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The Pennsylvania-based company that operates Hollywood Casino in Lawrenceburg must pay additional Indiana taxes accumulated over a three-year period, the Indiana Tax Court ruled Wednesday.
The court granted summary judgment in favor of the Indiana Department of Revenue in a lawsuit filed by PENN Entertainment Inc., f/k/a Penn National Gaming Inc.
On its 2015, 2016, and 2017 Indiana adjusted gross income tax returns, PENN reported the value of income taxes it had paid in other states.
PENN had deducted those payments from its federal income tax returns and added the value of those taxes back to its Indiana tax base.
The Indiana Department of Revenue audited PENN’s AGIT returns for the years at issue. Afterwards, the department determined certain other payments by PENN to other state governments also needed to be added back to the calculation of PENN’s Indiana tax base.
As a result, the department determined PENN owed additional taxes for 2015, 2016, and 2017, plus interest and penalties.
PENN protested the department’s proposed assessments of additional taxes, the amount of which is not spelled out in the court ruling.
Following an administrative hearing, the department eliminated the assessment of penalties but otherwise denied PENN’s protest after concluding that PENN should have included in its Indiana tax base the value of certain payments made to other state governments, as required by Indiana Code § 6-3-1-3.5(b).
PENN requested a rehearing, which the department denied.
PENN challenged the ruling and argued it does not have to add back those payments.
It claimed the department misapplied the governing statute. PENN further argued that adding back the value of the out-of-state payments violates its rights under the United States Constitution and the Indiana Constitution.
The Indiana Tax Court denied PENN’s motion for summary judgment and granted the department’s motion for summary judgment.
Special Judge John Baker wrote the opinion for the court.
Baker noted that, for business entities such as PENN, Indiana defines “adjusted gross income” the same as federal “taxable income” as defined in Section 63 of the Internal Revenue Code with certain adjustments.
PENN did not deny that some of its out-of-state tax payments should be included in its Indiana tax base.
But the company argued the specific out-of-state payments at issue, which are discussed below, should not be added to its Indiana tax base because the payments were for “un-apportioned excise taxes, privilege fees, and other non-tax payments” that are not measured by income.
Baker wrote that PENN cites Smith v. Indiana Department of State Revenue, 122 N.E.3d 489, (Ind. Tax Ct. 2019), in which the court distinguished between gross income and adjusted gross income.
“But Smith provides little guidance here because it is procedurally and factually dissimilar to the current case. In Smith, the key question was whether the Department had timely issued assessments to taxpayers, and the Court’s discussion of gross income versus adjusted gross income was in the context of the statute of limitations set forth in Indiana Code section 6-8.1-5-2(b) (2011),” Baker wrote.
Baker also rejected PENN’s argument that requiring it to add back the out-of-state tax payments would conflict with the department’s regulations governing adjusted gross income.
The judge wrote that none of these regulations conflict with the application of the add-back provision to PENN’s out-of-state tax payments.
“In summary, the out-of-state taxes at issue are based on income or measured by income for purposes of the add-back provision, and by statute PENN’s tax payments must be included in its Indiana tax base for the years in question. The law is with the Department on this issue,” Baker wrote.
PENN also argued the department’s proposed assessments under the add-back provision, as applied here, violate the company’s rights under the U.S. Constitution’s commerce clause, due process clause, and the equal protection clause.
The company contended the department’s application of the add-back provision to its out-of-state payments violates the internal consistency test because Indiana added back the full amount of the payments, and if every other state did not, PENN’s tax debt would increase by “18 times” the regular amount.
But Baker wrote that PENN’s argument relates to the size of its tax bill, not whether the tax at issue disadvantages interstate commerce and the company concedes elsewhere that Indiana apportions its fair share of interstate taxes only after the add-back process is complete.
“Also, PENN points to no evidence that Indiana will fail to follow the standard apportionment process here. Thus, the Department’s assessments will not disadvantage interstate commerce even if other states sought to add back PENN’s out-of-state payments in their jurisdictions,” Baker wrote.
Baker added that there is no dispute that once the department adds back the out-of-state tax payments to PENN’s tax base, the department must apportion the payments to take only Indiana’s fair share of the payments and the assessments do not discriminate against interstate commerce.
The case is Penn Entertainment, Inc. (f/k/a Penn) National Gaming, Inc.) v. Indiana Department of State Revenue, 22T-TA-15.
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