I. Introduction/Overview Of The Organization And Administration: I.C. § 6-8.1-1-1 et seq., 45 I.A.C. 15-1-1 et seq.

        The Indiana Department of State Revenue (the "Department") is a state agency existing for the purpose of, and with the primary responsibility for, "administering, collecting and enforcing" the taxes placed under its authority. I.C. § 6-8.1-2-1. The "listed taxes" that the Department is responsible for administering, collecting and enforcing include: the gross income tax, the state gross retail and use tax, the adjusted gross income tax, the supplemental net income tax, the financial institutions tax, and various special taxes on fuel, gambling, cigarettes, etc. I.C. § 6-8.1-1-1. The Department has the authority to promulgate rules relating to the administration of the tax laws and to interpret the Indiana tax statutes. I.C. § 6-8.1-3-3; 45 I.A.C. 15-3-2.

II. Resolving An Issue At The Administrative Level.

A. The taxpayer raises the issue.

        A taxpayer can request advice from the Department before taking a particular course of action. The Department may offer advice in the form of oral statements, informational letters, or letters of advice, all of which are not binding on the Department. 45 I.A.C. 15-3-2(e). However, the taxpayer can seek a ruling request in writing. If issued, the Department generally will be bound by the response with respect to the taxpayer who requested the information. 45 I.A.C. 15-3-2(d)(1).

B. The Department raises the issue. I.C. § 6-8.1-5-1, et seq.

1. The audit. I.C. § 6-8.1-3-12.

        A tax issue may, of course, arise during an audit. In carrying out its responsibility to administer, collect and enforce the tax laws, the Department may audit returns, investigate, subpoena evidence and witnesses, and question witnesses under oath. I.C. § 6-8.1-3-12(b), 45 I.A.C. 15-3-5. The auditor can enforce the Department's audit and investigatory powers by filing a petition with any court of competent jurisdiction seeking a court order compelling compliance. The court may, in turn, punish a taxpayer for contempt if the taxpayer fails to comply with the court's order. I.C. § 6-8.1-3-12(e).

        In planning for the audit, the taxpayer may wish to take the following steps:

(a) Prepare for the audit before the initial meeting with the auditor (review prior audit issues, determine company spokesperson, identify likely issues, and consider strategies).

(b) Establish audit ground rules (scope of audit (type of tax, years involved), procedures to be used, records to be reviewed, time frame, use of telephones/photocopiers, security measures, document photocopying).

(c) Protect sensitive/privileged documents.

(d) Control access to employees and facilities.

(e) Do not automatically sign waivers.

(f) Request closing conference (explanation of each issue, records reviewed, methods used, amounts in dispute).

2. Statutes of Limitation on Proposed Assessment. I.C. § 6-8.1-5-2(a).

        Generally, the Department has three years in which to issue a notice of proposed assessment. This three year period runs from the latest of the following dates: (a) the date the return is filed, (b) the due date of the return, or (c) the end of the calendar year which contains the taxable period for which the return is filed in the case of the state gross retail or use tax, the gasoline tax, the special fuel tax, the motor carrier fuel tax, the oil inspection fee, or the petroleum severance tax.

        However, the Department will not be limited to this three year period in certain circumstances. First, the Department may issue its proposed assessment at any time if a person fails to file a return, or files a fraudulent, unsigned, or substantially blank return. I.C. § 6-8.1-5-2(d). Also, if a person files an adjusted gross income tax, supplemental net income tax, county adjusted gross income tax, county option income tax, or financial institutions tax return which understates the income by at least 25%, the Department may issue the proposed assessment within six years instead of three. I.C. § 6-8.1-5-2(b).

3. Protesting the auditor's findings.

(a) Filing a Protest: I.C. § 6-8.1-5-1, 45 I.A.C. 15-5-2.

        A taxpayer has sixty days from the date a notice of proposed assessment is mailed to file a Protest of the proposed assessment with the Department. The Protest must be in writing and must request a hearing if desired.

