in-20250326-IR-045250129NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE LETTER OF FINDING: 02-20241550; 03-20241549; 04-20241548 Corporate Income Tax, Withholding Tax, and Sales Tax For the Years 2020 and 2021 HOLDING Company successfully established that, as it pertains to sales tax and income tax, certain adjustments made by the Department were incorrect. Company, however, was unable to establish that the resulting assessments from the withholding tax audit should have been netted against the income tax adjustment. ISSUE

III. Sales and Use Tax – Unreported Sales.

Authority: IC 6-2.5-1-2 IC 6-2.5-2-1; IC 6-2.5-4-1; IC 6-8.1-5-1; 45 IAC 2.2-6-8. Taxpayer protests the Department’s assessments for additional sales and use tax. STATEMENT OF FACTS Taxpayer is an Indiana company that elects to file its tax returns as an S Corporation (“S-Corp”). The Indiana Department of Revenue (“Department”) conducted an audit of Taxpayer for the 2020 and 2021 tax years that resulted in adjustments to Taxpayer’s income tax, sales tax, and withholding tax obligations. The Department’s income tax adjustment resulted in an increase of individual tax liability of Taxpayer’s sole shareholder. Letter of Findings 01-20241827 addresses the individual shareholder’s protest of the pass-through income tax obligation that resulted from the audit. Taxpayer protested the Department’s audit findings and waived its right to an administrative hearing. This Letters of Findings are written in reliance on information provided by Taxpayer and the Department’s records. Additional facts will be provided as necessary.

I. Indiana Corporate Income Tax – Gross Receipts.

DISCUSSION Taxpayer protests the Department’s adjustments to its gross receipts, arguing that the Department erroneously included some transactions that are items of reconciliation and do not reflect actual sales. In support of its protest, Taxpayer provided deposit summaries, balance sheets, transaction detail sheets, and reconciliation detail sheets for the relevant tax years. As a threshold issue, it is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. A proposed assessment is prima facie evidence the Department’s claim for the unpaid tax is valid. IC 6-8.1-5-1(c). The burden of proving the proposed assessment is wrong rests with the person against whom the proposed assessment is made. Id.; See e.g. 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). A taxpayer is required to provide documentation explaining and supporting his or her challenge that the Department’s position is wrong. Further, “[W]hen [courts] examine a statute that an agency is ‘charged with enforcing…[courts] defer to the agency’s reasonable interpretation of [the] statute even over an equally reasonable interpretation by another party.’” Dept. of State Revenue v. Caterpillar, Inc., 15 N.E.3d 579, 583 (Ind. 2014). An S-Corp, such as Taxpayer, is “[a] corporation whose income is taxed through its shareholders rather than through the corporation itself." Black’s Law Dictionary (11th ed. 2019); see also I.R.C. § 1361-62. Pursuant to 45 IAC 3.1-1-66, “[c]orporations electing Subchapter S status under Internal Revenue Code §1372…are exempt from adjusted gross and supplemental net income tax on all income….” It further notes, “Subchapter S corporation shareholders are taxed on their distributive shares of income at the individual income tax rate.” Therefore, the S-Corp’s income flows through to Taxpayer. The Department noted in its S Corporation income audit report that, “[s]ince the bank deposits were not able to be reconciled to gross receipts[,] an adjustment will be made for the additional income.” Taxpayer argues that some of the transactions that are recorded as income or income offsets do not affect the bank account. Further, it argues that certain deposits are not actual sales but are instead vendor refunds, sales tax assessments, gift certificates, and deposits from December of prior years, which are not reflected on the bank statements until January of the following year. The documentation provided by Taxpayer supports its argument that the adjustments made to its gross receipts were incorrect. The Department will conduct a supplemental review of the documentation provided and make additional adjustments. FINDING Taxpayer’s protest pertaining to income tax is sustained to the extent that a supplemental review by the Department will result in corrected adjustments to gross receipts for the relevant tax years.

