Indiana Department of State Revenue v. Bethlehem Steel Corp.

639 N.E.2d 264, 1994 Ind. LEXIS 104, 1994 WL 445089

• Court: Indiana Supreme Court
• Decided: August 19, 1994
• Docket: 49S05-9212-TA-1046
• Status: Published

Opinions

SHEPARD, Chief Justice.

Does the Indiana corporate gross income tax apply to receipts from the sale of federal tax benefits when the benefits derive from equipment located in Indiana but the owner is commercially domiciled in another state and the transaction occurs out of state? We hold it does not.

I. Facts

Neither party disputes the facts. Bethlehem Steel Corporation is a multistate corporation which manufactures and sells fron and steel products. The corporation is incorporated in Delaware, commercially domiciled in Pennsylvania, and authorized to conduct business in all fifty states and the District of Columbia. Some fifteen percent of Bethlehem's business occurs at its Burns Harbor Plant in Porter County, Indiana.

In 1981, 1982, and 1983, Bethlehem sold its rights to certain federal tax benefits under LR.C. § 168(£)(8) (repealed 1986).¹ Pursuant to § 168, Bethlehem structured these sales as sale-leaseback agreements or "safe harbor leases."² Each transaction followed the same pattern: Bethlehem purchased equipment eligible for federal tax deductions and credits (ie., investment tax credits, energy tax credits, and accelerated depreciation deductions). Bethighem then sold the equipment in exchange for cash and a nonrecourse note. The note equaled Bethlehem's basis in the equipment. The cash payment represented the purchase price for the tax benefits,. The buyer then leased the equipment back to Bethlehem for an amount equal to the note payments. At the end of the lease, Bethlehem would repurchase the equipment at a nominal charge. Bethlehem always retained both possession of the equipment and title to it, and the only money actually to change hands was the proceeds from the sale of the benefits.

Approximately forty-five percent of the equipment underlying Bethlehem's safe harbor leases was located at Burns Harbor. The agreements were negotiated and consummated outside Indiana, however, through Bethlchem's New York investment advisers and legal counsel. All the buyers were non-Indiana companies, and the payments were made and received through bank accounts beyond our borders. Further, Bethlchem based its decisions to enter these agreements on financial and investment considerations, not on the business operations at the Burns Harbor Plant. The management at Burns Harbor did not play any role in these decisions, and the plant would have continued its operations whether or not these sales occurred.

In 1987, the Indiana Department of State Revenue audited Bethlehem's returns for the three years in question and assessed Bethlehem for the gross proceeds from the sales of tax benefits on the Indiana equipment. The gross proceeds amounted to $55,065,367, creating a $729,588 net tax liability.³ Bethlehem protested. The Department conducted a hearing but upheld the additional taxes in May 1988. Bethlehem then paid the taxes and petitioned the Department for a $717,451 refund. The Department did not respond to the petition within 180 days, so Bethlehem filed an original tax appeal with the Indiana Tax Court. On cross motions for summary judgment, Judge Fisher reversed the Department's decision and held for Bethlehem. Bethlehem Steel Corp. v. Indiana Dep't of State Revenue (1992), Ind.Tax, 597 N.E.2d 1327. The Department timely petitioned this Court for review. Ind.Appellate Rule 18. We granted the Department's petition for review and now affirm the Tax Court's judgment.

II Standard of Review

It is well established that any doubts regarding the meaning or applicability of the gross income tax statute will be resolved in favor of the taxpayer. See, e.g., Gross Income Tax Div. v. Surface Combustion Corp. (1953), 232 Ind. 100, 111 N.E.2d 50, cert. denied, 346 U.S. 829, 74 S.Ct. 51, 98 L.Ed. 353; Indiana Dep't of State Revenue v. Convenient Indus. of Am. (1973), 157 Ind.App. 179, 299 N.E.2d 641.

Moreover, we do not set aside the findings or judgment of the Tax Court unless they are clearly erroneous, Ind.Tax Court Rule 10, and summary judgments also enter the process of appellate review cloaked with a presumption of validity. As we explained in Indiana Dep't of State Revenue v. Caylor-Nickel Clinic (1992), Ind., 587 N.E.2d 1311, 1313:

When [al summary judgment involves a question of law within the particular purview of the Tax Court, cautious deference is appropriate. The Indiana Tax Court was established to develop and apply specialized expertise in the prompt, fair, and uniform resolution of state tax cases.

