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Have there been any notable recent developments concerning state and local taxation in your state, including any regulatory changes or case law?
Indiana recently passed legislation in response to the federal Tax Cuts and Jobs Act (TCJA). The legislation conforms to the TCJA in part and decouples from it in part. Historically, Indiana has not taxed foreign earnings and decoupled from some of the foreign provisions within the TCJA. Further, Indiana has generally decoupled from capital expensing provisions and thus decoupled from the interest expense limitations. Indiana has had a net operating loss carryforward limitation and preserved its own approach. Other adjustments included Indiana decoupling from the income recognition changes to Internal Revenue Code § 118 in order to enhance its economic development tools. The legislature may look to make further adjustments when it next meets in early 2019. Indiana recently published an information bulletin that sets out its interpretation of this new law.
Indiana also recently passed legislation with respect to the taxability of software as a service. In general, the legislation provides that remotely accessing computer software is not subject to Indiana sales and use tax. Indiana is now one of only a few states taking this business-friendly approach. Indiana recently published an information bulletin that sets out its interpretation of this new law.
The State of Indiana is currently assessing its response to the US Supreme Court’s decision in South Dakota v. Wayfair. In 2017 Indiana passed legislation that was modeled after the laws enacted by South Dakota and litigation followed that was stayed pending the Supreme Court’s decision in Wayfair. Like other states, Indiana is currently considering its approach as to the timing and process for implementing this tax collection obligation. Indiana’s threshold mirrors that of South Dakota. Indiana’s law was also not retroactive by its terms. Indiana is also a member of the Streamline Sales Tax Project.
Lastly, the Indiana Tax Court decided University of Phoenix v. Indiana Dep’t of State Revenue, 70 N.E.3d 464 (Ind. Tax Ct. 2017), addressing Indiana’s cost of performance test for taxing services under the Indiana adjusted gross income tax. In a nutshell, the Tax Court held that ‘cost of performance’ means what it says and cannot be interpreted as if it was market-based sourcing. While other states have moved to market-based sourcing, Indiana has not – at least not yet. The guidance on how to compute cost of performance in Indiana is sparse and dated, to say the least.
What primary and secondary legislation governs the collection and remittance of taxes in your state?
Indiana has a net income tax (the adjusted gross income tax), sales (gross retail income tax) and use taxes, financial institutions tax, real and personal property taxes, along with various utility taxes, motor vehicle and fuel taxes, cigarette taxes, gaming taxes, insurance tax, and other ‘listed taxes’ enumerated by statute.
What government authorities (at both state and local level) are charged with the collection and administration of taxes, and what is the extent of their powers?
In general, Indiana taxation is codified in Title 6 of the Indiana Code. The Indiana Department of Revenue (IDOR) collects and administers the ‘listed taxes’, which essentially include all taxes except property taxes. The listed taxes are set forth in Ind. Code § 6-8.1-1-1. IDOR has audit powers including subpoena powers, as well as other administrative powers, such as the power to:
- issue proposed assessments of tax;
- administer appeals;
- grant or deny claims for refund;
- resolve disputes prior to litigation; and
- collect tax.
Property taxes are administered and collected at the local level, with county and certain township assessors having audit powers and other administrative powers. Unresolved property tax disputes between taxpayers and assessors first go to the local Property Tax Assessment Board of Appeals, which is a county-level board, and then proceed to the Indiana Board of Tax Review. The Department of Local Government Finance provides additional state-level oversight. The Indiana Board of Tax Review and Department of Local Government Finance are state-level agencies.
The Indiana Tax Court generally has exclusive jurisdiction over Indiana tax disputes. The Tax Court is a court of law, not an administrative tribunal. It is a single-judge court, with no jury trials. Appeals of final determinations by IDOR are de novo reviews, whereas property tax appeals are not de novo, but rather reviews to determine if the Indiana Board of Tax Review or Department of Local Government Finance’s determination was arbitrary or capricious. Any appeals of Tax Court decisions go directly to the Indiana Supreme Court as petitions for review (no right of appeal).
