in-20250430-IR-045250194NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDINGS: 03-20242287 Withholding Tax For the Tax Years 2021 and 2022 HOLDING Restaurant Chain was required to withhold income tax from the tip income the Restaurant Chain’s employees received and was required to accurately record and report its Indiana employees’ Indiana county residence. ISSUE

I. Withholding Tax – Calculation and Assessment.

Authority: I.R.C. § 3401 et. seq.; I.R.C. § 3401; I.R.C. § 3402; Treas. Reg. § 31.3401; Treas. Reg. § 31.3402; I.R.S. Publication 15; IC 6-3-4-8; IC 6-8.1-5-1; IC 6-8.1-5-4; Indiana Dept’ of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579 (Ind. 2014); Indiana Dept’ of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012); Wendt LLP v. Indiana Dept’ of State Revenue, 977 N.E.2d 480 (Ind. Tax Ct. 2012); Scopelite v. Indiana Dept’ of Local Gov’t Fin., 939 N.E.2d 1138 (Ind. Tax Ct. 2010); Lafayette Square Amoco, Inc. v. Indiana Dept’ of State Revenue, 867 N.E.2d 289 (Ind. Tax Ct. 2007); 45 IAC 3.1-1-97; IRS: Tip income is taxable and must be reported; IRS, Topic no. 761, Tips – withholding and reporting; IRS: Topic no. 761, Tips – withholding and reporting. Taxpayer argues that the Department’s assessment of Indiana and county withholding tax was overstated. STATEMENT OF FACTS Taxpayer operates full-service restaurants at multiple in-state and out-of-state locations. The Indiana Department of Revenue (“Department”) conducted an audit of Taxpayer’s business records and withholding tax documents. The audit resulted in an assessment of additional withholding tax for both 2021 and 2022 because, in part, the audit found that Taxpayer employed “Indiana employees for which state and county tax should have been withheld.” Taxpayer disagreed with the assessments and submitted a protest to that effect. An administrative hearing was conducted by telephone during which Taxpayer’s representatives explained the basis for the protest. This Letter of Findings results and is based on a review of the original source documents and on Taxpayer’s arguments and explanations.

