By Mike Kerman and Madison Barnett

The Indiana Tax Court granted summary judgment to Rent-A-Center East, Inc. (RAC), finding that the Department of Revenue’s determination that RAC and two affiliates should have filed a combined return was improper. This case was on remand from a prior Indiana Supreme Court ruling (please see our prior coverage). RAC engaged an independent accounting firm to conduct a transfer pricing study to determine arm’s-length pricing for royalty payments to one affiliate and for management fee payments to the other affiliate. While separate filing is the default method in Indiana, the Department may require a taxpayer to use an alternative apportionment method, including filing a combined return, if the standard sourcing rules do not fairly reflect the taxpayer’s income. However, the court rejected the Department’s argument that the mere fact that RAC and the affiliates operate a unitary business required a combined return regardless of a possibility of distortion. Similarly, the court also rejected the Department’s long-standing position that transfer pricing studies are not relevant to whether a separate return fairly reflects Indiana source income because Indiana Code § 6-3-2-2(m) mirrors the language in I.R.C. § 482. Additionally, the court concluded that the Department failed to introduce any evidence to show that RAC’s royalty and management fee payments lacked a business purpose or economic substance, or were made to avoid taxes. Finally, the court found that reductions in year-to-year Indiana taxable income do not establish per se that RAC’s Indiana sourced income was not properly reflected on its returns. Thus, the Department should not have required RAC to file a combined return. Rent-A-Center East, Inc. v. Dep’t of Revenue, No. 49T10-0612-TA-00106 (Ind. Tax Ct. Sept. 10, 2015).