In a pair of rulings issued last month, the Indiana Department of Revenue concluded that a Distributor’s clients didn’t have income from Indiana sources and had no substantial nexus with Indiana. Therefore, the clients were not required to file Indiana income tax returns or collect and remit sales tax on transactions sourced to Indiana. Distributor stores and distributes catalogs for its clients. It sought guidance on the following question posed to the Department:
Does storage by an out-of-state retailer of catalogs at [Distributor's] facilities in Indiana, prior to the distribution of those catalogs by [Distributor] to recipients throughout the United States, including Indiana, constitute ‘substantial nexus’ for the retailer in the state or otherwise require the out-of-state retailer to collect, remit, or report Indiana sales/use taxes or business activity taxes?
No Indiana sourced income = no income tax filing. Indiana imposes a tax upon non-residents’ adjusted gross income derived from doing business within the state. Ind. Code § 6-3-2-1(a) and -2(a)(2). By regulation, 45 IAC 3.1-1-38, “doing business” includes:
- Maintenance of an office or other place of business in the state
- Maintenance of an inventory of merchandise or material for sale distribution, or manufacture, or consigned goods
- Sale or distribution of merchandise to customers in the state directly from company-owned or operated vehicles where title to the goods passes at the time of sale or distribution
- Rendering services to customers in the state
- Ownership, rental or operation of a business or of property (real or personal) in the state
- Acceptance of orders in the state
- Any other act in such state which exceeds mere solicitation of orders so as to give the state nexus under P.L. 86-272 to tax its net income
The Department concluded that “the only semblance of a business activity that [Distributor’s] clients are conducting in the state consists of the presence of the clients’ advertising catalogs.” That “mere presence” didn’t qualify as “doing business” within the regulatory definition. According to the Department, Distributor’s “clients do not appear to have adjusted gross income derived from sources within Indiana” and thus don’t “have any Indiana income tax filing requirement derivative of the presence of their advertising catalogs within the state.” The Department’s ruling can be viewed here.
No Indiana nexus = no sales tax collection. The Department first notes, “In a typical situation, the retail merchant [in a retail transaction] is statutorily required to collect and remit the tax as an agent for the state.” (citing Ind. Code § 6-2.5-2-1(b).) But the “United States Constitution places limits upon Indiana’s ability to compel merchants to collect and remit sales tax.” (citing Quill Corp. v. North Dakota, 504 U.S. 298 (1992).) The Commerce Clause requires, among other things, that a tax imposed by Indiana must be “applied to an activity with a substantial nexus with” the Hoosier State. The Supreme Court’s decision in Quill “reaffirmed that, at the very least, ‘substantial nexus’ with [Indiana] for Commerce Clause purposes must include some kind of physical presence” in Indiana. Here, the only presence of Distributor’s clients within Indiana was their advertising catalogs. “Without more, the Department finds this to fall short of the physical presence requirement contemplated by Quill and its progeny.” The clients lacked substantial nexus with Indiana, so the Department could not “compel [Distributor’s] clients to collect and remit sales tax on their transactions sourced to Indiana absent more of a physical presence in the state.” The Department’s ruling can be viewed here.