Change in tax law allows profitable retailer to receive refund

A ruling from the Indiana Tax Court has positioned a retailer who recorded a banner year in sales and growth in 2003 to get a tax refund from the state of Indiana.

In 2003, Rent-A-Center East, which includes the stores in Indiana, filed an Indiana corporate adjusted gross income tax return reporting zero AGIT liability and requesting a nearly $500,000 refund. The Indiana Department of State Revenue countered the retailers owed $513,272.60 in AGIT, penalties and interest for the 2003 tax year.

The dispute first came before the Indiana Tax Court in 2011 where summary judgment was granted in favor of RAC East. However, the Indiana Supreme Court reversed and remanded.

Again, the Tax Court has granted summary judgment in favor of RAC East in Rent-A-Center, Inc., v. Indiana Department of State Revenue, 49T10-0612-TA-000106.
 
“While the Court is aware that a taxpayer may use its business structure and transfer pricing policies to lower its state income tax liability, the evidence designated in this case simply does not indicate that RAC East has engaged in any improper tax avoidance measures,” Judge Martha Blood Wentworth wrote.

The revenue department contended that RAC East spread its revenue around to the other corporate divisions, RAC West and RAC Texas, in order to reduce its Indiana taxable income to zero. RAC East, the department argued, should have filed a combined income tax return with its two affiliates.

In particular, the revenue department pointed to the results from 2003 and argued RAC East’s separate return did not fairly reflect its Indiana source income. RAC East enjoyed a record-setting year because its Indiana property, payroll and sales factors all grew and the Indiana operation contributed more than two-thirds of the $2.2 billion revenue increase within the entire RAC company.

The Tax Court acknowledged the growth and revenue results do not facially support the retailer’s zero tax liability. Yet, the Tax Court pointed to a change in Indiana’s corporate income tax laws between 2002 and 2003 which limited companies to only paying AGIT.

 “Indeed, the designated evidence reveals that RAC East requested a refund because it had overpaid its Indiana income tax liability by making estimated tax payments in both 2002 and the first two quarters of 2003,” Wentworth wrote. “….In this case, therefore, the amount of RAC East’s 2003 profits, the fact that its 2003 Indiana AGIT liability was zero and its nearly half-million dollar refund request do not show that its separate return failed to fairly reflect its Indiana source income.”