Tax Court vacates proposed assessments for University of Phoenix

Proposed assessments against an Arizona-based university that offers online classes to Indiana students have been thrown out after the Indiana Tax Court determined the university properly followed statutory procedure by not sourcing its receipts for Indiana students to the Hoosier state.

When the University of Phoenix filed its Indiana adjusted gross income tax returns for the 2009, 2010 and 2011 tax years, it did not source any of its receipts from its online students to Indiana because it determined the majority of its activities were performed in Arizona. However, after conducting an audit, the Indiana Department of State Revenue determined the university should have sourced receipts for online students with an Indiana billing address to the state. Thus, the department issued proposed assessments for additional AGIT liabilities, interest and penalties against the school.

The department denied the university’s subsequent protest, but did abate the penalties for each of the three tax years. The school then filed its appeal in The University of Phoenix, Inc. v. Indiana Department of State Revenue, 49T10-1411-TA-65. The Indiana Tax Court ruled in favor of the school.

Writing in a Thursday opinion, Tax Court Judge Martha Wentworth agreed with the school’s definition of its income-producing activities, a term used in Indiana Code section 6-3-2-2(f). Those activities include the school’s eCampus platform and classroom instruction, its curriculum development and its graduation teams, which work with students individually to ensure they stay on track to graduate.

Further, under I.C. 6-3-2-2(f)(2), income-producing activities can be sourced to Indiana only if it is the location where the greater proportion of the costs of performing those activities are located. Thus, the department erred in employing a market-based, rather than cost-based, analysis to determine where to source the receipts from online Indiana students, Wentworth ruled.

Finally, Wentworth wrote that Indiana broadly defines income-producing activities as “the act or acts directly engaged in by the taxpayer for the ultimate purpose of obtaining gains or profit.” Thus, the university was not required to take a transaction-by-transaction approach when conducting its cost study to define income-producing activities.

Taking the definition in that context, the judge then agreed with the school that the greater portion of the costs of performing the income-producing activities was incurred in the school’s Arizona offices, rather than Indiana. Thus, the department’s proposed assessments for thee three tax years at issue were erroneous and were vacated.