Indiana Provides Guidance on Application of Repealed Throwback Sales Rules

April 2, 2018

Indiana letter of finding explains when the state’s repealed throwback rule applies to out-of-state sales.

By Tina M. Chunn, SALT senior manager

On Feb. 8, 2018, Indiana issued a letter of finding (LOF) to address the application of the state’s throwback rule to taxpayer’s sales for tax years 2011 and 2012.[1]  The taxpayer manufactures and sells large bins/boxes.  The taxpayer is a subsidiary of a parent company and both operate in Indiana, throughout the U.S. and other countries, and the taxpayer files a separate company Indiana corporate income tax return.  The taxpayer is protesting the state’s inclusion of revenues from sales of goods shipped from Indiana to other states (and foreign countries).  It is worth noting that Indiana’s throwback rule was repealed for tax years beginning on or after Jan. 1, 2016.  However, this ruling is instructive regarding how other states may apply their throwback rules under similar facts.

Under Indiana’s former throwback rule, revenue from sales of tangible personal property is includable in the numerator of the sales factor for apportionment purposes if (i) the property is shipped from an office, a store, a warehouse, a factory, or other place of storage in this state and (ii) the taxpayer is not taxable in the state of the purchaser.  A taxpayer is “taxable in another state” if the state has jurisdiction to subject the taxpayer to a net income tax.

The taxpayer identified over 20 states and several foreign jurisdictions in which it claimed it was subject to tax.  The arguments were grouped into three categories.  First, the taxpayer argued that it is subject to tax in the states in which it is a member of a combined/unitary return filed with its parent company.   The LOF noted that although the state followed the Finnigan rule, that only applies if the taxpayer has filed an Indiana combine/unitary return.  Indiana found that the filing of these combined/unitary returns in the other states does not mean that the taxpayer is taxable in these states.  Therefore, the LOF denied the taxpayer’s claim.

Second, the taxpayer argued that it was engaged in substantial solicitation of sales activities in 14 states and thus was taxable in those states.  The LOF noted two concerns with this argument.  First, the taxpayer did not provide any supporting document or substantive legal argument to support its position.  The taxpayer did provide expense reports but did not provide any tax returns or business registrations in those states.  The expense reports are not enough to establish that the taxpayer is subject to tax in those states.  Second, the taxpayer’s protest letter states only that the taxpayer engaged in “solicitation of sales” activities.  However, those activities are protected under P.L. 86-272, so the LOF concluded that the taxpayer did not meet its burden of proving that it was taxable in those states.

Finally, the taxpayer argued they were taxable in foreign jurisdictions.  The taxpayer argued that although it did not do business in these jurisdictions, the affiliate or parent is soliciting sales on their behalf.  However, no support was provided to substantiate taxes were filed or paid in these jurisdictions or that sales were solicited on behalf of the taxpayer.  Even if an affiliate was soliciting sales on behalf of the taxpayer in a foreign jurisdiction, that activity would still have been protected under P.L. 86-272 (if such activity was conducted in another state), and thus the taxpayer was not taxable in those foreign jurisdictions.

Although Indiana repealed its throwback rule for tax years beginning on or after Jan. 1, 2016, this LOF highlights the difficulty of claiming that sales to another jurisdiction are not subject to the rule.  Businesses want to claim that they are subject to tax in another jurisdiction for purposes of the rule, but don’t necessarily want to file in those states.  Substantial documentation is required to show that a taxpayer is not required to throwback its sales. Aprio’s SALT team has experience with applying these rules and taking a holistic approach to a business’ income tax compliance obligations so that income tax exposures are minimized.  We constantly monitor these and other important state and local tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Tina Chunn at or  Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the March 2018 SALT Newsletter

[1] Indiana Letter of Findings: 02-20170298 (February 5, 2018).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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About the Author

Tina Chunn

Tina is a senior manager with Aprio’s State & Local Tax group. She has over 24 years of experience assisting companies and their owners to minimize their tax liability and maximize their profitability. Some of the industries Tina serves include professional services, manufacturing, warehousing and distribution, telecommunications, real estate, retailers and wholesalers. Tina has extensive experience dealing with corporate tax issues, including state and local tax returns; state and federal tax credits; state and local sales; and use, income, escheat, business licenses and property tax issues.