ATTORNEYS FOR PETITIONER: RANDAL J. KALTENMARK, ZIAADDIN
MOLLABASHY, BARNES & THORNBURG LLP, Indianapolis, IN.
FOR RESPONDENT: GREGORY F. ZOELLER, ATTORNEY GENERAL OF
INDIANA, JESSICA R. GASTINEAU, DEPUTY ATTORNEY GENERAL,
ORDER ON PARTIES' CROSS-MOTIONS FOR SUMMARY
Blood Wentworth, Judge.
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. The dispositive issue is whether the
Department's adjustments to Columbia Sportswear's net
for each of the years at issue were proper. The Court
finds that they were not.
AND PROCEDURAL HISTORY
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.)
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.)
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.
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.
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).
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, 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).
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 (Or. 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))).
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. (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. (See, e.g.,
Resp't Reply Pet'r Resp. Br. (" Resp't Reply
Br." ) at 8-9; Hr'g Tr. at 34-37.)
Code § 6-3-2-2(l)(4)
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.