PENN Entertainment, Inc. (f/k/a Penn National Gaming, Inc.), Petitioner, –v– Indiana Department of State Revenue, Respondent.
Supreme Court Case No. 24S-TA-382
Indiana Supreme Court
June 29, 2026
Pursuant to Indiana Appellate Rule 65(E), the trial court and parties shall not take any action in reliance upon this opinion until it is certified.
Argued: January 16, 2025 | Decided: June 29, 2026
On Petition for Review from the Indiana Tax Court, No. 22T-TA-15
The Honorable John G. Baker, Special Judge
Opinion by Justice Molter
Chief Justice Rush and Justices Massa, Slaughter, and Goff concur.
All but a handful of states levy a corporate income tax. And when states tax income from interstate commerce, the federal constitution requires them to apportion that income. That is, they must calculate which portion of income is connected to the taxing state, and then they can tax only that portion. They can’t tax income sourced to other states.
To comply, states typically have corporate taxpayers start with the taxable income they report on their federal tax return. States then apply a statutory formula calculating their share of that federal taxable income. Finally, they apply the tax rate to their state’s portion only.
That leaves one problem, though. Taxpayers deduct state income taxes from federal taxable income. By starting with federal taxable income, then, a taxing state is apportioning income that is missing income that other states already taxed. That is like trying to calculate the size of a state’s slice of pie after other states have already taken bites.
For a more accurate apportionment, the taxing state needs to calculate its portion before other states’ apportioned income taxes have been removed, not after. So before applying their apportionment formulas, almost all states with a corporate income tax require the taxpayer to add back the state income tax deduction from the federal return. Indiana does that through standard statutory language, directing corporate taxpayers to add to their federal taxable income “an amount equal to any deduction or deductions allowed or allowable pursuant to Section 63 of the Internal Revenue Code for taxes based on or measured by income and levied at the state level by any state of the United States.”
In this case, PENN Entertainment, Inc. (“Penn”) added back the apportioned income taxes it paid to other states in the relevant tax years. The question here is whether Penn must also add back unapportioned wagering taxes it paid to other states—that is, excise taxes on intrastate transactions that are not subject to an apportionment formula. We hold the statute does not require adding back these taxes because they are neither income taxes (taxes “based on” income) nor the functional equivalent of income taxes (taxes “measured by” income).
Undisputed, foundational tax principles provide critical context for resolving this case. And to explain those concepts, Penn offered analysis from Professor Richard Pomp, a state-tax-law expert who is a tenured professor at the University of Connecticut Law School. App. Vol. 7 at 62–108; see also Richard D. Pomp, State Corporate Income Taxes: The Illogical Deduction for Income Taxes Paid to Other States, 42 Tax L. Rev. 419 (Winter 1987). The Indiana Department of State Revenue (“the Department”) agrees that Professor Pomp’s analysis is “academically sound.” App. Vol. 3 at 29. So we begin this background discussion by explaining in Part I the undisputed foundational tax concepts underlying Indiana’s statutory requirement to add back the federal deduction for state income taxes, and then we describe the facts and procedural history of this case in Part II.
I. Add-Back Statutes for State Income Taxes
Both sides agree there are two reasons
A. Adjusted Gross Income (the “Taxable Pie”)
The taxes the Department contends Penn underpaid are taxes levied under the Indiana Adjusted Gross Income Tax Act of 1963,
Under the Act, a corporation pays the tax rate “on that portion of its adjusted gross income derived from sources within Indiana.” Consolidation Coal Co. v. Ind. Dep’t of State Revenue, 583 N.E.2d 1199, 1200 (Ind. 1991). A corporation’s “gross income” is “all income from whatever source derived.”
The first step in calculating a state’s corporate net income tax is to determine the tax base, which is its adjusted gross income. App. Vol. 7 at 96–97;
To simplify things and promote uniformity, most states with corporate income taxes, including Indiana, use as their starting point the tax base for the federal income tax return—federal adjusted gross income (which essentially amounts to net income). Id. at 99–100; Jerome R. Hellerstein, Walter Hellerstein & Andrew D. Appleby, State Taxation ¶ 7.02 (3d. ed. March 2026 update);
This process of determining the state tax base is akin to assessing the size of a taxable pie. App. Vol. 7 at 96–97.
B. State Apportionment (a State’s “Slice of the Pie”)
The second step is to determine the portion of the tax base attributable to income from the taxing state—that state’s “slice of the pie”—which is the only portion that state can tax. Id. at 97; Hellerstein & Hellerstein, supra, at 8-71. A state government may tax only income sourced to that state because the Fourteenth Amendment’s Due Process Clause “demands that there exist some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax, as well as a rational relationship between the tax and the values connected with the taxing State.” MeadWestvaco Corp. ex rel. Mead Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16, 24 (2008) (quotations omitted). And the U.S. Constitution’s Commerce Clause “forbids the States to levy . . . unfairly apportioned taxation.” Id.
So after determining the state adjusted gross income, the taxing state applies a formula to determine how much taxable income is sourced to that state. App. Vol. 7 at 97–99. Most states, including Indiana, use a “single-factor sales formula” to apportion their net income tax base.
