributable to State
In Indiana Department of Revenue Letter of Findings (“LOF”) No. 02-20130238 (Sept. 25, 2013), an out-of-state business was required to assign to Indiana receipts from providing information services to Indiana customers for purposes of the sales factor apportionment formula.
The taxpayer reported its Indiana sales figures based on cost of performance and excluded all of its “information services” revenues received from Indiana customers from its Indiana numerator because the taxpayer believed that the money earned from its Indiana clients should be sourced to its out-of-state location. However, the Department of Revenue performed an audit, disagreed with the taxpayer’s method of reporting its Indiana source income, and issued an assessment of additional tax.
The taxpayer explained that the direct costs associated with the income producing activity giving rise to the service receipts were staffing and information technology, which costs were both incurred within and without Indiana. The taxpayer asserted that a majority of the direct costs were incurred outside of Indiana. Upon audit, the department believed that the taxpayer’s income attributable to information services should be apportioned to Indiana since the taxpayer received such revenues only because the information was “rendered” by the taxpayer to its Indiana customers and such information would not have any value unless it was offered to and accepted by its Indiana customers.
According the LOF, under Indiana regulation, for sales of most intangible property, if the income-producing activity giving rise to the sales is performed within and without the state, then receipts from the activity are attributable to Indiana if the greater proportion of the income-producing activity is performed within the state, based on costs of performance. The LOF determined that the taxpayer earned its money because it conducted financial research and then sold the results of its research to Indiana customers; therefore, it found that the money earned from those Indiana sales transactions was Indiana-sourced and must be included in the taxpayer’s sales factor apportionment formula.