(b) Hearing: I.C. § 6-8.1-5-1, 45 I.A.C. 15-5-3.

        If a taxpayer requests a hearing, the Department shall provide one. Generally, it is advisable to request a hearing and provide a legal memoranda addressing the facts, issues and arguments prior to the hearing. The Department will then conduct an informal hearing and should consider all of the relevant evidence and legal authority provided by the taxpayer and available to the Department. The taxpayer can waive its right to a hearing.

(c) Written findings:  I.C. § 6-8.1-5-1(e), 45 I.A.C. 15-5-4.

        As a practical matter, the taxpayer's Protest will not be resolved at the hearing. Rather, the Department will issue a letter of findings ("LOF") after the hearing. The Department has 60 days to do so. I.C. § 6-8.1-5-1(e). See, City Securities, below. The LOF will either sustain the assessment in its entirety, or sustain the Protest partially or in its entirety.

(d) Settlement:  I.C. § 6-8.1-3-17.

        Once an original tax appeal has been filed with the Indiana Tax Court, the Department has the authority to settle a tax liability dispute where the amount in contention is twenty-five thousand dollars or less. Effective January 1, 1998, before an original tax appeal is filed with the Indiana Tax Court, the Department may settle any such tax liability dispute (presumably irrespective of the dollar amount) if a substantial doubt exists as to: (i) the constitutionality of the tax under the Constitution of the State of Indiana, (ii) the right to impose the tax, (iii) the correct amount of tax due, (iv) the collectability of the tax, or (v) whether the taxpayer is a resident or nonresident of Indiana.

(e) Rehearing:  I.C. § 6-8.1-5-1, 45 I.A.C. 15-5-5.

        After receipt of a LOF, the taxpayer may petition for a rehearing before the Department. Rehearing must be sought within thirty days from the date on which the LOF was issued. Rehearings will be granted only in unusual circumstances. Specifically, the taxpayer must allege that certain material facts or circumstances were not presented or were not considered in the original proceeding.

III. Claim For Refund. I.C. § 6-8.1-9-1.

        A. In General.

        If a taxpayer discovers it has overpaid taxes, it may file a Claim for Refund. The Claim for Refund must be filed within three years of the later of the following: (1) the due date of the return, or (2) the date of the payment of tax. Effective January 1, 1999, if a taxpayer's federal income tax liability for a taxable year is modified by the Internal Revenue Service, and the modification would result in a reduction of the tax legally due, the due date by which the taxpayer must file a Claim for Refund with the Department is the later of the following: (1) the date as determined in the previous sentence, or (2) the date that is six months after the date on which the taxpayer is notified of the modification by the Internal Revenue Service.

        B. Unresolved Protest Issues.

        After a Protest is denied, the taxpayer has two options. First, the taxpayer may pay the assessment and file a timely Claim for Refund with the Department before pursuing additional means of relief. The benefit of this approach is that once the assessment is paid, interest no longer accrues against the taxpayer (rather, interest accrues on any refund).

        Alternatively, if a taxpayer disagrees with a decision in a LOF, the taxpayer may appeal the decision to the Indiana Tax Court. The disadvantage of this approach is that it will not stay the collection procedures (or the accrual of interest) against the taxpayer.

Note: The Tax Court confirmed the availability of these two options in City Securities, discussed below.

IV. Tax Court.

        A. In General.

        If a taxpayer wishes to contest the Department's decision on a Protest or refund claim, the taxpayer must file suit in the Indiana Tax Court, which has exclusive jurisdiction over Indiana tax disputes.

        If a taxpayer wishes to contest the Department's decision on a Protest, the Tax Court will not have jurisdiction to hear the appeal unless it is filed within 180 days from the date the LOF is issued. I.C. § 6-8.1-5-1(g).

