Rent-A-Center East, Inc. v. Indiana Department of State Revenue
42 N.E.3d 1043
| Ind. T.C. | 2015Background
- Rent-A-Center East, Inc. (RAC East) operated rent-to-own stores (106 in Indiana) in 2003; two affiliates, Rent-A-Center West (RAC West) and Rent-A-Center Texas (RAC Texas), operated in other regions and had no Indiana presence.
- In a 1998–2002 reorganization, RAC West owned the trademarks (RAC Marks) and RAC Texas housed executive management; RAC East paid royalties to RAC West (3% of revenues) and management fees to RAC Texas (guaranteeing a 4.5% return) based on an independent Transfer Pricing Study referencing IRC § 482.
- For 2003 RAC East filed a separate Indiana AGIT return reporting zero tax; the Indiana Department of Revenue audited and assessed additional tax, requiring RAC East to file a combined return with RAC West and RAC Texas.
- Lower Tax Court initially granted summary judgment to RAC East for lack of a prima facie case, but the Indiana Supreme Court reversed, holding the Department’s assessment and notice can make a prima facie case and remanded for merits.
- On remand, the Tax Court considered (1) unitary-business/combinability, (2) whether intercompany transactions distorted Indiana-source income despite an arm’s-length transfer pricing study, and (3) whether RAC East’s post-reorganization profits indicated improper tax avoidance. The court granted summary judgment to RAC East.
Issues
| Issue | Plaintiff's Argument (RAC East) | Defendant's Argument (Department) | Held |
|---|---|---|---|
| Whether the Department properly required a combined Indiana return | RAC East: Separate-company return fairly reflected Indiana-source income; Transfer Pricing Study shows intercompany charges were arm’s-length | Dept: RAC East is unitary with affiliates; intercompany royalties/fees distorted Indiana income and allowed income to be shifted out of state | Held: No — unitary status alone insufficient; designated evidence shows arm’s-length intercompany transactions and valid business purpose, so separate return fairly reflected Indiana income |
| Relevance of RAC East’s Transfer Pricing Study | RAC East: Study (based on IRC § 482) is objective evidence that royalties/fees were arm’s-length and relevant to whether income was fairly represented | Dept: Study is for financial/federal purposes, not binding on states; other jurisdictions rejected similar studies; study is flawed | Held: Study is relevant; similarities between § 482 and I.C. § 6-3-2-2(m) make it probative; Department failed to show study was flawed or irrelevant |
| Whether royalty payments lacked business purpose/economic substance | RAC East: Affiliates were formed for valid business purposes; parties stipulated no showing of lack of substance | Dept: Structure allowed shifting income out of Indiana; cited cases where trademark assignments lacked substance | Held: No evidence here of lacking business purpose/economic substance; Sherwin-Williams-type facts are absent, so royalties cannot be disregarded |
| Whether management fees to RAC Texas violated partnership law or were a sham | RAC East: Management fees were set at arm’s-length per the study; limited partnership agreement did not show a prohibition on compensation | Dept: UPA § 23-4-1-18(f) bars partner compensation absent agreement; fees used to reduce Indiana tax | Held: Designated evidence does not show contravention of the statute or lack of arm’s-length; Department failed to prove distortion requiring combination |
Key Cases Cited
- Rent-A-Center East, Inc. v. Indiana Dep’t of State Revenue, 952 N.E.2d 387 (Ind. Tax Ct. 2011) (Tax Court initially granted summary judgment to taxpayer for lack of prima facie case)
- Indiana Dep’t of State Revenue v. Rent-A-Center East, Inc., 963 N.E.2d 463 (Ind. 2012) (Indiana Supreme Court held Department’s assessment and notice can make a prima facie case and remanded)
- Hunt Corp. v. Dep’t of State Revenue, 709 N.E.2d 766 (Ind. Tax Ct. 1999) (discusses combined reporting rationale to avoid distortion for unitary businesses)
- Eli Lilly & Co. v. United States, 372 F.2d 990 (Ct. Cl. 1967) (use of IRC § 482 arm’s-length standard to assess whether intercompany pricing reflects true taxable income)
- Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (1992) (identifies unitary-business indicia: functional integration, centralized management, economies of scale)