How would you describe the balance between taxes collected at state and local level?
In general, all taxes are collected at the state level, except for property taxes. However, there are instances in which funds are collected at the state level and then transferred to local government, such as for school funding, local option income taxes, innkeeper’s tax, and food and beverage tax.
Tax year and filing deadlines
What is the prescribed tax year in your state and what filing deadlines apply?
While taxpayer obligations are generally based on a calendar year, there are exceptions, such as for taxpayers on a fiscal year for federal income tax purposes with respect to Indiana adjusted gross income tax obligations. Further, the state’s fiscal year begins on 1 July of each year, so legislation is often effective as of 1 July.
How competitive is your state in terms of taxation in relation to other states? What is the government’s general policy and approach to taxation?
Over the past 18 years, the State of Indiana has prioritized making Indiana a more attractive state in which to do business – and that includes its tax climate. In that time, Indiana’s national rankings have steadily climbed in various national publications ranking states in these categories. For example, Indiana has:
- lowered income tax rates;
- eliminated the throwback rule for the sourcing of sales for income tax purposes;
- resisted mandatory unitary combined reporting;
- resisted a broad-based sales tax on services; and
- placed caps on property taxes.
Indiana has also invoked a moratorium on new business regulations. Today, Indiana is generally ranked in the top 10 if not top five in most business-friendly categories, as well as ranked as the most attractive state in which to do business in the Midwest. For example, in 2018 Tax Foundation ranked Indiana’s business tax climate first in the Midwest and ninth nationally.
Corporate income and franchise taxes
How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?
Indiana starts with taxable income as defined in Section 63 of the Internal Revenue Code, and then makes certain adjustments (additions and subtractions) specified by statute (Ind. Code § 6-3-1-3.5).
How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?
As set forth in Ind. Code § 6-3-2-2, Indiana generally apportions business income from the sale of tangible personal property based on a sales factor, with the numerator being sales in Indiana and the denominator being all sales. Indiana allocates non-business income. For service-based income, Indiana follows a ‘cost of performance’ test and not market-based sourcing.
Aside from its single sales factor, Indiana generally follows the Uniform Division of Income for Tax Purposes Act, with provisions for alternative apportionment and special treatment of certain industries.
In audits, the Indiana Department of Revenue (IDOR) has challenged transfer pricing and intercompany transactions if it believes there is distortion and made such modifications as deemed appropriate (e.g., disallowing deductions, excluding companies from consolidated returns, and forcing combined reporting).
How is nexus determined for corporate income tax purposes?
Indiana applies a ‘facts and circumstances’ approach in determining nexus, applying its interpretation of the US constitutional requirements. The Indiana Tax Court has stated that a physical presence is required for purposes of Indiana’s corporate income tax.
Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?
There is no affiliate nexus statute and no case law on affiliate nexus.
What are the applicable corporate income tax rates?
The corporate income tax rates are currently subject to a phased-in reduction. Starting 1 July 2018, the rate is 5.75%, and will continue to decrease incrementally down to 4.9% in July 2021.
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
There are myriad exemptions, deductions and credits. Subject to various limitations and exceptions, Indiana generally exempts:
- pass-through entities (e.g., S corporations, partnerships, limited liability companies);
- organizations exempt under Section 501 of the Internal Revenue Code (other than income from unrelated trade or businesses);
- banks and other financial institutions (which are subject to the financial institutions tax); and
- insurance companies (which are subject to the insurance premiums tax).
Notable deductions for businesses include foreign source dividends and intercompany transactions among affiliates included in an Indiana consolidated or combined return.
Indiana also has numerous credits (e.g., the research expense credit) and other credits designed to promote investment in property and payroll in Indiana (e.g., the economic development for a growing economy (EDGE) credit and the Hoosier business investment tax credit).
What filing requirements and procedures apply? Are there special filing requirements for groups of company?
There are filing requirements and procedures for every listed tax, including the adjusted gross income tax.