        If a taxpayer wishes to contest the Department's decision on a refund claim, the Tax Court will not have jurisdiction to hear the appeal if the suit: (1) is filed more than 3 years after the date the Claim for Refund was filed with the Department, (2) is filed more than 90 days after the date the Department mails the decision of denial to the taxpayer, or (3) is filed both before the decision is issued and before the 181^st day after the date the person files the Claim for Refund with the Department. I.C. § 6-8.1-9-1(c).

        B. Injunctive Relief.

        If a taxpayer wishes to seek to enjoin the collection of tax pending an original tax appeal, the taxpayer may file a petition with the Tax Court requesting an injunction. I.C. § 33-3-5-11. The petition must set forth the issues to be raised in the tax appeal and the equitable considerations in favor of the taxpayer's petition. The Tax Court will hold a hearing on the petition and will enjoin collection efforts if it finds that the following three requirements are met: (1) the issues raised by the appeal are substantial, (2) the taxpayer has a reasonable opportunity to prevail, and (3) the equitable considerations favoring the injunction outweigh the State's interest in collecting the tax pending the appeal.

C. Appeals.

        Following the issuance of an opinion by the Tax Court, the nonprevailing party may file a Petition for Rehearing with the Tax Court or a Petition for Review with the Indiana Supreme Court.

V. Current Developments/Issues.

A. City Securities Corp. v. Indiana Dept. of State Revenue, No. 49T10-9505-TA-00049 (December 30, 1998).

1. Introduction. At all times since 1946 the petitioner reported its gross earnings from sales of bonds issued by school building corporations and universities and bonds issued by political subdivisions to fund sewage works (the "Bonds") as exempt from tax. The Bonds' organic statutes have at all times stated that the Bonds "are exempt from taxation for all purposes." Despite a 1952 unappealed trial court decision, a 1979 LOF, and a 1988 audit report all holding in favor of the petitioner on the exact same issue (and a 1981 LOF in favor of a different taxpayer), in 1994 the Department reversed its position and assessed gross income tax on gross earnings from the Bonds.

2. Substantive Issue. The petitioner claimed that the Bonds' enabling statutes, in contrast to those for other municipal bonds, provide a blanket exemption from taxation. The Court held that despite the sweeping language of the Bonds' enabling statutes, the Bonds are only exempt from tax to the extent provided in I.C. § 6-8-5-1 (the General Exemption Statute ("GES")) based on the principle that when two statutory provisions address the same subject matter, the more specific of the two controls.

3. Alternative Appeals to Tax Court. As discussed above, I.C. § 6-8.1-5-1(g) authorizes a taxpayer to appeal an adverse LOF to the Tax Court, provided the appeal is filed within 180 days after the LOF is issued. I.C. § 6-8.1-9-1(c) authorizes a taxpayer to appeal a Departmental decision with respect to a Claim for Refund, provided the appeal is filed (a) within 3 years after the claim is filed, and (b) within 90 days of the decision, or, if no decision is issued, more than 180 days after the claim is filed. The Tax Court, noting that an appeal under the Claim for Refund provision is authorized "whether or not [the taxpayer] protested the tax payment," sua sponte held that the time limitation for an appeal from a LOF does not apply to an appeal from a Claim for Refund decision.

4. 60-Day Rule for LOFs. The petitioner claimed the Department's assessment was in excess of its authority under I.C. § 6-8.1-5-1 because it was based on a LOF issued 105 days after the hearing. I.C. § 6-8.1-5-1(e), added as part of the 1989 Taxpayer Bill of Rights, states that a LOF shall be issued no later than 60 days after hearing. The Department claimed the 60-day period requirement is suggestive, not mandatory. The Court held that while the 60-day period is mandatory, the Department's assessment was not invalid because the legislature did not expressly state the consequences of a Departmental failure to meet the time limit. Though disavowing any right to engraft a remedy when none is provided by the legislature, the Court held that an aggrieved taxpayer can either (a) appeal to the Court if no LOF is timely issued, or (b) petition the Court for mandamus. Query: What are the expressly stated consequences of a Departmental failure to issue a timely notice of proposed assessment under I.C. § 6-8.1-5-2?

