Columbia Sportswear USA Corporation v. Indiana Department of State Revenue
2015 Ind. Tax LEXIS 80
| Ind. T.C. | 2015Background
- Columbia Sportswear USA (Oregon corp.) sold and distributed products for parent CSC and affiliate Mountain Hardwear during 2005–2007; CSC prepared federal consolidated returns and pro forma separate-company results for state reporting.
- Indiana Dept. of State Revenue audited Columbia, concluded intercompany pricing distorted Columbia’s Indiana-source income, and issued assessments increasing Columbia’s Indiana net income dramatically (e.g., 2005 tax base from ~$8.6M to ~$107.8M).
- Department based adjustments on: (1) deriving an average consolidated net profit ratio, (2) applying that ratio to Columbia’s gross receipts to recompute Columbia’s net income, and (3) applying Columbia’s original Indiana apportionment percentage to the incremental amount.
- Columbia produced transfer-pricing studies (arm’s-length comparable profits method) showing intercompany transactions were at arm’s-length; studies contained standard disclaimers limiting scope to IRC § 482 compliance.
- Department invoked Indiana Code § 6-3-2-2(l)(4) (alternative apportionment methods) and § 6-3-2-2(m) (distributions among related entities) to justify increasing Columbia’s tax base; Columbia sued and moved for summary judgment.
- The Tax Court held Department lacked authority to recalculate the tax base under § 6-3-2-2(l)(4) and that the record (transfer-pricing studies) failed to show § 6-3-2-2(m) justified adjustments; court granted summary judgment to Columbia.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether I.C. § 6-3-2-2(l)(4) authorized Dept. to increase Columbia’s net income (recompute tax base) | § 6-3-2-2(l)(4) applies only to allocation/apportionment among states, not to computing or increasing the tax base | Dept. says § 6-3-2-2(l)(4) permits reallocating sales and thus was a valid method to reach an accurate starting point | Held for Columbia: § 6-3-2-2(l)(4) addresses division of tax base among states, not recalculation of the tax base itself; Dept. exceeded authority |
| Whether I.C. § 6-3-2-2(m) authorized adjustments to intercompany deductions to correct distorted Indiana-source income | Columbia: Transfer-pricing studies prove arm’s-length pricing; Standard Sourcing Rules fairly reflect Indiana-source income, so § 6-3-2-2(m) does not authorize adjustments | Dept.: § 6-3-2-2(m) is analogous to IRC § 482 and allows reallocation among related entities when Standard Rules distort income | Held for Columbia: Transfer-pricing evidence rebuts Dept.’s prima facie case; Dept. failed to show Standard Rules produced distortion so § 6-3-2-2(m) didn’t authorize adjustments |
| If § 6-3-2-2(m) applied, whether Dept.’s specific adjustments were reasonable | Columbia: Dept.’s methodology produced grossly disproportionate attribution (over 99% income to Columbia) without changing apportionment factors — unreasonable | Dept.: Adjustments sought to effect equitable profits consistent with its approach ("golden rule") | Held for Columbia: Even assuming distortion, Dept.’s adjustments were unreasonable and produced grossly distorted attribution relative to Columbia’s in-state factors |
| Whether Dept. met its prima facie burden via proposed assessments and whether Columbia presented sufficient contrary evidence | Columbia: Offered transfer-pricing studies and testimony showing arm’s-length transactions and lack of factual support for Dept.’s “gut-feel” conclusion | Dept.: Proposed assessments create prima facie case; studies contain disclaimers and Indiana hasn’t adopted IRC § 482 exactly | Held for Columbia: Dept.’s conclusory assertions insufficient; transfer-pricing studies admissible and sufficient to create genuine issue and defeat summary judgment for Dept. |
Key Cases Cited
- Rent-A-Center E., Inc. v. Indiana Dep’t of State Revenue, 963 N.E.2d 463 (Ind. 2012) (burden-shifting when Department designates proposed assessments in summary-judgment context)
- Caterpillar, Inc. v. Indiana Dep’t of State Revenue, 15 N.E.3d 579 (Ind. 2014) (Indiana AGIT computation begins with federal taxable income and prescribed statutory adjustments)
- May Dep’t Stores Co. v. Indiana Dep’t of State Revenue, 749 N.E.2d 651 (Ind. Tax Ct. 2001) (discussion of business vs. nonbusiness income and UDITPA’s role in allocation/apportionment)
- Hunt Corp. v. Dep’t of State Revenue, 709 N.E.2d 766 (Ind. Tax Ct. 1999) (distinction between allocation and apportionment of income)
- Moorman Mfg. Co. v. Bair, 437 U.S. 267 (U.S. 1978) (states enjoy wide latitude in apportionment formulas; assessments disturbed only if income attributed is ‘out of all appropriate proportion’)