Annual returns and tax payments are due on the 15th of the month following the due date of the federal return, although IDOR may extend the due date if the federal due date is extended, which extension shall be to the same date.
For calendar-year taxpayers, estimated taxes are due on the 20th of April, June, September and December, and for fiscal-year taxpayers, the 20th day of the fourth, sixth, ninth, and 12th months.
Taxpayers must file notice of federal modifications within 180 days of the modification being made (as defined by Ind. Code § 6-3-4-6). For adjusted gross income tax purposes, Indiana is a separate return state, but offers an election to file a consolidated return, generally based on federal law, but only including those corporations with income derived from sources within Indiana.
Indiana is not a mandatory unitary combined return filing state, but taxpayers can request, and in some cases IDOR can require, combined returns for unitary groups. There are annual return filing and tax payment obligations, as well as estimated tax payment obligations. There are also special rules and procedures for filing claims for refund. Pass-through entities (e.g. partnerships, limited liability companies and S corporations) must file annual informational returns and also have tax withholding and payment obligations with respect to the income of a non-resident partner or shareholder (as detailed in Ind. Code §§ 6-3-4-12, -13). There are also rules addressing composite returns. Credits based on economic development may include annual compliance filings with both IDOR and the Indiana Economic Development Corporation.
Corporate franchise tax
Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?
If your state imposes a corporate franchise tax, please stipulate:
(a) The applicable tax base.
(b) Tax rates.
(c) Any exemptions or deductions.
(d) Filing formalities.
Personal income taxes
How is taxable personal income determined in your state?
Indiana starts with adjusted gross income as defined in Section 62 of the Internal Revenue Code and then makes certain adjustments specified by statute (Ind. Code § 6-3-1-3.5).
Under what circumstances is an individual deemed resident in your state for personal income tax purposes?
An individual is deemed a resident if, during the taxable year, the individual is domiciled in Indiana or maintains a permanent place of residence in Indiana and spends more than 183 days in the state. In recent years, Indiana has been very aggressive in claiming residency particularly for individuals moving from Indiana but keeping a place of residence in the state.
What are the applicable personal income tax rates?
There is a single state tax rate. In 2018 the state tax rate is 3.23%. Additionally, each county in Indiana also applies a single county income tax rate, ranging from 0.35% to 3.38% in 2018.
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
There are myriad exemptions, deductions and credits. There are limited deductions for:
- military pay;
- rent payments;
- permanently and totally disabled individuals; and
- unemployment compensation.
There are also credits for taxes paid to other states, a limited credit for charitable contributions to colleges, a limited credit for the elderly (aged 65 and over), and a child credit, among others.
What filing requirements and procedures apply?
There are various filing requirements and procedures for filing returns, including estimated tax returns and annual returns, as well as procedures for audits and appeals. Annual returns and tax payments are due on 15 April, but the return can be extended. Annual estimated tax payments are due on the same dates as federal estimated tax payments.
What obligations are imposed on the employer in relation to the collection and remittance of state personal income taxes (eg, withholding)?
Indiana imposes payroll tax collection and remittance obligations on employers with respect to its wages paid to its employees. Every employer must withhold Indiana adjusted gross income tax on wages paid to its employees and must generally remit those taxes to IDOR within 20 days of the end of the month in which the wages were withheld.
Sales and use taxes
What goods are subject to sales and use tax in your state (at both state and local level)?
In general, sales of all tangible personal property in Indiana by a retail merchant are subject to Indiana sales tax and, generally speaking, the storage, use or consumption in Indiana of property acquired in a retail transaction are subject to Indiana use tax. Some electronically delivered goods may also be subject to sales and use tax if not remotely accessed or are special digital products (e.g., music, movies and books). Indiana is a party to the Streamlined Sales and Use Tax Agreement.
What is the state sales tax rate?
What is the range of local sales tax rates levied in your state?
What goods are exempt from sales and use tax?