5. Retroactive Revocation of Prior Ruling. The petitioner claimed that the Department's assessment in 1994 represented a retroactive revocation of its 1979 LOF which was impermissible under 45 I.A.C. 15-3-2. The Court did not address this claim.

6. Unilateral Change of Position. The petitioner claimed the Department's assessment violated I.C. § 6-2.1-8-3 (repealed 1997) and I.C. § 6-8.1-3-3(b), because it was a change in the Department's interpretation of the gross income tax without promulgation of the change in a rule and would increase the petitioner's liability. The Department claimed, despite its consistent treatment of the petitioner as exempt for more than 42 years, that its 1978 regulations informed the petitioner of its change in policy. Held: The regulations cited by the Department are of questionable applicability to the taxpayer's gross earnings, and the meaning now ascribed to them is contrary to the Department's interpretation of them for at least five years following their promulgation. Accordingly, under I.C. § 6-2.1-8-3, the taxpayer is not obligated to pay taxes on gross earnings from the Bonds (to the extent held as investments) until the first full tax year following the issuance of the opinion.

7. Status. The parties have 30 days from the date of the decision (December 30, 1998) to either file a Petition for Rehearing in the Tax Court, or a Petition for Review with the Indiana Supreme Court. If no such filings are made, the decision will become final.

B. U-Haul Company of Indiana, Inc. et al. v. Indiana Dept. of State Revenue, No. 49T10-9801-TA-1 (Pending).

1. Substantive Facts. The U-Haul Rental System ("System") provides a moving equipment rental service to the public, and is composed of four groups of business entities - Fleet Owners, Rental Cos. (the petitioners), Rental Dealers, and U-Haul International, Inc. ("UHI")- bound together by contractual relationships. Fleet Owners own and supply equipment to the System pursuant to contracts with UHI in exchange for a percentage of amounts collected from the public. Rental Cos. are separate corporations which merchandise equipment, including establishing Rental Dealers in territories defined in their contracts with UHI, in exchange for a percentage of rentals collected by Rental Dealers in their territories. Rental Dealers are entities which actually enter into agreements with the public, and derive their authority through contracts with Rental Cos. Pursuant to such contracts (and the contracts between UHI and Rental Cos.), Rental Dealers receive a percentage of rentals collected from the public. UHI is a service company providing clearing house, accounting, and other services. All amounts collected by Rental Dealers from the public are, dollar for dollar, remitted to UHI which, in turn, allocates to each member of the System the percentage to which it is entitled under the contracts.

2. The Department's Claims. The Department claims that Rental Cos. are taxable on 100% of the amounts collected by Rental Dealers located in Indiana because the Rental Dealers act as agents for the Rental Cos. The fact that the Rental Dealers remit all amounts to UHI and that the Rental Cos. actually receive only their agreed percentage is claimed to be "irrelevant" because UHI's distributions (and the amounts it retains) "represent the payment of the [petitioners'] expenses for [their] direct benefit."

3. The Petitioners' Claims. Petitioners claim that amounts collected by Rental Dealers are not petitioners' "receipts" as defined in I.C. § 6-2.1-1-10, nor did petitioners "receive" such amounts within the meaning of I.C. § 6-2.1-1-11. Petitioners have no right, title, or interest in amounts collected by Rental Dealers beyond their contractually specified shares, and no obligation to make payments to other members of the System.

4. Procedural Facts. For at least 30 years, petitioners have reported their contractual share of the rentals collected by Indiana Rental Dealers for gross income tax purposes. In 1976, the Department assessed petitioners or their predecessors in interest with tax on 100% of the rentals collected by Indiana Rental Dealers for 1972 and 1973, resulting in litigation. Following an audit for 1974 through 1977 and further administrative proceedings, the Department issued a LOF in 1980 holding the petitioners taxable only on their share of amounts collected by Indiana Rental Dealers. The lawsuits for earlier years were then resolved on the same basis.

