Company establishes nexus in Canada and avoids throwback of Canadian sales revenue to Indiana sales factor

Today I want to talk about Indiana state income tax ruling involving a company that shipped product from its plant in Indiana and delivered it to customer sites in Canada.  The company excluded the Canada sales revenue from its Indiana sales factor.

Indiana audited the company’s tax returns and included the Canada sales revenue in the Indiana sales factor, resulting in additional Indiana income tax, under what is called the “throwback rule.”  Under that rule the Canada sales revenue is thrownback to the Indiana sales factor if the company was not doing the requisite business in Canada to subject it to Canadian taxation.

The company protested the audit and won at an administrative hearing.  The determination of whether the company did enough business in Canada to subject it to Canadian tax depended on the company’s activities in Canada.  In the words of the ruling, the company operated:

“a rail fabrication and distribution facility in Indiana.” It supplied “standard lengths of rail as well as continuous welded rail (“CWR”) in 1,600 foot lengths. ‘Due to the size and nature of [CWR], [Taxpayer] owns a fleet of modified flat-bed train cars used to transport the CWR to … (its Canadian) … customer job sites. [Taxpayer] also owns a specialized unloading car, which is used at the jobsite to unload the [CWR] from the train.” However, “[Taxpayer] does not own any locomotives, so a railroad . . . must be engaged by [Taxpayer] to haul its weld train to a customer’s job site.

“When CWR is delivered to a customer’s job site, a [Taxpayer] “employee will travel to the destination to supervise the process and operate the unloader car, and work in unison with the rest of the crew to pull the rail off the weld train as a locomotive pulls the weld train in the opposing direction.” Customer typically provide the locomotive, but if not, Taxpayer will rent one. Customers also typically provide its own crew, but if not, Taxpayer will send its own. Unloading CWR “takes roughly [three] days without any delays or other constraints.” Taxpayer does not install any of the rail.”

The Indiana administrative hearing ruling is Letter of Findings Number: 02-20170109, and can be found at: http://www.in.gov/legislative/iac/20180131-IR-045180029NRA.xml.pdf

Comment. This company would not be doing business in Canada if it just shipped product by common carrier to Canadian customers. Here the company had to prove that its employees and equipment were involved in unloading the product to the Canadian customers.

You find the throwback rule in many state income tax laws.

By John McCauley: I help people buy and sell businesses.

Email:        jmccauley@mk-law.com

Profile:       http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

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