Indiana Requires Casino to Add Back Gaming-Related Taxes Imposed by Other States

At a glance

• The main takeaway: A taxpayer that operated casinos was required by the Indiana Tax Court to add back many out-of-state gaming-related taxes, even those measured by gross receipts.
• Assess the impact: This case highlights the importance of understanding the specific language of each state’s add back provision, as well as other state modifications.
• Take the next step: Aprio’s State and Local Tax (SALT) team are experienced with analyzing state add back provisions and can help you determine your income tax obligations.   

Schedule a free consultation today to learn more!

The full story:

For purposes of computing state taxable income, states typically start with federal taxable income and then make a variety of adjustments. One of the most common adjustments is an add back for state taxes that were deducted in determining federal taxable income. However, the scope of those add back provisions varies from state-to-state, as illustrated in a recent Indiana Tax Court ruling.[1]

A closer look at the case

The taxpayer, Penn Entertainment, Inc. (Penn), operated a casino in Indiana and other gaming and entertainment ventures in several other states. As a result, Penn paid state-level taxes in multiple states, including Indiana. When calculating adjusted gross income for Indiana’s corporate income taxes, Indiana requires taxpayers to add back any deduction taken for federal income tax purposes for, “taxes based on or measured by income and levied at the state level by any state of the United States.”[2]

Penn did not deny that some of its out-of-state tax payments should be added back, which increased Indiana’s tax base. However, Penn argued that certain tax payments, specifically to 10 states, should not be added back because the payments were for un-apportioned excise taxes, privilege fees, and other non-tax payments that are not measured by income. Specifically, these taxes included various state-level gambling-related taxes that are measured, in part, by gross receipts. For example, Illinois imposes a wagering tax measure by “adjusted gross receipts,”[3] and Massachusetts imposes tax on gaming licensees calculated based on “gross gaming revenue.”[4] 

Unpacking the ruling

Indiana’s Tax Court considered two prior cases on this matter which reached different conclusions.

• The first case – Indiana’s Supreme Court ruled that West Virginia’s Business and Occupation Tax, a tax on the privilege of doing business in that state, was measured by income (in this case, gross proceeds of sales).[5] Thus, the taxpayer’s West Virginia Business and Occupation Tax was subject to Indiana’s add back provision. 
• The second case – Indiana’s Tax Court ruled that Michigan’s Single Business Tax was a value-added tax. Although the taxpayer’s income was part of the calculation of the tax, the tax measured the value-added from the production process and not the income derived from sales.[6] Thus, the taxpayer’s Michigan Single Business Tax was not subject to Indiana’s add back provision.

In the case of Penn, Indiana’s Tax Court determined that the gambling taxes and fees paid to the 10 states at issue were more like the privilege tax than the value-added tax. Each of these taxes and fees were based on some form of income (e.g., adjusted gross receipts, gross or net slot machine income, income from table gaming, or casino revenues). Consequently, Penn was required to add back the gambling taxes and fees at issue and owed more Indiana tax.

Interestingly, the years at issue in this case were from 2015 to 2017, and in 2018, Indiana’s legislature enacted a phased-in exemption to the add back provision for certain “wagering taxes” paid to Indiana and other states. Beginning in 2019, taxpayers were only required to add back 87.5% of wagering taxes that were deducted for federal income tax purposes. That percentage is reduced by 12.5% each year such that for taxpayer years beginning on or after January 1, 2026, no add back for wagering taxes is required.[7] Thus, under this new law, Penn, and similar taxpayers, may no longer be required to add back the full amount of certain taxes that were the subject of this case.

The bottom line

This case highlights the importance of understanding the specific language of each state’s tax add back provision (as well as other state modifications). For example, Georgia’s add back rule applies to, “any taxes on, or measured by, net income or net profits . . . by any state except the State of Georgia”[8] Unlike Indiana’s rule, which applies to “income” taxes, Georgia’s rule applies to “net income” taxes. Thus, under Georgia’s rule, Penn would likely not be required to add back some of these taxes. Also, it’s important to note that Indiana requires taxpayers to add back Indiana taxes, whereas Georgia does not require an add back for Georgia taxes. There can also be differences among the states regarding the treatment of local and foreign taxes. 

Aprio’s SALT team has experience analyzing state add back provisions. We can assist your business to ensure that you are in compliance with your income tax obligations, and that you do not add back any amounts to the income tax base that are not required. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

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[1] Penn Entertainment, Inc. v. Department of Revenue, Ind. T.C. No. 22T-TA-00015, 02/28/2024.

[2] Ind. Code §6-3-1-3.5(b)(3).

[3] See 230 Ill. Comp. Stat. 10/13.

[4] See Mass. Gen Laws ch. 23K §55.

[5] Consolidation Coal Company v. Indiana Department of State Revenue, 583 N.E.2d 1199 (Ind. 1991).

[6] First Chicago NBD Corporation v. Department of State Revenue, 708 N.E. 2d 621 (Ind. Tax Ct. 1999).

[7] See Ind. Code §6-3-1-3.5(c).

[8] GA Code Ann. §48-7-21(b)(2)