Consider a corporation with $10,000 worth of sales—$2,000 of sales in Indiana, and $8,000 in Illinois—producing a total of $1,000 in state adjusted gross income after deducting ordinary business expenses (and no deduction for state income taxes). See App. Vol. 7 at 102. Indiana’s apportionment percentage would be 20% ($2,000 in Indiana sales ÷ $10,000 in total sales), yielding apportioned net income of $200 (20% apportionment x $1,000 adjusted gross income). If Indiana applied a 10% tax rate, its net income tax would be $20 (10% x $200). If Illinois used the same formula and rate, its apportionment percentage would be 80% ($8,000 in Illinois sales ÷ $10,000 in total sales); its apportioned net income would be $800 ($8,000 ÷ $10,000); and its tax would be $80 (10% x $800).
The taxation, with each state taking its tax bite out of only its own slice, breaks down like this:
There is a potential glitch lurking, though, which is the core of this case. Even when a state uses a proper apportionment formula for calculating the state’s taxable slice, it remains critical to first properly calculate the size of the pie. Underestimating the pie will lead to under-taxation when
To avoid underestimating the size of the pie and collecting too little tax, states that levy a net income tax usually require corporations to add back to their adjusted gross income the federal deduction for apportioned income taxes they pay to other states, which we discuss next.
C. Adding Back Deductions for Other States’ Apportioned Income Taxes
When designing their own taxes, states start with federal adjusted gross income because it simplifies things, but stopping there would create a problem. The federal government allows deductions for state income taxes because those taxes are costs of generating federal taxable income. Id. at 101. In our example above, the corporation paid $20 in taxes to Indiana and $80 in taxes to Illinois to generate $1,000 in federal taxable income, so the federal government lets the taxpayer deduct that $100, reducing federal adjusted gross income from $1,000 to $900. Key here is recognizing that federal adjusted gross income reflects a taxpayer’s income after deducting the states’ apportioned income taxes.
But an apportioned tax, such as a state net income tax, that a corporation pays to one state cannot be a cost of generating taxable income for another state—that’s the whole point of apportionment. Id. at 101–103. The net income tax our hypothetical corporation paid to Illinois was a cost of generating federal and Illinois taxable income, but not Indiana taxable income; Illinois could tax only income sourced to Illinois, from which Indiana can’t take a share. Id.
If Indiana deducted the Illinois net income tax payment even though that tax didn’t generate any income that Indiana would be apportioning and then taxing, Indiana would be applying its apportionment formula to an artificially deflated base. Id. Considered another way, Indiana would allow the taxable income to be apportioned twice—first when paid to
The problem is that state adjusted gross income should be calculated before deducting the states’ apportioned income taxes, unlike federal adjusted gross income which is calculated after that deduction. To fix this, Indiana takes the typical approach. In the example, Indiana adds back the federal deduction for the income tax the corporation paid to Illinois and then calculates its slice of the tax pie with its apportionment formula.
Continuing with our illustration, without the add-back, the Indiana tax base would be $920—the $1,000 adjusted gross income minus the $80 Illinois tax. (There would be no deduction for the $20 Indiana tax because states generally don’t allow a deduction for their own income taxes.) Applying Indiana’s 20% apportionment to this tax base yields $184 (20% of $920), not the $200 in sales actually attributable to Indiana. And at a 10% rate, Indiana would collect only $18.40 instead of $20. The Illinois deduction—which had nothing to do with generating Indiana taxable income—would artificially shrink Indiana’s tax base.
Beyond just diminishing the State’s coffers, this treats corporations that generate interstate revenue more favorably than corporations that generate revenue only intrastate. See Ross Fogg Fuel Oil Co. v. Dir., Div. of Tax’n, 22 N.J. Tax 372, 377 (2005) (“If the deduction of the taxes of other jurisdictions is allowed, corporations which do business in several states pay a lower effective rate of tax on their New Jersey activities than do corporations which only do business in New Jersey.”). A competitor with $200 in Indiana sales but no sales elsewhere would owe Indiana $20, while the multi-state corporation would owe only $18.40, even though both had identical Indiana-sourced income. By requiring corporations to add back
D. Unapportioned Costs (Including Taxes)
This logic applies only to adding back apportioned taxes—taxes states levy on only their share of income after applying an apportionment formula. Because states levy those taxes on only their share, out-of-state apportioned income taxes cannot be costs to generate in-state income.
But unapportioned taxes—like sales taxes or utilities taxes, which cover only intrastate transactions and are not subject to an apportionment formula—are different. App. Vol. 7 at 103. Those are the same as any other unapportioned costs for generating taxable income, such as labor or utilities. Id. Those costs, regardless of the state where they were incurred, contributed to taxable income across all taxing states—they were costs of producing income that went into the pie from which all the income-generating states will take their slice and so should be deductible. Id. Adding those costs back would artificially inflate the tax base and the resulting tax. Id. at 103–04. This is likely why, to our knowledge, no other state does so. See id. at 104–05.