II. Withholding Tax – State and County Tax.

DISCUSSION At issue is whether the Department should allow Taxpayer to include the assessments for additional Indiana state and county withholding tax in the S-Corp’s income tax adjustment and thereby pass the assessments through to its sole shareholder. As previously noted, all tax assessments are prima facie evidence that the Department’s claim for unpaid tax is valid. It is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. IC 6-8.1-5-1(c). Under IC 6-3-4-8(a), any employer “making payments of wages subject to tax under [Art. 6-3] . . . is required . . . to withhold, collect, and pay over income tax on wages paid . . . [and] deduct and retain therefrom the amount prescribed in withholding instructions issued by the [D]epartment.” Further, “[a]ll money deducted and withheld by an employer shall immediately upon such deduction be the money of the state, and every employer who deducts and retains any amount of money under the provisions of this article shall hold the same in trust for the state of Indiana….” (Emphasis added.) IC 6-3-4-8(f). If the Department reasonably believes a person has not reported the proper amount of tax due, the Department shall make a proposed assessment based on the “best information available.” IC 6-8.1-5-1(b). The Department’s non-sales tax trust audit report notes “it was determined there were Indiana employees for which county tax was incorrectly withheld. The discrepancy was due to the taxpayer using the wrong county rates.” Additionally, Taxpayer gave one employee a “gift” that was not included in calculating his W-2 nor was withholding tax held or remitted on said gift. As a result, the Department issued assessments for additional county and state income taxes that were not withheld in accordance with IC 6-3-4-8. In its protest, Taxpayer states that it agrees with the assessed amounts but is “requesting that those amounts be included and netted against the S Corporation income adjustments.” Further, Taxpayer argues that “[Taxpayer] should be allowed to accrue those additional amounts as payroll expenses in 2020 and 2021 and pass them through to the owner’s personal tax return.” The Department does not agree that Taxpayer should be allowed to accrue the assessments for unpaid withholding tax as payroll expenses and pass them through to its sole shareholder. As noted above, all money deducted from an employee is immediately money payable to the state upon its deduction under IC 6-3-4-8(f). Therefore, it is not a payroll expense or an expense of any kind. Further, the employer making payments to employees is the party liable to the state for the payment of the taxes withheld. Taxpayer’s request would, in essence, make its sole shareholder responsible for the remittance of withholding tax to the Department. FINDING Taxpayer’s protest as to the withholding tax assessments is denied.

III. Sales and Use Tax – Unreported Sales.

DISCUSSION At issue is whether the Department incorrectly adjusted Taxpayer’s taxable sales to match its gross deposits for the tax years at issue. As previously noted, all tax assessments are prima facie evidence that the Department’s claim for unpaid tax is valid. It is a taxpayer’s responsibility to establish that the existing tax assessment is incorrect. IC 6-8.1-5-1(c). Pursuant to IC 6-2.5-2-1(a), sales tax, also known as state gross retail tax, is imposed on retail transactions made in Indiana unless a valid exemption is applicable. A retail transaction is a transaction made by a retail merchant that constitutes “selling at retail.” IC 6-2.5-1-2(a). Selling at retail occurs when a person “(1) acquires tangible personal property for the purpose of resale; and (2) transfers that property to another person for consideration.” IC 6-2.5-4-1(b). Further, under 45 IAC 2.2-6-8, a retail merchant’s sales tax liability for a reporting period is calculated by multiplying the retail merchant’s total retail income from taxable transactions made during the period by the sales tax rate. This amount is “the retail merchant's state gross retail and use tax liability regardless of the amount of tax he actually collects.” Id. The Department, after conducting an audit of Taxpayer’s sales, determined that “total sales were also under reported for sales tax purposes.” The Department then adjusted the sales by “[applying] a percentage based on the [sales tax returns] to the unreported sales to determine the taxable sales.” Additionally, the Department made adjustments for certain purchases which are not statutorily exempt from sales and use tax and for which no sales and use tax was remitted. Taxpayer agrees with the Department’s determination the reported sales on its sales tax returns was incorrect. However, it argues that because it “reconciled the deposits per the bank statements to the gross receipts per the [U.S. Income Tax Return for an S Corporation]”, the transactions which were removed for income tax purposes should similarly be removed for sales tax purposes. The Department agrees with Taxpayer. Some of the adjustments made for unreported income for the income tax audit were incorrect and directly impacted the calculation of Taxpayer’s sales tax liability for the relevant tax years. The Department will conduct a supplemental review of the documentation and make additional adjustments. FINDING Taxpayer’s protest as it relates to the sales tax audit is sustained to the extent that a supplemental review by the Department will result in reduced assessments due for the relevant tax years. SUMMARY Taxpayer’s protests pertaining to sales and use tax and income tax are partially sustained. Taxpayer’s protest pertaining to withholding tax is denied. The Department will conduct a supplemental review of the sales tax and income tax audits and make appropriate adjustments. January 31, 2025 Replaces Finding Document at: New