By Stephanie Do and Open Weaver Banks
The Indiana Department of Revenue determined that an out-of-state taxpayer improperly sourced tuition received from its Indiana students taking online learning courses on a cost of performance basis. The taxpayer provided educational services through local campus courses and online learning programs. In computing its Indiana sales factor, the taxpayer sourced to Indiana tuition income received from Indiana students taking local campus courses in Indiana, but did not include tuition from Indiana students taking online courses in the numerator of its sales factor.The taxpayer asserted that income received from its Indiana students taking online courses should not be included in the numerator of its Indiana sales factor based on the cost of performance apportionment methodology because the location of the taxpayer’s online campus personnel, “eCampus” platform, curricula development, online servers, and marketing activities were all outside of Indiana. The Department disagreed with the taxpayer’s assertion, finding that the cost of performance methodology was inappropriate because the Department sought to tax only the taxpayer’s income producing activities “that occurred in Indiana.” However, if a cost of performance methodology applied, the Department contended, the result would be the same. According to the Department, the taxpayer’s services “took place here in Indiana because Indiana is the location where the students purchased Taxpayer’s services and participated in Taxpayer’s classes.” Although the Department disagreed with the taxpayer’s cost of performance methodology, the Department abated the imposition of an underpayment penalty because the taxpayer exercised ordinary business care and prudence. Ind. Department of Revenue, Letter of Findings No. 02-20130359 (Nov. 1, 2014).