Returning to our hypothetical, the corporation spent $9,000 to produce its $1,000 of net income. Assume half those costs were labor and half were unapportioned taxes, like sales or utilities taxes. All those costs produced the $1,000 of taxable net income to which both Indiana and Illinois will apply their apportionment formulas; both states will get a percentage of the income those costs produced.
But if those states instead added the costs back in, the tax base would become $10,000 even though the corporation had only $1,000 in profit. Indiana’s 20% slice would become $2,000 instead of $200, and its 10% tax rate would yield a $200 tax rather than $20; Illinois’ 80% slice would become $8,000, yielding an $800 tax. That would artificially inflate the taxes by a multiple of ten, and a ten percent income tax would consume
It also makes no difference that these unapportioned costs—labor or taxes—were incurred entirely inside one state, either Indiana or Illinois. The costs still contributed to the entire taxable pie out of which both states cut a slice and took their tax “bite,” so the unapportioned costs should remain deducted no matter where they were incurred.
II. Penn’s Tax Protest
Penn is a Pennsylvania corporation with subsidiaries operating casinos and other gambling operations in seventeen states during the relevant tax years. One of those subsidiaries is Indiana Gaming Company, LLC, which operates the Hollywood Casino in Lawrenceburg.
On Penn’s federal tax returns for tax years 2015, 2016, and 2017, it deducted roughly $9.2 million for net income taxes it paid to other states. That was under
On Penn’s Indiana tax returns for those years, Penn added back, under
In February 2021, the Department audited Penn for those years and determined that the statute also required Penn to add back the wagering taxes it paid to Illinois, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Mexico, Ohio, Pennsylvania, and West Virginia. Those taxes were:
| Illinois | Privilege tax based on receipts from gaming transactions minus winnings | $82,216,286 (2015) $73,306,187 (2016) $26,349,650 (2017) |
| Maine | Tax on slot machine or table game transactions minus winnings | $22,605,653 (2015) $22,467,309 (2016) $0 (2017) |
| Massachusetts | Daily remitted transactions tax on gross gaming revenues | $34,775,399 (2015) $63,224,720 (2016) $81,144,483 (2017) |
| Mississippi | License fee on gross gaming revenue | $12,852,846 (2015) $12,014,874 (2016) $5,265,439 (2017) |
| Missouri | Tax on gaming receipts minus winnings | $78,589,061 (2015) $82,288,823 (2016) $49,831,573 (2017) |
| Nevada | Monthly license fee on cash from gaming transactions minus cash paid out | $6,215,194 (2015) $6,471,542 (2016) $6,610,971 (2017) |
| New Mexico | Excise tax on cash received from gaming transactions minus amount paid out | $22,505,447 (2015) $19,211,466 (2016) $19,913,377 (2017) |
| Ohio | Tax on gross casino revenue | $194,941,127 (2015) $197,506,669 (2016) $232,884,133 (2017) |
| Pennsylvania | Daily slot machine tax and table games tax | $132,365,552 (2015) $128,417,910 (2016) $125,759,436 (2017) |
| West Virginia | Privilege tax on adjusted gross receipts from gaming transactions minus winnings paid | $65,300,267 (2015) $187,785,889 (2016) $0 (2017) |
The Department doesn’t dispute that the $9.2 million in net income taxes Penn added back were apportioned taxes and the roughly $2 billion Penn didn’t add back were unapportioned taxes. After adding back those wagering taxes, the Department determined Penn owed (before penalties
Penn protested the Department’s assessment requiring that Penn add back the wagering taxes. Penn argued the statute only required it to add back apportioned state net income taxes, not unapportioned wagering excise taxes. It also argued that requiring it to add back the wagering taxes would violate the Commerce Clause, the Equal Protection Clause, and the Due Process Clause of the U.S. Constitution as well as similar provisions of the Indiana Constitution.
The Department sustained Penn’s protest of penalties but not Penn’s protest of additional taxes and interest, so Penn appealed to the Tax Court, where the parties cross-moved for summary judgment. The Tax Court entered summary judgment for the Department, concluding that this Court’s precedent required Penn to add back the wagering taxes consistent with both the state and federal constitutions. PENN Ent., Inc. v. Ind. Dep’t of State Revenue, 230 N.E.3d 385, 395, 400 (Ind. T.C. 2024). Penn then filed a Petition for Review in this Court, which we granted. Ind. Appellate Rule 63.
Standard of Review
“Summary judgment is appropriate only when the designated evidence shows there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.” Merch. Warehouse Co. v. Ind. Dep’t of State Revenue, 87 N.E.3d 12, 15–16 (Ind. 2017). Because that presents a legal question, we generally review summary judgment rulings de novo. Korakis v. Mem’l Hosp. of S. Bend, 225 N.E.3d 760, 764 (Ind. 2024).
Discussion and Decision
Penn must add back “any deduction or deductions allowed or allowable pursuant to Section 63 of the Internal Revenue Code for taxes based on or measured by income and levied at the state level by any state of the United States.”
