The Indiana Department of Revenue determined that a taxpayer and its two affiliated entities were not required to report their income using a “separate accounting” method because the Department’s audit staff failed to prove the standard apportionment formula did not fairly reflect the taxpayer’s business activities in Indiana. The taxpayer, a manufacturer of automotive parts, filed a separate Indiana income tax return until 2005, when it began filing a consolidated income tax return with two affiliated entities. On audit, the Department’s audit staff concluded that the standard method of apportionment did not fairly represent the taxpayer’s income from Indiana sources because the taxpayer and one of its affiliated entities had substantial disparities in both the amount of their Indiana activities and their respective amounts of income and loss. As a result, audit staff required separate accounting for the companies. On appeal, the taxpayer presented evidence that the affiliated entity in question maintained resident and non-resident employees in Indiana who regularly conducted business activities within the state that exceeded the protections under P.L. 86-272 and that such entity had taxable income in years prior to the audit years. The Department reasoned that while sufficient differences in the method of doing business may be justification for separate classification and differential tax treatment, the Department has the burden of establishing that the standard apportionment method does not fairly reflect the taxpayer’s Indiana sourced income. Consequently, the Department concluded that the taxpayer established that the affiliated entity in question had substantial contacts with the state and that the Department audit staff failed to demonstrate that a departure from the standard apportionment formula was necessary. On a separate issue involving the disallowance of royalty expenses, the Department ruled in favor of the taxpayer, concluding that its audit staff failed to establish such royalty payments distorted the taxpayer’s Indiana source income. Letter of Findings 02-20130215 (Ind. Dep’t of Rev. Oct. 30, 2013).