By Ted Friedman and Eric Coffill

On August 30, 2017, the Indiana Department of Revenue determined that an out-of-state corporation doing business in Indiana and worldwide was entitled to a reduction of its Indiana sales factor because certain sales in foreign jurisdictions should not have been sourced to Indiana under the state’s “throwback rule.” In a prior audit, the Department had required the corporation to include in its income royalties received by subsidiaries for licensing intellectual property in order to “fairly reflect” the corporation’s income. The Department explained that “[b]y allocating the royalty income to [the corporation], the Department’s prior audit implicitly considered that [the corporation’s] subsidiaries’ nexus could be attributable to [the corporation],” and that, for the current years at issue, the Department will consider the subsidiaries’ nexus for purposes of the corporation’s apportionment computation “as a matter of equity under these particular set of facts.” The Department concluded that the corporation demonstrated that its subsidiaries’ activities in certain foreign countries exceeded the protection of P.L. 86-272 and that the corporation would be subject to a net income tax in those countries. Therefore, the Department determined that the throwback rule should not apply to the corporation’s receipts from sales in those countries. Mem. of Decision 02-20160336R (Ind. Dep’t of State Revenue Aug. 30, 2017).