By Madison Barnett and Prentiss Willson

The Indiana Department of Revenue determined in a Letter of Finding that an out-of-state information service provider must apportion its receipts from sales to Indiana customers to Indiana in a market-sourcing-like manner, even though the majority of its costs were incurred outside Indiana. The taxpayer provided information services electronically to customers in Indiana and around the country. Its direct costs of providing the services—wages of editors, researchers, analysts and database managers, as well as computer and software development costs—were incurred outside Indiana. The taxpayer applied Indiana’s statutory cost of performance (COP) sourcing method and sourced its service receipts to the location where the majority of its costs were incurred, i.e., outside Indiana. Under a strained interpretation of its COP statute, the Department upheld an audit assessment against the taxpayer, determining that the taxpayer’s “income-producing activity” occurred entirely within Indiana, and therefore the COP sourcing methodology was inapplicable. The Department reasoned that the relevant “income-producing activity” was the actual “Indiana sales transactions” rather than the taxpayer’s development, aggregation and analysis of the information being sold. While a small handful of courts in other states have accepted similarly narrow interpretations of the term “income-producing activity,” others have properly rejected it for what it is—an attempt to administratively convert statutory COP sourcing rules to market sourcing. Indiana Dept. of Rev. Letter of Finding No. 02-20130238 (Sept. 25, 2013).