Indiana Department of State Revenue v. J. C. Penney Co.

Citations: 412 N.E.2d 1246; 1980 Ind. App. LEXIS 1804Docket: 2-378A109

Court: Indiana Court of Appeals; December 2, 1980; Indiana; State Appellate Court

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J.C. Penney Company, Inc. (Penney), a Delaware corporation with its principal business in New York, sought a refund from the Indiana State Department of Revenue (Department) for gross income taxes assessed on its direct mail catalog sales and credit service charges for the period from January 31, 1968, to January 31, 1972. The trial court granted the refund, leading to the Department's appeal, which raised three key legal issues: 

1. The income was not derived from activities within Indiana and thus was not taxable under Indiana Code § 6-2-1-2.
2. Taxing the income violates the due process clause of the U.S. Constitution.
3. Penalties for negligence or intentional disregard of law were unjustified under Indiana Code § 6-2-1-16.

The Department argued that Penney’s activities, including maintaining retail and warehouse facilities in Indiana and conducting advertising through mass media, fell under the taxing jurisdiction. In response, Penney contended that the transactions in question were interstate and not connected to local business operations. 

The court noted that the facts were undisputed and emphasized that the reviewing court must accept the trial court's factual findings. The crux of the appeal focused on whether Penney's activities constituted "doing business within the state." The court referenced prior rulings indicating that the statute requires more than minimal activities to impose a tax, as excessive taxation on interstate commerce would contravene constitutional protections. Therefore, the income's derivation must be linked to activities within Indiana rather than the source from which the income is received.

Direct mail catalog sales and credit service charges are addressed separately. Income from desk sales by Indiana customers is acknowledged and taxed without dispute, while the direct mail sales, where orders are sent from Indiana customers to a catalog center in Wisconsin, are contested. The trial court determined that Indiana's involvement in direct mail sales was minimal, with only 20% of catalogs briefly available at local stores and occasional adjustments handled at those stores for dissatisfied customers. This limited interaction was deemed insufficient under the Indiana Gross Income Tax Act to warrant taxation.

The court referenced Indiana case law, which differentiates between income from in-state activities and interstate transactions. Previous rulings upheld state taxation when the interstate connection was incidental, as seen in cases like Department of Treasury v. Allied Mills, Inc., where deliveries made from out-of-state plants were subject to Indiana tax. Conversely, taxation was disallowed in cases like the Ohio corporation shipping a furnace to Indiana, where the overall transaction was clearly interstate.

In summary, the trial court found that the transactions related to direct mail catalog sales are primarily interstate commerce, with minimal local activity in Indiana. Therefore, the gross receipts from these sales should not be taxed under Indiana law, consistent with precedents that recognize the distinction between local and interstate commerce.

Appellee's reservation of visitation rights to determine its license fee does not constitute engagement in the local exhibition of the licensed film. The licensing agreement, which stipulates a percentage of the exhibitor's admission price as the fee, does not alter this characterization. Citing prior cases, the Indiana Supreme Court clarified that income from sales solicited and accepted outside Indiana, with shipment and payment also occurring out of state, does not derive from Indiana sources, thus exempting it from state taxation. In a similar vein, sales made by Owens-Corning to customers in Indiana, managed by its out-of-state office without significant intrastate activity, were deemed interstate and not subject to state taxes. Furthermore, in Mueller Brass Co., the court ruled that sales initiated by out-of-state personnel, with all transactions handled outside Indiana, did not qualify as Indiana sales, exempting them from the Indiana Gross Income Tax. The conclusion that Penney's direct mail sales were interstate was upheld as consistent with legal precedent.

Unconflicted evidence indicates that minimal local intervention did not meet the level of activity required by the Indiana Gross Income Tax Act. During the relevant years, Penney offered charge accounts, with customers able to submit applications either by mail or with assistance from in-store 'credit associates.' These applications were sent to a regional office in Chicago or Pittsburgh, which were managed separately from retail operations and lacked employees in Indiana. Although local stores could issue courtesy cards to creditworthy applicants, all account crediting and payment processing occurred at the regional office. 

The primary issue is the taxability of service charges on Indiana customers' credit accounts, which function similarly to interest, applied to unpaid balances. Gross income tax on sales from these credit transactions is undisputed. The Department of Revenue argues that sufficient local activity supports tax levies, citing credit associates, courtesy card issuance, and application availability in stores. However, the trial court concluded that the service charge income constituted earnings from intangibles outside Indiana's jurisdiction. The service charge, defined as income from a loan account, aligns with the Intangible Tax Act's definition of 'intangible.' The key question is whether this income was derived from in-state activities. In cases of uncertainty, the gross income tax statute favors the taxpayer, as established in precedent, where minimal local activities were deemed insufficient for tax liability. In this case, the service charge is effectively interest on credit extended to customers.

All accounting and record-keeping for the credit service income occurred outside Indiana, with statements and payments handled directly by the Regional Office. Customer inquiries and collection of delinquent accounts were also managed by this office. The trial court determined that local activities related to this income were minimal and incidental. This conclusion aligns with the Department's interpretation of relevant statutes, which states that income from intangibles owned by a non-resident is generally not taxable in Indiana unless the intangibles are part of an established business in the state. The court emphasized that Penney's local credit service activities were insufficient to establish legal situs in Indiana, affirming the trial court's finding of non-taxability without addressing the constitutional implications of tax imposition. Consequently, the matter of penalties for improperly assessed taxes was rendered irrelevant. The judgment was upheld, with concurrence from other judges.