ATTORNEYS FOR PETITIONER: FRANCINA A. DLOUHY, DANIEL R. ROY, JON B. LARAMORE, FAEGRE BAKER DANIELS, LLP, Indianapolis, IN.
ATTORNEYS FOR RESPONDENT: GREGORY F. ZOELLER, ATTORNEY GENERAL OF INDIANA; ANDREW W. SWAIN, CHIEF COUNSEL, TAX SECTION; JESSICA E. REAGAN, JOHN D. SNETHEN, DEPUTY ATTORNEYS GENERAL, Indianapolis, IN.
ORDER ON PARTIES' CROSS-MOTIONS FOR SUMMARY JUDGMENT
Martha Blood Wentworth, Judge.
Rent-A-Center East, Inc. (RAC East) challenges the Indiana Department of State Revenue's assessment of adjusted gross income tax (AGIT) for the 2003 tax year. The matter is currently before the Court on the parties' cross-motions for summary judgment. The dispositive issue is whether the Department properly determined that RAC East must file a combined income tax return with two of its corporate affiliates for the 2003 tax year. The Court finds that the Department's determination was not proper.
FACTS AND PROCEDURAL HISTORY
The following facts are not in dispute. Renter's Choice, Inc. (n/k/a RAC East) was formed in 1986 to operate retail stores offering home electronics, appliances, computers, furniture, and accessories to customers under flexible rent-to-own agreements. (See Resp't Des'g Evid., Ex. N ¶ 2, Ex. A at 4.) In 1998, Renter's Choice acquired its largest rent-to-own competitor with the trademarks and trade names associated with the " Rent-A-Center" brand (RAC Marks), changed its name to Rent-A-Center, Inc. (RAC Inc.), and transferred the RAC Marks to its new affiliate, Advantage Companies, Inc. (Advantage). (See Resp't Des'g Evid., Ex. N ¶ 5, Ex. A at 4.)
RAC Inc. and its affiliates subsequently reorganized their corporate structure whereby RAC Inc. assumed the name RAC East and Advantage changed its name to Rent-A-Center West, Inc. (RAC West). (See Resp't Des'g Evid., Ex. N ¶ ¶ 5-6.) In addition, two new entities were formed, Rent-A-Center Holdings, Inc. (RAC Holdings) and Rent-A-Center Texas, LP (RAC Texas). (See Resp't Des'g Evid., Ex. N ¶ 6.) As part of the reorganization, RAC East (f/k/a RAC Inc.) engaged an independent accounting firm to conduct a Transfer Pricing Study to determine arm's-length pricing for royalties it would pay to RAC West and management fees it would pay to RAC Texas (the Intercompany Transactions). (See Resp't Des'g Evid., Ex. N ¶ ¶ 16-21, Ex. A at 1, 3.)
During 2003, RAC East had 11,359 employees and operated 1,932 rent-to-own stores in the Midwest and eastern United States, including 106 stores in Indiana. (See Resp't Des'g Evid., Ex. N ¶ ¶ 3, 7.) RAC West owned and licensed the RAC Marks, operated 437 rent-to-own stores in the western United States, and employed 2,537 individuals. (See Resp't Des'g Evid., Ex. N ¶ ¶ 11-13.) RAC Texas operated
278 rent-to-own stores in Texas and employed 1,994 individuals, including the executive management team. (See Resp't Des'g Evid., Ex. N ¶ ¶ 14-15.) RAC West and RAC Texas were not qualified to do business in Indiana, did not have any employees in Indiana, and did not own or use any of their capital, plant, or other property in Indiana. (See Resp't Des'g Evid., Ex. N ¶ ¶ 8, 10.)
For the 2003 tax year, RAC East filed an Indiana corporate AGIT return on a separate company basis reporting that it owed no tax. (See Resp't Confd'l Des'g Evid., Ex. J at 1-4.) The Department audited RAC East for the 2001, 2002, and 2003 tax years, proposing an additional $513,272.60 in AGIT, penalties, and interest for the 2003 tax year based on its determination that RAC East should have filed a combined income tax return with RAC West and RAC Texas (the RAC Group). (See Resp't Des'g Evid., Ex. N ¶ ¶ 22-25, 28, 33.) RAC East protested, and after conducting a hearing, the Department issued its final determination upholding the audit results. (See Resp't Des'g Evid., Ex. N ¶ ¶ 29-31.)
On December 12, 2006, RAC East initiated an original tax appeal. On March 20, 2009, the Department filed its motion for summary judgment and designated, among other things, its proposed assessments as evidence. On June 3, 2009, RAC East filed a cross-motion for summary judgment. On May 27, 2011, after holding a hearing, the Court granted summary judgment to RAC East stating the Department had not designated facts sufficient to make a prima facie case. See Rent-A-Center East, Inc. v. Indiana Dep't of State Revenue (RAC I), 952 N.E.2d 387, 390-92 (Ind.Tax Ct. 2011), rev'd, 963 N.E.2d 463 (Ind. 2012). The Department subsequently sought review with the Indiana Supreme Court. On March 9, 2012, the Indiana Supreme reversed this Court's decision in RAC I, explaining that " as a starter" the Department needs nothing more than its motion and " notice of proposed assessment [to] constitute a prima facie showing -- sufficient to satisfy Trial Rule 56(C) -- that there is no genuine issue of material fact with respect to the validity of the unpaid tax[.]" See Indiana Dep't of State Revenue v. Rent-A-Center East, Inc. (RAC II), 963 N.E.2d 463, 465-67 (Ind. 2012). Consequently, the Supreme Court remanded the case for the Court to consider the parties' motions on their merits. Id. at 467. 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 makes 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. RAC II, 963 N.E.2d 466-67. " 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. Cross-motions for summary judgment do not alter this standard. Horseshoe Hammond, LLC v. Indiana Dep't of State Revenue, 865 N.E.2d 725, 727 (Ind.Tax Ct. 2007), review denied.
Indiana taxes the portion of a corporation's adjusted gross income that is
derived from sources within Indiana. Ind. Code § 6-3-2-1(b) (2003) (amended 2004). Each corporation with Indiana adjusted gross income must report its AGIT liability on a separate company basis according to the applicable allocation and apportionment rules set forth in Indiana Code § 6-3-2-2(a)-(k) (Standard Sourcing Rules). See RAC II, 963 N.E.2d at 465; RAC I, 952 N.E.2d at 389. While separate filing is the default filing method in Indiana, in limited instances, the Department may grant prospectively or require retroactively that a taxpayer determine its AGIT liability using an alternative method to that provided by the Standard Sourcing Rules:
If the allocation and apportionment provisions of this article do not fairly represent the taxpayer's income derived from sources within the state of Indiana, the taxpayer may petition for or the department may require, in respect to all or any part of the taxpayer's business activity, if reasonable:
(1) separate accounting;
(2) the exclusion of any one (1) or more factors;
(3) the inclusion of one (1) or more additional factors which will fairly represent the taxpayer's income derived from ...