Penn and its supporting amici argue the statute’s reference to “income” conveys several limits. In their view, the statute covers only net income taxes, not gross income taxes; only income taxes, not excise taxes; and only apportioned taxes, not unapportioned taxes. The Department disagrees. In its view, the phrase “measured by income” conveys that the statute covers more than traditional net income taxes, and the test is whether the tax is calculated with reference to revenue. With that understanding, the Department argues the statute covers gross income taxes, excise taxes, and unapportioned taxes, so long as those taxes are calculated with some reference to revenue.
Both sides overshoot. We conclude the phrase refers to direct income taxes (taxes “based on” income) and their functional equivalents (taxes “measured by income”), and both those categories cover only taxes subject to the apportionment requirements of the federal constitution. Contrary to Penn’s view, our precedent holds that the phrase covers gross income taxes as well as net income taxes. And the phrase also covers some excise taxes—those that are calculated similarly to direct income taxes, including that they are apportioned. But contrary to the Department’s view, this statute does not cover unapportioned excise taxes. In other words, this statutory tool to prevent double apportionment does not apply to taxes that were never apportioned a first time. Because none of the excise taxes at issue are apportioned, Penn did not need to add them back.
We interpret the statute this way for three reasons. First, the statute is a standard add-back provision for calculating the State’s proportionate share of income taxes, and our interpretation reflects the conventional understanding among the states. Second, the Department does not identify any good reason, consistent with the statute’s purpose, for adding back the unapportioned wagering taxes, and we agree with Penn that adding them back would exaggerate the tax base. Third, deducting the unapportioned wagering taxes is consistent with our precedent.
We discuss each of these reasons in turn.
Indiana’s statute is a standard add-back provision that requires adding back apportioned income taxes. The statute covers both gross and net income taxes, and it covers excise taxes that are the functional equivalent of income taxes. One reason for this is because those kinds of excise taxes are subject to the same federal constitutional apportionment requirements. But the statute does not cover unapportioned excise taxes, which describes all the wagering taxes at issue here.
A. The statute covers direct income taxes and their functional equivalents.
Our legislature adopted a conventional tax policy through conventional tax language.
The policy is the one we explained above. Supra, at 7–9. In short, for a sensible apportionment, a taxing state needs to calculate its share before other states’ apportioned taxes have been deducted. Otherwise, there is a double apportionment, with the second apportionment dividing an artificially deflated tax base. To avoid this, states typically require taxpayers to add back the federal deduction for apportioned income taxes they paid to other states.
There is no dispute that almost all states with a corporate income tax have adopted this policy. See Hellerstein et al., supra, ¶ 7.12[1]. And they adopt this policy through varied references to other states’ income taxes. Compare App. Vol. 7 at 121–22 (collecting statutes); see generally 2B Norman Singer & Shambie Singer, Sutherland Statutory Construction § 52:3 (7th ed.) (“Legislation in other states and jurisdictions may help guide the interpretation of a doubtful statute which pertains to the same subject matter, persons, things, or relations.”). Some references are direct, instructing taxpayers to add back other states’ “income taxes.” E.g.,
Whichever variation states choose, these statutes all refer to adding back corporate income taxes. Forty-four states levy a corporate income tax, and those taxes fall into two categories—direct income taxes and excise taxes that function like income taxes. See Abir Mandal, State Corporate Income Tax Rates and Brackets, 2026, Tax Foundation (Jan. 5, 2026), https://taxfoundation.org/data/all/state/state-corporate-income-tax-rates-brackets/ [https://perma.cc/9B6U-EW7Z] (cataloging states with corporate income taxes); App. Vol. 7 at 121 (same); 14A Fletcher Cyc. Corp. § 6890 (Sep. 2025 update) (discussing the two categories of corporate income taxes). By referring to taxes “based on or measured by income,” states like Indiana more clearly include both categories than if they simply referred to “income” or “
The first category covers taxes “based on” income.
The second category covers taxes “measured by income.”
This has long been the understanding. Shortly after Indiana enacted the add-back statute in its current form, the Department’s 1968 audit manual explained that, with one exception, “the only taxes which would be added back were state income taxes.” App. Vol. 5 at 180–81.6 The “[o]ne exception would be a franchise tax that is based on or measured by income and levied at the state level.” Id. at 181. Just as we explain today, the Department explained then that the exception was because that “type of tax is usually found as a substitute for a state income tax where a state’s constitution forbids a direct income tax.” Id. Even today, the Department’s audit manual still aptly refers to the statutory provision as “the state income tax addback to federal taxable income” even though it also covers excise taxes that are the functional equivalent of income taxes. App. Vol. 3 at 146, 147.7 And the Department’s director of Audit Operations Support testified in her Trial Rule 30(b)(6) deposition for this case that “any state and local income tax deducted on the federal return is what’s required to be added back.” App. Vol. 6 at 28–29.
