Tax Court rules for State Revenue Department in assessment case

The Indiana Tax Court has granted summary judgment to the Indiana Department of State Revenue after finding the department’s proposed assessments of a northern Indiana heating equipment manufacturer were not void as a matter of law.

In July 2010, the Department of State Revenue notified Thermo-Cycler Industries Inc., a heating equipment manufacturer based in LaPorte County, that it planned to conduct a compliance audit for the 2007, 2008 and 2009 tax years and would need access to Thermo-Cycler’s federal income tax returns, sales reports showing total and exempt sales, and withholding tax forms. The audit date was postponed several times, and by January 2011, the requested records had not been provided to the revenue department.

The audit was eventually conducted using the “best information available,” and in April 2011, the department issued an audit summary and proposed assessments against Thermo-Cycler imposing roughly $70,000 in sales and use tax liabilities for the 2008, 2009 and 2010 tax years. The proposed assessments were based on figures extrapolated from Thermo-Cycler’s 2007-2009 tax returns.

Thermo-Cycler protested the assessments, claiming they were void as a matter of law because the department did not follow the statutory audit procedure or, in the alternative, that the amounts set forth were improper because of mathematical errors.

The revenue department rejected the void as a matter of law claim, but granted the portion of the protest relating to the math errors. Revised proposed assessments were then issued showing sales and use tax liabilities totaling $62,000.

Thermo-Cycler filed an appeal in October 2011, and while the appeal was pending in 2013, the department again reduced the proposed assessment to $16,000. Both parties then moved for summary judgment in the case of Thermo-Cycler Industries, Inc. v. Indiana Department of State Revenue, 71T10-1110-TA-00062, in July 2016.

On appeal, Thermo-Cycler again claimed the proposed assessments were void as a matter of law because the department failed to get a subpoena and court order before completing the audit and because the department wasn’t authorized to conduct a best information audit. Further, Thermo-Cycler argued it was never notified prior to the issuance of the assessments that tax year 2010 would be included, an omission it says constitutes a due process violation under the federal and state constitutions.

But Indiana Tax Court Judge Martha Blood Wentworth disagreed, writing in a Thursday opinion that Thermo-Cycler misread the language of Indiana Code 6-8.1-3-12(d) when it made its argument regarding a court order and subpoena. That statute holds the department “may subpoena the production of evidence…,” but the use of the word “may” indicates the department can, but is not required to, issue and enforce a subpoena.

Similarly, Wentworth said Thermo-Cycler misconstrued the meaning of Indiana Code 6-8.1-5-1(b), which holds that “if the department reasonably believes that a person has not reported the proper amount of tax due, (it) shall make a proposed assessment of the amount of the unpaid tax on the basis of the best information available to (it).”

In this situation, Thermo-Cycler’s federal tax returns – the only information available to the department – led it to believe the company had underreported its sales and use tax liabilities. Thus, it was proper for the department to rely on those returns to complete the audit in light of Thermo-Cycler’s refusal to provide access to the other requested documents, Wentworth said.

Finally, the tax court judge said the evidence does not show Thermo-Cycler was injured by any procedural due process violation with respect to the 2010 proposed assessment. The company was given the opportunity to protest the 2010 assessment and present evidence contesting it, she said, and “due process requires no more.”