There are numerous exemptions from sales and use tax, each of which is subject to specific qualifications. Notable exemptions include exemptions for:
- equipment directly used or consumed in the direct production of tangible personal property, as well as for property incorporated into goods for sale;
- property predominantly used in providing public transportation;
- certain medical equipment, drugs and devices;
- transactions involving colleges and other not-for-profits;
- environmental compliance equipment;
- research and development equipment; and
- recycling materials and equipment.
Are any services taxed?
Indiana does not have a broad based sales tax on services. It does tax certain specified services, including:
- renting accommodation for less than 30 days;
- renting tangible personal property; and
- licensing pre-written software, telecommunications services, utility services, and cable television services.
What filing requirements and procedures apply?
Vendors are required to collect and remit sales tax on retail transactions made in Indiana. In general, returns must be filed within 20 or 30 days of the end of each month (depending on collection volume), although the Indiana Department of Revenue can use a different reporting schedule.
Individuals are required to report use tax on their Indiana adjusted gross income tax return, which is due on 15 April. Indiana is expected to soon require remote sellers to collect and remit tax on sales to Indiana residents based on thresholds similar to those in South Dakota v. Wayfair. There is pending litigation over legislation passed in Indiana in 2017 that was modeled on South Dakota’s remote seller laws.
How is the value of property assessed for tax purposes in your state? Which types of property are subject to tax?
Property is assessed based on market value in use, which is generally considered market value for the property’s current use. Real property, both land and improvements, is subject to tax, with specified statutory exceptions. Business personal property, excluding inventory, is subject to tax, with specified statutory exceptions.
What is the state property tax rate?
There is no state property tax rate.
What is the range of local property tax rates levied in your state?
The rate is determined at a local level based on the assessed value within the taxing unit and the budgeted expenses. As a result, the rates vary among and within Indiana’s 92 counties, but are also subject to state constitutional caps, which, in general terms, include residential property (1% of assessed value), rental property (2%), and business property (3% of assessed value).
Exemptions and deductions
What exemptions and deductions are available?
There are numerous exemptions and deductions for property tax purposes. Subject to various limitations, there are (for example) exemptions for state and municipal property, bridges, airports, certain property used in supplying water or disposing of sewage and waste, air pollution control equipment, and certain non-profit uses. There are deductions for mortgages and for a homestead, the military, the elderly (aged 65 and over), the blind and disabled, veterans and surviving spouses, certain rehabilitated property, and solar, geothermal, and wind powered property, among others.
What filing requirements and procedures apply?
Business taxpayers generally are required to file a business personal property tax return each year by 15 May with the county or township assessor of the county in which the property is located (a 30-day extension may be allowed in some cases). An amended return may be filed within 12 months, but may receive only a 90% credit if filed more than six months after the original or extended filing date.
There may be additional filing requirements depending upon the positions taken on the return. For example, a claim of exemption for water pollution control equipment must also be filed with the Indiana Department of Environmental Management. Further, while real property taxes are assessed without the taxpayer first filing a return, there are various filing requirements for appeals, to claim deductions, exemptions, etc. As another example, property tax abatement deductions are subject to specific procedures that require initial filings, as well as continued compliance filings.
Real estate transfer tax
How is the transfer of real estate taxed in your state (including tax base, rates, exemptions, and filing formalities)?
Indiana does not have a real estate transfer tax. A transfer may generate income subject to the adjusted gross income tax.
Unclaimed and abandoned property
Reporting and remittance
Describe your state’s regime for reporting and remitting unclaimed and abandoned property. How is the value of such property calculated? How assertive is your state in enforcing its rights to unclaimed property?
A holder of property that is presumed abandoned and is subject to custody as unclaimed property, after attempting to reach the owner without success no more than 120 days and no less than 60 days before filing the report, must report in writing to the attorney general concerning the property and deliver the property to the attorney general.
Although the presumption of abandonment varies depending upon the type of property, most types of property are presumed abandoned after three years. In general, the report must provide the apparent owner’s name, last known address and social security or taxpayer identification number, if readily ascertainable.