As we explain next, what matters for Indiana’s corporate tax and its
B. Whether the tax is a gross income tax or a net income tax is not dispositive.
One of Penn’s arguments is that the statute requires adding back only net income taxes, not gross income taxes, so Penn didn’t need to add back any of the disputed taxes because none of them are limited to net income. Some states’ statutes make that distinction expressly, with some saying taxpayers must add back only “taxes based on or measured by net income,” see, e.g.,
Our Court previously rejected the argument that the statute is limited to net income taxes, and Penn acknowledges we do not need to revisit that precedent here. Consolidation Coal Co. v. Indiana Dep’t of State Revenue, 583 N.E.2d 1199, 1200, 1201 (Ind. 1991) (rejecting the argument that “income” is “equivalent to gross receipts less the costs of goods sold” and concluding that the phrase “based on or measured by income” “suggests a broader inquiry”). We only overturn our precedent when necessary, and we can resolve this appeal on other grounds, so we decline to reconsider our prior analysis. See State v. Timbs, 169 N.E.3d 361, 369 (Ind. 2021) (explaining that we only overturn precedent “when there are urgent reasons and a clear manifestation of error” (quotations omitted)).
That takes us to the parties’ next point of disagreement, which is whether the statute covers “excise” taxes.
C. Apportioned excise taxes must be added back, but not unapportioned excise taxes.
Penn argues that the statute covers “income” taxes, not “excise” taxes. An “income tax is in effect a tax upon earnings.” Tax, Black’s Law Dictionary (12th ed. 2024) (quoting Henry Campbell Black, A Treatise on
The Department responds that the label doesn’t matter. To the Department, what matters is not the subject of the tax but its measure, and the Department concludes the statute covers any tax that is measured by reference to revenue. We find the answer somewhere between these two positions: The statute covers excise taxes that are the functional equivalent of income taxes (apportioned excise taxes), but not excise taxes that aren’t (unapportioned excise taxes).
The problem with Penn’s focus on the label of “income” or “excise” taxes is that, depending on the context and level of generality, income taxes can be a form of excise tax. See, e.g., 14A Fletcher Cyc. Corp. § 6904.50 (“Since income taxes generally are held to be excise taxes, they are not governed by constitutional provisions with respect to uniformity, valuation, and the like as apply to property taxes.”). And sometimes the taxes are functionally equivalent even though there are reasons to keep the labels distinct. See Cal-Roof Wholesale, Inc. v. State Tax Comm’n, 410 P.2d 233, 238 (Or. 1966) (“In tax parlance a corporation tax ‘measured by income’ is an excise tax; a tax ‘based upon income’ is an income tax.”); see also Ind. Dep’t of State Revenue v. Fort Wayne Nat’l Corp., 649 N.E.2d 109, 111 n.4 (Ind. 1995) (“Throughout the case law, the term ‘excise tax’ is a collective term which denotes a number of various indirect taxes, including franchise and privilege taxes.”).
As we explained in the previous section, in this context—add-back statutes applied before apportioning corporate net income—direct income taxes and excise taxes that are the functional equivalent of direct income taxes “are described simply, and interchangeably, as corporate income taxes.” Hellerstein et al., supra, ¶ 7.01; Miles v. Dep’t of Treasury, 199 N.E. 372, 377 (Ind. 1935) (“While there may be a ‘theoretical distinction’ or a ‘very slight’ difference between a net income tax and an excise measured by income, it is difficult to find any practical distinction to be made
What matters most is whether the excise tax is subject to the federal constitutional requirement that states apportion the revenue they are taxing. That distinction is the most important one because the statute’s purpose is to prevent a double apportionment. Privilege taxes, franchise taxes, and business-and-occupation taxes measured by income are all excise taxes, but they usually capture income from interstate commerce too, so they must be apportioned. See, e.g., Glatfelter Pulpwood Co. v. Commonwealth, 61 A.3d 993, 998 (Pa. 2013) (“Pennsylvania’s corporate income tax is an excise tax on the privilege of earning income and, therefore, under the Commerce Clause of the United States Constitution, Pennsylvania may subject to taxation only that part of corporate income reasonably related to the privilege exercised in this Commonwealth.”); Miss. State Tax Comm’n v. Murphy Oil USA, Inc., 933 So. 2d 285, 294 (Miss. 2006) (applying apportionment requirements to a franchise tax). Because these excise taxes are the functional equivalent of direct income taxes, including that the excise taxes are subject to apportionment requirements, the statute requires adding the taxes back to avoid a double apportionment.
Other excise taxes, like fuel and cigarette taxes, cover only intrastate transactions. And because the transactions are not in interstate commerce, they are not subject to apportionment requirements. See Philadelphia Eagles Football Club, Inc. v. City of Philadelphia, 823 A.2d 108, 130 n.37 (Pa. 2003) (collecting authority for the proposition that intrastate transactions are not
D. The wagering taxes here did not need to be added back.
The Department acknowledges all the taxes at issue are unapportioned excise taxes. The gambling transactions Illinois taxes, for example, can occur only in Illinois, so Illinois doesn’t need to apply an apportionment formula to limit its wagering tax. And because Illinois never applied an apportionment formula to those transactions in the first place, there is no double apportionment risk to avoid by adding the taxes back when calculating Indiana income.
