Today I want to talk about state income taxation of service revenue provided to a state’s residents through the internet. This case involved online courses provided to Indiana students by the University of Phoenix, a company providing its services from Arizona.
Now you would not be surprised that Indiana would tax that revenue if your employees performed the services in Indiana. And the University of Phoenix did teach Indiana students from an Indiana brick and mortar school; and did report that brick and mortar revenue as Indiana income.
But the University of Phoenix also taught Indiana residents through its online program; delivering all teaching online, from the University’s Arizona office, and not at a brick and mortar store. In that case the University did not report this income as Indiana income.
So, how could Indiana tax online course revenue? It could tax online course revenue earned from Indiana residents. And that is what the Indiana Department of State Revenue tried to do in the University of Phoenix case.
The only problem is that Indiana law did not authorize this approach. It taxed online course revenue not based upon the location of the students but on where the profit-making activities were located; and that was Arizona. So, the Indiana tax court said no tax.
The Indiana tax court decision is The University of Phoenix, Inc. v. Indiana Dep’t of State Revenue, Cause No. 49T10-1411-TA-00065 (Ind. Tax Ct. 2017), and can be found at: http://caselaw.findlaw.com/in-tax-court/1881285.html
Comment. This ruling is important. The Indiana Department of State Revenue has been incorrectly assessing income tax on online service revenue earned by an out of state company because the service was provided to Indiana customers. There may be taxpayers out there that should look into making refund claims.
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
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
Recent Comments