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The University of Phoenix, Inc. v. Indiana Department of State Revenue

Tax Court of Indiana

November 30, 2017

THE UNIVERSITY OF PHOENIX, INC., Petitioner,
v.
INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

         ON APPEAL FROM A FINAL DETERMINATION OF THE INDIANA DEPARTMENT OF STATE REVENUE

          ATTORNEYS FOR PETITIONER: RANDAL J. KALTENMARK ZIA MOLLABASHY BARNES & THORNBURG LLP Indianapolis, IN JENNY A. AUSTIN THEODORE R. BOTS BAKER & MCKENZIE LLP Chicago, IL SCOTT L. BRANDMAN BAKER & MCKENZIE LLP New York, NY

          ATTORNEYS FOR RESPONDENT: CURTIS T. HILL, JR. INDIANA ATTORNEY GENERAL WINSTON LIN PARVINDER K. NIJJAR DEPUTY ATTORNEYS GENERAL Indianapolis, IN

          WENTWORTH, J.

         The University of Phoenix, Inc. challenges the Indiana Department of State Revenue's assessments of adjusted gross income tax (AGIT) for the 2009, 2010, and 2011 tax years. The question is whether the University's online campus revenue can be sourced to Indiana based on a student's Indiana billing address. The Court finds that it cannot.

         FACTS AND PROCEDURAL HISTORY

         The University, a wholly-owned subsidiary of Apollo Education Group, Inc., is a private, accredited education service provider headquartered in Phoenix, Arizona. (Second Stip. of Facts ("Second Stip.") ¶¶ 1, 4, 35.) The University's educational model is directed toward students attempting to balance the demands of taking college classes with the demands of work and/or family life. (Trial Tr. at 32-33, 35-36, 80-81, 114-15.) The University offers associate's, bachelor's, master's, and doctoral courses and degrees in a variety of fields at both its online campus and its ground campus locations throughout the United States. (Second Stip. ¶ 34; Trial Tr. at 31.)

         Online campus students participate in academic activities online, such as class meetings and study groups, discussions with instructors or fellow students, online research, accessing course materials, paying for courses, getting grades, and requesting transcripts. (Second Stip. ¶ 37.) In addition, online campus students are permitted to access facilities and resources at the ground campus locations. (Second Stip. ¶ 38.)

         During the years at issue, the University's online campus offered classes year-round to students in "sections" that were newly launched weekly. (Second Stip. ¶ 41.) Students could access the sections at any time or location. (Trial Tr. at 35-36.) Online campus associate degree class sections are nine weeks long, and students enroll in one or two courses at a time. (Second Stip. ¶ 40.) The other online class sections are five to eight weeks long, and students complete them one at a time - sequentially rather than concurrently. (Second Stip. ¶ 40.) Students pay for each course as they attend them. (Second Stip. ¶ 42.)

         The University's online educational services fall within four general categories: the online eCampus platform, online faculty instruction, curriculum development, and graduation assistance. (See generally Second Stip. ¶¶ 37, 48, 67, 72; Trial Tr. at 233-34; Pet'r Trial Ex. 1 at 4.) First, the University's eCampus provided a web-based platform for students to access its educational services online. (Second Stip. ¶¶ 37, 39.) The eCampus platform contained student resources and the online classroom environment - where students attended class, participated in discussions and projects, communicated with faculty, turned in assignments, and reviewed grades. (Second Stip. ¶¶ 37, 39.) The eCampus platform was developed and maintained from locations in Arizona, Washington, and California, but during 2011, one individual performed services related to the eCampus from Indiana. (Second Stip. ¶ 20, Ex. S at 13; Trial Tr. at 460-61.)

         Second, the University provided online classroom instruction taught by faculty members to the students enrolled in each class section. (Second Stip. ¶¶ 41, 72-74; Trial Tr. at 180-82, 289-90.) Faculty members were able to teach online course sections from any location. (Trial Tr. at 181.) During each of the years at issue, the University had more than 1, 500 online campus faculty members located in Arizona while just 293 online faculty members were located in Indiana in 2009, 354 in 2010, and 350 in 2011. (Second Stip. ¶ 20, Ex. S at 2-3, 7-8, 12-13.)

         Third, the University had a curriculum team that centrally developed the online curricula to maintain consistency across course sections. (Trial Tr. at 151-56.) The curriculum development team created each course section's online classroom and posted all the course materials online. (Trial Tr. at 172-74.) All the University's curriculum development activities were performed outside of Indiana, primarily in Arizona, during the years at issue. (Trial Tr. at 155.)

         Finally, the University assigned a graduation team to each student to assist them in completing their degree program. (Second Stip. ¶ 48; Trial Tr. at 58-59, 86-91.) Each team included an enrollment representative, an academic advisor, and a financial advisor. (Second Stip. ¶ 48; Trial Tr. at 58-62, 86-91.) The enrollment representative maintained contact with a student through their first two courses to help them with classroom participation, attendance, study habits, and time management. (Second Stip. ¶ 50; Trial Tr. a t 56-58, 86-87.) The academic advisor helped the student manage program requirements, policies, and course scheduling. (Second Stip. ¶¶ 57-59; Trial Tr. at 58-59; 84, 90-91.) The financial advisor ensured that the student had access to the funding necessary to pay the cost of obtaining a degree. (See Second Stip. ¶¶ 63-65; Trial Tr. at 129-31.) More than 6, 000 graduation team members who assisted online campus students were located in Arizona and only three were located in Indiana in 2009, one in 2010, and none in 2011. (See Second Stip. ¶ 20, Ex. S at 2-3, 7-8, 12-13; Trial Tr. at 85-86, 118.)

         The University filed Form IT-20 Indiana Corporation Adjusted Gross Income Tax Returns for each of the years at issue. (Second Stip. ¶¶ 11-16, Exs. O-Q.) In computing its Indiana adjusted gross income (AGI), the University sourced 100 percent of its receipts attributable to its Indiana ground campus students to Indiana, but sourced none of its receipts from its online campus students to Indiana. (Second Stip. ¶¶ 17-18.)

         Upon audit, the Department issued its report stating that the University should have sourced all receipts from online students with an Indiana billing address to Indiana. (Second Stip. ¶¶ 21-25, Ex. T at 4.) Accordingly, the Department issued Proposed Assessments for additional AGIT liabilities, interest, and penalties. (Second Stip. ¶¶ 22, 24, Ex. U.)

         On June 20, 2013, the University protested the Proposed Assessments. (Second Stip. ¶ 26.) On September 11, 2014, the Department denied the University's protest of the additional AGIT assessments, but abated the penalties for each of the years at issue. (Second Stip. ¶ 29, Ex. V.)

         On November 7, 2014, the University filed its original tax appeal. The Court held the trial from February 28 through March 1, 2017, and heard oral argument on June 22, 2017. Additional facts will be supplied if necessary.

         STANDARD ...


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