While Illinois is taxing only intrastate transactions, those transactions generate revenue to which both Illinois and Indiana ultimately apply their apportionment formulas when calculating their apportioned corporate net income taxes. Since Indiana imposes a net income tax on corporations, ordinary business expenses—expenses necessary to generate income Indiana apportions and then taxes—should remain deducted. All the wagering excise taxes at issue here are ordinary business expenses, so they should also remain deducted.
There is yet another reason the disputed, out-of-state taxes are not the functional equivalent of income taxes and, thus, should not be added back to Penn’s taxable income in Indiana. If a proposed tax classification already exists elsewhere in the state’s taxation scheme, this fact supports the view that a different tax should carry a different classification. Hellerstein et al., supra, ¶ 6.03[3][a]. Here, all ten states that collected the disputed taxes from Penn during the relevant tax years also “imposed state income taxes” for those years. Petitioner’s Notice of Additional Authorities at 1 (collecting statutes). As Hellerstein puts it, “Although it is conceivable that a state would adopt a second levy . . . that in relevant structural aspects was similar to the pre-existing” tax, common sense
West Virginia provides an example. Through the “West Virginia Corporation Net Income Tax Act,”
Confirming this view, Penn designated uncontroverted evidence that no other state requires it to add back the wagering taxes at issue, and its state-tax-law expert confirms that no state requires adding back these unapportioned taxes. The Department isn’t sure whether other states require adding the taxes back, but it says that is irrelevant because Indiana can adopt a tax policy different from every other state. Of course, the Department is correct that Indiana can chart its own path inside constitutional boundaries, but there is no indication Indiana chose to take an idiosyncratic approach by adopting standard statutory language on a matter of standard tax policy.
At bottom, because an add-back statute is a tool for accurate apportionment, it is generally understood as covering two categories of apportioned taxes only: (1) state income taxes and (2) excise taxes that substitute for or are the functional equivalent of income taxes. The disputed wagering taxes fall into neither category and therefore did not need to be added back. The add-back statute undoes other states’ prior apportionment for their income taxes, preventing artificial deflation of the tax base. Because the wagering excise taxes were never apportioned, there is no apportionment to undo.
II. The Department does not identify any good reason for adding back the unapportioned excise taxes.
The Department argues that (1) adding back the unapportioned excise taxes Penn paid to other states is necessary to accurately capture all of Penn’s Indiana-sourced net income, and (2) Penn’s concern that adding back those taxes artificially inflates the tax base is misplaced because the apportionment formula stops that from happening. Both arguments fail.
A. Adding back other states’ unapportioned excise taxes does not produce a more accurate apportionment for Indiana.
The only reason the Department proposes for adding back the unapportioned excise taxes Penn paid to other states is that “a corporation having its most profitable casino in Indiana might use its Indiana income to pay taxes owed in other states,” so that casino should not “be allowed to write off a portion of its income, even income generated in Indiana, when that income was used to pay taxes to other states.” Resp. to Pet. for Rev. at 9.
The Department’s argument has things backwards. Penn is not trying to write off income generated in Indiana. All the taxes Penn deducted were wagering taxes exclusively on intrastate transactions in other states. Those taxes were an expense Penn paid to generate revenue in other states, and Indiana now includes that revenue in the nationwide tax pie from which it seeks to apportion and then tax a slice. That is why Penn deducted the expenses from its federal taxable income as ordinary business expenses under
Those wagering excise taxes contrast with the income taxes Penn paid to other states. Unlike the wagering excise taxes, the income taxes were subject to an apportionment formula to ensure those states were taxing only income sourced to the taxing state. Thus, those apportioned income taxes could not be costs of generating income taxable in Indiana—again, that’s the whole point of apportionment. For that reason, the income taxes are not deductible in Indiana, and Penn appropriately added them back so that the related revenue would be apportioned only once rather than twice.
To be sure, as the Department says, it is not our place to judge the soundness of the tax policy the legislature adopted. See Estabrook v. Mazak Corp., 140 N.E.3d 830, 834 (Ind. 2020). But we do have to discern the most reasonable interpretation of the words the legislature chose, and we choose the conventional understanding of those words that are broadly adopted among the states for uniform reasons the Department acknowledges are sound tax policy. See Andrew Nemeth Props., LLC v. Panzica, 271 N.E.3d 1100, 1110 (Ind. 2025) (“We think it is likely that the close similarity between Indiana’s statute and other states’ statutes reflects that our legislature made the same policy choice as those other states . . . .“).
As we discuss next, this conventional understanding also avoids exaggerating the tax base.
B. The apportionment formula does not protect against the Department exaggerating the tax base by adding back unapportioned excise taxes.
Penn’s core critique is that the Department is taking a statutory tool for preventing an artificially deflated tax base and misusing it to artificially inflate the tax base. The Department responds that the State’s apportionment formula prevents that sort of distortion. Penn has the better argument.