I. Withholding Tax – Calculation and Assessment.

DISCUSSION The issue is whether Taxpayer has met its burden of establishing that the Department’s audit made a mistake when it assessed Taxpayer additional withholding tax. As with any assessment, it is Taxpayer’s responsibility to establish that the tax assessment is incorrect. As stated in IC 6-8.1-5-1(c), “The notice of proposed assessment is prima facie evidence that the department’s claim for the unpaid tax is valid . . . The burden of proving that the proposed assessment is wrong rests with the person against whom the proposed assessment is made.” See also Indiana Dept’ of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463, 466 (Ind. 2012); Lafayette Square Amoco, Inc. v. Indiana Dept’ of State Revenue, 867 N.E.2d 289, 292 (Ind. Tax Ct. 2007). Consequently, a taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. In assessing whether a taxpayer has met that burden, the Department bears in mind that poorly developed and non-cogent arguments are subject to waiver. Scopelite v. Indiana Dept, of Local Gov’t Fin., 939 N.E.2d 1138, 1145 (Ind. Tax Ct. 2010); Wendt LLP v. Indiana Dept’ of State Revenue, 977 N.E.2d 480, 486 n.9 (Ind. Tax Ct. 2012). When an agency is charged with enforcing a statute, the courts defer to the agency’s reasonable interpretation of that statute “over an equally reasonable interpretation by another party.” Indiana Dept’ of State Rev. v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). Indiana withholding requirements piggy-back the federal standards, statutes, rules, and regulations. To correctly examine an employer’s income taxes withholding responsibility, the Department refers to I.R.C. § 3401 et. seq., which is under “Employment Taxes” for the purpose of “Collection of Income Tax at Source on Wages.” I.R.C. § 3402(a)(1) requires an employer to withhold income tax on wages it paid to its employees. I.R.C. § 3401 defines what constitutes “wages” for income tax purposes, which in relevant part, provides: Treas. Reg. § 31.3401(f)-1(a) further explains that, unless specifically excluded such as I.R.C. § 3401(a)(16)(A), (B), or Treas. Reg. § 31.3401(a)(16)-1, “[t]ips received after 1965 by an employee in the course of his employment are considered to be wages, and thus subject to withholding of income tax at source.” See Treas. Reg. § 31.3401(a)-1(b)(11); 31.3402(k)-1; See also I.R.C. § 451(c)(stating “tips included in a written statement furnished an employer by an employee pursuant to section 6053(a) shall be deemed to be received at the time the written statement including such tips is furnished to the employer”). I.R.C. § 3402(k) specifically requires the employer to withhold income tax on tips, which provides, in relevant part, as follows: Treas. Reg. § 31.3402(k)-1(a)(1) details the general rules which apply to tips, as follows: Treas. Reg. § 31.3402(k)-1(a)(2) explains further: Treas. Reg. § 31.3402(k)-1(a)(3) provides that employees may furnish funds to employers to be withheld, as follows. Recognizing that an employer may not be able to fully deduct and withhold all taxes on tip income from the wages under the employer’s control or from the funds turned over by the tipped employees, Treas. Reg. § 31.3402(k)-1(c)(1) further establishes a priority of the taxes to be withheld, which provides: Treas. Reg. § 31.3402(k)-1(c)(2) provides additional examples to illustrate the application of the priority. In short, an employer is required to first withhold the taxes on the non-tip wages it paid to the tipped employees. Thereafter, if there is any remaining amount available, the employer is required to withhold the taxes on tips in the following order: (1) FICA taxes under I.R.C. § 3101, (2) federal income tax under I.R.C. § 3402, and (3) state and local taxes. In other words, after the statutorily required withholding taxes from the non-tip wages has been satisfied, the employer must then deduct and withhold federal taxes imposed on tip income from the remaining non-tip wages, which are under its control. Under the federal procedures, if the amount of remaining wages is not sufficient to cover the federal amount required to be withheld on tip income, the amount of tax which remains unsatisfied should be withheld from the wages under the control of the employer the following pay period. I.R.S. Publication 15, at 17-18; see also Form 8027 and instructions. Every employer is required to withhold taxes on payments of wages it pays to its employees pursuant to IC 6-3-4-8(a) (as in effect during July 1, 2021, to December 31, 2023), which states in part as follows: Accordingly,IC 6-3-4-8(a) requires an employer to “withhold, collect, and pay over income tax on wages paid by such employer to such employee . . . [in] the amount prescribed in withholding instructions issued by the department.” IC 6-3-4-8(a)(1) provides that the employer is “liable to the state of Indiana for the payment of the tax required to be deducted and withheld.” (Emphasis added). IC 6-3-4-8 specifically provides that the employer is liable for the amount that it was required to withhold. 45 IAC 3.1-1-97 further explains in relevant part: Thus, employers are “withholding agents . . [required to] make return of and payment to the Department . . . tax due, for either County and State.” Id. “All amounts deducted and withheld by an employer shall immediately upon deduction become the money of the State.” Id. The regulation further states, “In the case of delinquency or nonpayment of withholding tax, the employer is liable for such tax, penalties, and interest.” Id. Taxpayer argues that it was not required to withhold tax on its employees’ tip income for the following reasons. Taxpayer explains it was unable to withhold tax on behalf of its employees because it never had the tip income in hand. In other words, the tips went from the hands of its customers to the hands of Taxpayer’s employees. Further, Taxpayer argues that it was not required to withhold tax on its employees’ tip income. Taxpayer explains that “there is no law, rule, regulation, or legislative support such a proposition.” As to the issues raised by the failure to withhold county income taxes, Taxpayer argues that their payroll system does not allow automatic county of residence record-keeping. As explained by Taxpayer: Finally, Taxpayer states that its employees filed their individual returns and paid all tax due. In effect, Taxpayer should not be assessed withholding tax because it believes that its employees paid the tax at the time the employees filed their individual returns. As mentioned, “wages” includes tips received by an employee in the course of his employment” and the employer is required to withhold tax. I.R.C. § 3401(f). The Department does not agree that Taxpayer was not required to withhold tax on its employees’ tip income for either state or federal purposes. Treas. Reg. § 31.3402(k)-1(c)(1). Further, the IRS guidance on this issue is straightforward. IRS: Tip income is taxable and must be reported, https://www.irs.gov/newsroom/tip-income-is-taxable-and-must-be-reported (Last visited January 18). See also IRS: Topic no. 761, Tips – withholding and reporting, https://www.irs.gov/taxtopics/tc761. The Department does not ignore Taxpayer’s argument that maintaining a record of its employees’ county of residence adds a layer of complexity which Taxpayer’s systems and procedures are ill-equipped to deal with. However, the argument does not stand up against IC 6-3-4-8(a) which requires an employer to “withhold, collect, and pay over income tax on wages paid by such employer to such employee . . . [in] the amount prescribed in withholding instructions issued by the department.” In addition, Taxpayer’s argument does not comport with Indiana’s requirement that “[e]very person subject to a listed tax must keep books and records so that the department can determine the amount, if any, of the person's liability for that tax by reviewing those books and records.” IC 6-8.1-5-4(a). Without its employees’ county information, it is not possible to determine Taxpayer’s own liability under IC 6-3-4-8(a)(1). Finally, the Department does not agree that the assessment was wrong because – with some apparent certainty – Taxpayer’s employees filed for and paid their full share of state and county income taxes. Taxpayer here touches on the nature of withholding tax, but Taxpayer cannot know for certain what portion of the contested assessment should be abated on the grounds that the assessment constitutes “double-dipping.” To take the route, Taxpayer seems to suggest would require the Department to audit the returns of each of Taxpayer’s employees. The Department must respectfully decline Taxpayer’s suggestion. FINDING Taxpayer’s protest is respectfully denied. February 28, 2025 Replaces Finding Document at: New