Life insurance companies must file before 1 May each year, and all other holders shall file before 1 November. The attorney general is required to annually publish a notice identifying the apparent owners of the unclaimed property and other information. Claims are filed with the attorney general. The statutes are codified at Ind. Code § 32-34-1.
Excise and other indirect taxes
What excise taxes are levied in your state, including applicable goods, rates, and filing formalities?
Excise taxes are included in the ‘listed taxes’ administered by the Indiana Department of Revenue (IDOR), and include:
- the auto rental excise tax;
- the motor vehicle excise tax;
- the aviation fuel excise tax;
- the commercial vehicle excise tax;
- an excise tax on recreational vehicles and truck campers;
- excise taxes on beer, liquor, wine, hard cider, and malt;
- excise taxes on controlled substances; and
- other taxes and fees not denominated as excise taxes, such as taxes on other fuels and oil, tobacco products, and waste disposal.
The rates and filing requirements vary among these taxes.
Other indirect taxes
Are any other indirect taxes levied in your state?
The listed taxes administered by IDOR are set forth in Ind. Code § 6-8.1-1-1. There are also certain taxes outside Title 6 of the Indiana Code that are often industry specific (e.g., gaming taxes and insurance company taxes).
The specific taxes applicable to any business will be based in part on the facts and circumstance of that business. Indiana also imposes various fees that might be construed as taxes or imposed in lieu of taxes.
Do any other taxes apply to businesses in your state? If so, please include applicable tax bases, rates, exemptions/deductions, and filing formalities.
The listed taxes administered by the Indiana Department of Revenue (IDOR) are set forth in Ind. Code § 6-8.1-1-1. There are also certain taxes outside Title 6 of the Indiana Code that are often industry specific (e.g., gaming taxes and insurance company taxes).
There are also special rules within Title 6, such as the application of the financial institutions tax to banks and other financial institutions, in lieu of the adjusted gross income tax, and the application of the utility receipts tax and utility services use tax. The specific taxes applicable to any business will be based in part on the facts and circumstance of that business. Indiana also imposes various fees that might be construed as taxes or imposed in lieu of taxes.
Does your state offer any tax incentive schemes to attract businesses and promote investment?
Yes. Many of these incentives involve the Indiana Economic Development Corporation. For example, the economic development for a growing economy credit and the Hoosier business investment tax credit are granted, administered and reviewed for compliance as are certain other incentives, often in conjunction with the Indiana Department of Revenue. Many local government units offer property tax abatement to induce businesses to locate or expand in Indiana.
What tax compliance procedures and best practices should businesses operating in your state be aware of?
Best practices in tax compliance would of course start with a complete understanding of the Indiana tax laws that apply to a taxpayer’s particular facts and circumstances and result in complete and accurate reporting.
If questions arise during the return preparation or tax planning processes, there are opportunities to address these issues to generate greater certainty, including through formal and informal discussions with the Indiana Department of Revenue (IDOR). IDOR will often issue rulings (which are binding), or advisory letters (which are not binding, but are generally helpful and available on a more expedited basis).
What strategic planning considerations should businesses operating in your state bear in mind to optimize tax efficiency?
This will depend greatly on the nature of the business. Since Indiana is a separate return state with a consolidated return election, there may be opportunities to structure your business operations in a manner that optimizes tax efficiency.
Indiana generally disregards single-member limited liability companies for adjusted gross income tax purposes, but not for sales and use tax purposes, so awareness and structuring with that in mind can help optimize tax efficiency. For service companies, with Indiana being a ‘cost of performance’ state, operating so that your costs are not predominantly incurred in Indiana in servicing customers outside Indiana can be critical to optimizing tax efficiency.
For all taxes, understanding and utilizing available exemptions, deductions and credits is essential to tax optimization. If you are looking to locate, relocate, expand, reduce or otherwise change your business operations or business model, then there may be leveraging opportunities given the competition among states, and Indiana has been aggressive in trying to attract and retain business. There are numerous additional planning opportunities depending upon a taxpayer’s facts and circumstances.