That is the effect of what the Department proposes here, but on a much larger scale. For example, by requiring Penn to add back more than $800 million in other states’ unapportioned wagering taxes in 2016, the Department’s assessment multiplies the income apportioned to Indiana by sixteen—adding almost $50 million to the tax base, growing it from $3.1 million to $50.1 million—without changing the apportionment percentage. And by distorting the tax base, the Department’s assessment allows Indiana to tax roughly twice the amount of Penn’s total worldwide profit. This also multiplies Penn’s tax burden to Indiana by about sixteen, from $204,218.87 to $3,256,609.92.
| Adding Back State Net Income Taxes But Not Wagering Taxes | Adding Back State Net Income Taxes and Wagering Taxes | |
|---|---|---|
| Federal AGI | $26,169,552 | $26,169,552 |
| State AGI | $52,803,8458 | $842,045,228 |
| Apportionment % | 5.95% | 5.95% |
| IN Apportioned Income | $3,141,828.78 | $50,101,691.10 |
| Corporate Income Tax Rate | 6.50%9 | 6.50% |
| Tax Owed to Indiana | $204,218.87 | $3,256,609.92 |
App. Vol. 4 at 15–16; App. Vol. 5 at 91.
Returning to the pie metaphor, by artificially expanding the tax base, the Department dramatically grows Indiana’s slice of the pie without changing the percentage Indiana is taking. So much so that the $3.2 million tax “bite” Indiana taxes from the inflated base exceeds all of the State’s $3.1 million “slice” from a properly calculated base.
The Department responds that none of these points matter because Penn concedes the Department applies a valid apportionment formula, which, the Department believes, ensures Indiana taxes no more revenue than is fairly apportioned to the State. Whatever the tax base, the Department points out, Indiana is taking only its 6–8% share based on the apportionment formula. That misses the key point, though—the apportionment formula does nothing to prevent a distortion of the underlying tax base to which the State applies the formula. The apportionment formula applies only after the tax base is calculated.
Indeed, that’s why there is an add-back statute in the first place. Without it, the tax base would be artificially deflated before applying the apportionment formula, resulting in Indiana’s apportionment being too small and its tax too low. But just as the base can be artificially deflated, it can also be artificially inflated, resulting in an apportionment that is too large and a tax that is too high.
In sum, our statutory interpretation aligns with both the conventional understanding among states with a corporate income tax and the underlying tax policy that produced the add-back statutes. Our interpretation also aligns with our precedent.
III. Our precedent confirms the statute requires adding back only income taxes or their functional equivalent.
Our Court’s precedent confirms Penn did not need to add back the disputed wagering taxes. And we do not find other tax court precedent or the legislature’s subsequent decision to phase out any requirement to add
A. Consolidation Coal Company supports our conclusion.
Our Court has interpreted this add-back statute only once before, in Consolidation Coal Co. v. Indiana Department of State Revenue, 583 N.E.2d 1199 (Ind. 1991). There, we considered whether “West Virginia’s Business and Occupation Tax [was] a state tax ‘based on or measured by income’” that had to be added back. 583 N.E.2d at 1200. During the tax years involved in Consolidation Coal, 1983 to 1985, West Virginia’s business-and-occupation tax imposed an “annual privilege tax” on “business and other activities” that was “determined by the application of rates against values or gross income” as stated in the statute. Id. at 1202 (quoting
As we discussed above, these sorts of privilege taxes are the functional equivalent of income taxes, and in Consolidation Coal we held they had to be added back. We reasoned the statute requires “the add-back of taxes based on income but not those such as property or excise taxes.” Id. In context, our reference could not have been to all “excise” taxes because the business-and-occupation taxes at issue were a form of excise tax, yet we held they had to be added back.
Instead, our analysis reflects that the West Virginia tax had to be added back because, even though it was an excise tax, it functioned like an income tax: Like an income tax, West Virginia’s business-and-occupation tax in those years applied to a broad range of economic activity—everything from “the business of producing for sale, profit or commercial use any natural resource products” to “manufacturing, compounding or preparing any article or articles for sale, profit or com[m]ercial use.” Owens-Illinois Glass Co. v. Battle, 154 S.E.2d 854, 857 (W. Va. 1967) (citing
These features are typical among business-and-occupation taxes. As with any tax, the details may vary, but the common feature is that they tax “general business activity,” not specific transactions or activities. Hellerstein et al., supra, ¶ 6.03[3][a]. Washington, for example, imposes a business-and-occupation tax “on ‘the act or privilege of engaging in business activities’” within its borders, generally measured by “the ‘gross proceeds of sales.’” Tyler Pipe Indus. v. Wash. State Dep’t of Revenue, 483 U.S. 232, 234–35 (1987) (quoting
As with West Virginia’s business-and-occupation tax in Consolidation Coal, this Washington tax applies to a broad range of activity like “extracting raw materials in the State, manufacturing in the State, making wholesale sales in the State, and making retail sales in the State.” Id. at 235 (footnotes omitted) (quoting
A leading tax treatise confirms there is “a much stronger case” for treating Washington’s business-and-occupation tax as “analago[us]” to an income tax. Hellerstein et al., supra, ¶ 6.03[3][a]. In other words, a unified statutory framework imposing a tax on a broad range of business activities is properly viewed as the functional equivalent of an income tax. Indeed, the Department’s own auditing manual instructs that Washington’s business-and-occupation tax is to be added-back as a “state income tax.” App. Vol. 3 at 146.
