Indiana Supreme Court kicks tires on RV delivery option

A recreational vehicle dealership in Elkhart County that used the open road to help certain customers avoid Indiana sales tax, told the Indiana Supreme Court Friday its actions were greenlighted by the state’s statue and regulations.

Richardson’s RV, Inc., in Middlebury, gave buyers, who were not exempted from paying Indiana sales tax, the option of physically picking up their vehicles across the state line in Michigan. The Hoosier state has reciprocal agreements with 41 states that enables customers to avoid paying Indiana sales tax but customers from the other nine states had to pay the sales tax from Indiana as well as their home state.

By physically handing over the keys at a dirt lot in White Pigeon, Michigan, 7.8 miles north of the dealership, Richardson’s maintains the transaction was completed outside Indiana and therefore not subject to Indiana sales tax.

The Indiana Department of State Revenue disagreed. It found that every aspect of the sale — the selection of the vehicle, the financing, the mechanical adjustments and the titling — were all completed on the lot in Middlebury. Driving the RV to Michigan before giving it to the customer was an impermissible attempt to avoid Indiana sales tax.

Concluding the sales did take place in Indiana and the RV dealer should have collected state sales tax on those Michigan transactions, the department assessed additional tax liabilities against Richardson’s for 2010, 2011 and 2012.

Richardson’s successfully appealed to the Indiana Tax Court. In granting a motion for summary judgment, the court agreed that because physical delivery was made across state lines, the RVs were not subject to Indiana sales tax.

The department then appealed to the Indiana Supreme Court in Richardson’s RV, Inc. v. Indiana Department of State Revenue, 18S-TA-00022. During the oral arguments, George Plews, partner at Plews Shadley Racher & Braun LLP, represented the department of state revenue and Randal Katlenmark, partner at Barnes & Thornburg LLP, represented Richardson’s RV.

Plews told the court the dealership had no legitimate business purpose for taking the RVs to Michigan. It only wanted to avoid the Indiana sales tax.

“The fundamental principle of our tax system is that we expect honest conduct, we expect honestly productive economic activity,” he said. “That’s what we apply our tax code to. And when we have activity that doesn’t meet that standard, when we have activity that is conducted solely to avoid sales tax and not for some other valid, legitimate economic purpose, we reject that as sham conduct.”

Both Justice Geoffrey Slaughter and Justice Mark Massa questioned the difference between Richardson’s practice and an individual investor delaying the sale of stock to avoid being taxed at a higher rate.

Plews answered there can be a legitimate reason for tax avoidance or minimization. With the stockholder waiting for the best tax rate, that is a productive activity because the money has remained invested and supported the economy.

In this case, he said, the act had no business purpose. It was artificial conduct that had no business use other than tax avoidance.  

“We wouldn’t be here if it were just the dollars involved or this particular neck of the sales tax woods. It’s the principle that rides behind all of our taxation. We look at those transactions searchingly and if they don’t have a legitimate business purpose we disallow them with respect to their application for tax purposes.”

Katlenmark countered Richardson’s had a legitimate business purpose for taking the RVs to Michigan –  it wanted to make the sale. Customers from the non-reciprocal states would not buy from the Middlebury dealership if the vehicles were not delivered outside Indiana.

Chief Justice Loretta Rush pressed, saying the idea for the Michigan delivery came from the dealer asking the customers what they wanted to pay. Richardson’s had no non-tax reason for driving 7.8 miles north.

Katlenmark said the dealership would not have been able to sell the vehicles if out-of-state delivery was not an option.

“Even if he had no business purpose, even if the sole purpose from both parties the sole purpose was to minimum tax, the statute allowed for that, the text of the statute says you can make your sales within or without Indiana structure your affairs accordingly,” Katlenmark said. “So there’s nothing untoward about closing in Michigan.”

Repeatedly Katlemark argued the Indiana Code 6-2.5-2-1 advises only transactions “made in Indiana” are taxable and the revenue department’s regulations and guidance holds that such transactions require the property to be physically delivered within the Hoosier state.

“It’s not tax avoidance to follow the text of the statute and the department’s regulation, particularly when that text authorizes buyers and sellers to choose out of state delivery,” he told the court.