5. Procedural Issues. This case presents many similar procedural issues to those in City Securities:

(a) Petitioners claim that the Department's assessment of gross income tax is invalid under I.C. § 6-2.1-8-3 and I.C. § 6-8.1-3-3(b) and the Department's regulations for the same reasons stated in City Securities, supra.

(b) As in City Securities, the Petitioners claim that the Department is attempting to retroactively revoke a previously issued LOF which is impermissible under 45 I.A.C. 15-3-2.

(c) The Department claims that petitioners were "put on notice" of a change in its position in 1986, when the Department ruled that one of the Fleet Owners was not subject to gross income tax because it had no Indiana activities. The Department claims that notice to petitioners' counsel, while representing other taxpayers, was notice to petitioners. The Department further claims that it gave notice of revocation of its earlier ruling by such ruling to a Fleet Owner, even though it did not state that it was revoking its prior ruling, or reference its prior ruling.

6. Status. The case was presented to the Court by a summary judgment motion filed by petitioners. An oral argument was held on November 23, 1998, and the Court took the matter under advisement.

C. Mead Johnson & Company v. Indiana Dept. of Revenue, 49T10-9712-TA-196. A Tax Court Petition is pending which involves several procedural and sales/use tax issues. The sales/use tax issues are discussed in the Outline entitled "Selected Sales And Use Tax Developments."

The procedural issues are as follows:

1. Refund resulting from an audit. When an audit of 1992 determined that the taxpayer overpaid tax, did the Department have an affirmative obligation to issue a refund? The taxpayer claims that it did under I.C. § 6-8.1-9-2, and as evidenced by the Department's past practice, rulings, and directives. The Department claims that it did not; rather, the taxpayer must timely file a refund claim under I.C. § 6-8.1-9-1. For future periods, see P.L. 119-1998.

2. Letter of Findings. I.C. § 6-8.1-5-1 requires the Department to issue a letter of findings within 60 days of a hearing. The issue is whether the Department is barred from further assessment if it fails to timely issue the letter of findings. But see, City Securities.

D. ANR Pipeline Co. v. Indiana Dept. of State Revenue, 672 N.E.2d 91 (Ind. Tax 1996). In that case, the Department issued a favorable LOF to the taxpayer, and then eleven months later issued a second, unfavorable LOF revoking the first LOF. The Tax Court held that the Department's second LOF, which was issued more than 180 days after the first LOF, was invalid.

E. Storm, Inc. v. Indiana Dept. of State Revenue, 663 N.E.2d 552 (Ind. Tax 1996). In that case, the taxpayer argued that the Department should be estopped under the doctrine of laches from collecting tax since the Department waited almost four years from the date of the hearing to issue the LOF. The hearing was held before the enactment of I.C. § 6-8.1-5-1(e). The Tax Court held the doctrine of laches inapplicable since the Department did not delay in asserting the proposed assessment, only in resolving the case.

F. Zayas v. Gregg Appliances, Inc., 676 N.E.2d 365 (Ind. Ct. App. 1997). A retail customer filed a class action lawsuit in Circuit Court against a retailer for unlawfully collecting sales tax on delivery charges. The Court of Appeals upheld the dismissal of the case, holding that the Tax Court has exclusive jurisdiction over tax refund cases. The Court found that to hold otherwise would defeat legislative intent that the Tax Court have sole and exclusive jurisdiction over tax cases, and that class action lawsuits for tax refunds not be maintained. See also State v. Sproles, 672 N.E.2d 1353 (Ind. 1996); Winski Bros., Inc. v. Bayh, 679 N.E.2d 912 (Ind. Ct. App. 1997).

G. Publication of Rulings. Effective July 1, 1997, the Department is required to publish its rulings and letters of findings subject to the procedures for deleting confidential information. I.C. § 6-8.1-3-3.5.

H. Interest on refunds. The legislature appears to have attempted to clarify the language in I.C. § 6-8.1-9-2 to make it clear that the State of Indiana does not have an interest free loan.