Now compare the tax added back in Consolidation Coal to the disputed West Virginia tax at issue here, which is a “tax on the privilege of holding a license to operate West Virginia Lottery table games.”
What follows is that the taxes in Consolidation Coal were properly added back because they functioned like income taxes; they were part of West Virginia’s broad framework to tax “general business activity” within that state. Hellerstein et al., supra, ¶ 6.03[3][a]. The West Virginia tax at issue here, in contrast, is nothing of the kind; it functions like a typical, transaction- or activity-based excise tax, not an apportioned income tax.
B. We do not find the Aztar analysis to be a compelling reason to add back the taxes.
The Department relies heavily on Aztar Indiana Gaming Corp. v. Indiana Department of State Revenue, in which the Tax Court held that Indiana’s Riverboat Wagering Tax—a daily tax “on the adjusted gross receipts received from gambling games“—had to be added back. 806 N.E.2d 381, 383, 386 (Ind. T.C. 2004). The Tax Court concluded that Consolidation Coal compelled this result because the court read our precedent as creating a dividing line between property and non-property taxes. Id. at 385. The court reasoned that because the gambling tax was a non-property tax, it had to be added back as one measured by income. Id. at 386.
We acknowledge that is a fair reading of Consolidation Coal, because we did say in that case that the statute requires “the add-back of taxes based on income but not those such as property or excise taxes.” And we cited Miles v. Department of Treasury, 199 N.E. 372 (Ind. 1935), for the proposition that a critical distinction is whether the tax at issue is “a property or non-property tax,” Consolidation Coal Co., 583 N.E.2d at 1201–02, or, put another way, whether the tax is “measured by income” or “measured by value of property held.” Id. But while that is a fair reading, we don’t believe it is the best reading, and we therefore disapprove of it.
C. We do not find the legislature’s subsequent statutory changes to be a compelling reason to add back the taxes.
In 2017, the legislature amended the statute to phase out the add-back requirement for “wagering taxes.”
Again, this is a fair argument, but we disagree. Subsequent legislative action is a “hazardous basis for inferring the intent of an earlier” legislature. Pension Benefit Guar. Corp. v. LTV Corp., 496 U.S. 633, 650 (1990) (quotations omitted). And while we have said before that a statutory amendment “raises the presumption that the legislature intended to change the law,” we’ve also said that is unless “the amendment was passed in order to express the original intent more clearly.” United Nat’l Ins. Co. v. DePrizio, 705 N.E.2d 455, 460 (Ind. 1999). Given all the context we discussed above, we think it is more likely that the legislature was seeking to statutorily abrogate Aztar consistent with the statute’s original understanding.
In sum, corporations must add back direct income taxes and taxes that are the functional equivalent of income taxes under Indiana Code section
Conclusion
For these reasons, we reverse the Tax Court and remand for entry of summary judgment in Penn’s favor.
Rush, C.J., and Massa, Slaughter, and Goff, JJ., concur.
Mark J. Richards
Jenny R. Buchheit
Matthew J. Ehinger
Joshua W. Schlake
Ice Miller LLP
Indianapolis, Indiana
ATTORNEYS FOR RESPONDENT
Theodore E. Rokita
Attorney General of Indiana
Benjamin M. L. Jones
Samuel J. Dayton
Stephen J. Reen
Office of the Attorney General
Indianapolis, Indiana
ATTORNEYS FOR AMICI CURIAE COUNCIL ON STATE TAXATION AND THE TAX FOUNDATION
Mark A. Loyd
Dentons Bingham Greenebaum LLP
Louisville, Kentucky
Stephanie M. Bruns
Dentons Bingham Greenebaum LLP
Indianapolis, Indiana
Helen V. Cooper
Dentons Bingham Greenebaum LLP
Louisville, Kentucky
ATTORNEY FOR AMICI CURIAE INDIANA LEGAL FOUNDATION, INC. AND INDIANA CHAMBER OF COMMERCE
Randal J. Kaltenmark
Barnes & Thornburg LLP
Indianapolis, Indiana
Notes
One result of the constitutional barriers to direct corporate income taxes was that the States turned to franchise or privilege taxes measured by net income, which were considered to be “indirect taxes.” In doing so they were following the lead of the United States Congress which in 1909 imposed an “excise” tax on corporations measured by net income. This tax, which was held constitutional by the Supreme Court as an indirect tax, was subsequently supplanted by the Federal direct income tax structure. However, several States followed the example of the 1909 act and instituted levies on the privilege of incorporation or on the privilege of doing business in corporate form within the State, to be measured by the corporation’s net income. Connecticut, for example, in 1915 levied such a tax measured by corporate income derived from sources within the State.
H.R. Rep. No. 88-1408 at 101 (footnote omitted).