Thus, we accord due deference to the Tax Court's determinations of tax law on summary judgment and set aside such determinations only if we are definitely and firmly convinced that an error was made. Cf. Associated Milk Producers, Inc. v. Indiana Dep't of State Revenue (1989), Ind., 534 N.E.2d 715 (applying clearly erroneous standard to case tried on merits).

III. Imposition Statute and Regulation

Indiana imposes a gross income tax on the gross receipts of residents and domici-liaries and on the gross receipts of nonresidents and nondomiciliaries⁴ Ind.Code Ann. art. 6-2.1 (Burns 1989). The taxability of the income of a nonresident or nondomiciliary depends upon three determinations.

First, the receipts must constitute "gross income." Ind.Code Ann. § 6-2.1-1-2 (Burns 1989). In Hoosier Energy Rural Electric Coop. v. Indiana Dep't of State Revenue (1991), Ind., 572 N.E.2d 481, we determined that the proceeds from sales of federal tax benefits under § 168(F)(8) are "gross income."

Second, the receipts must be "taxable gross income," which the statute defines as that portion of "gross income" not subject to exemption, Ind.Code Ann. ch. 6-2.2-8 (Burns 1989), or deduction, Ind.Code Ann. ch. 6-2.1-4 (Burns 1989). Ind.Code Ann. § 6-2.1-1-13 (Burns 1989). The provision relevant to this appeal exempts taxpayers with "[glross income derived from business conducted in commerce between the state of Indiana and either another state or a foreign country ... to the extent the state of Indiana is prohibited from taxing that gross income by the United States Constitution." Ind.Code Ann. § 6-2.1-3-8 (Burns 1989). This, of course, is less a tax exemption than a recognition that the Commerce Clause limits state taxing authority. U.S. Const. art. I, § 8, cl. 8.

Third, the imposition statute distinguishes between the income of residents and domicili-aries and the income of nonresidents and nondomiciliaries. The relevant provision reads:

(2) An income tax, known as the gross income tax, is imposed upon the receipt of:

(1) The entire taxable gross income of a taxpayer who is a resident or a domiciliary of Indiana; and

(2) The taxable gross income derived from activities or businesses or any other sources within Indiana by a taxpayer who is not a resident or a domiciliary of Indiana.

Ind.Code Ann. § 6-2.1-2-2(a). As a nondo-miciliary, then, Bethlehem's gross receipts, including any proceeds from the sale of intangibles, are taxable only if they were "derived from activities or businesses or any other sources within Indiana." Two questions thus present themselves under the statute. First, were Bethlehem's cash proceeds from the sale of the tax benefits accruing to its Indiana equipment "derived from an activity or business or any other source within Indiana" for the purposes of § 6-2.1-2-2(a)(2)? Second, even if these proceeds were derived from an Indiana source, would a gross income tax on those proceeds violate the Commerce Clause of the United States Constitution and trigger the exemption specified by § 6-2.1-3-37

IV. "Sources within Indiana"

The statute does not define income "derived from activities or businesses or any other sources within Indiana." In the Tax Court, Judge Fisher read the imposition statute against the background of its interpreting regulation, the history of situs analysis, and judicial treatment of taxes on income from intangibles.⁵ He explained:

[Thhe case law analysis focuses on the relationship between the intangible and the taxpayer's "business situs" by identifying activities related to the critical transaction, here, the sale of an intangible giving rise to income, and then determining whether the degree of activities related to the critical transaction is sufficient to uphold taxation in Indiana. When activities related to the critical transaction occur at more than one situs, the dispositive inquiry therefore asks what degree of activity was regularly conducted at the different locations, i.e., are the activities more than minimal, not remote and incidental to the critical transaction.

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The "integral" analysis [under the departmental regulation] therefore weighs the degree of related activity at a "business situs" to determine if it is more than minimal and not remote or incidental to the transaction giving rise to the income....

Bethlehem Steel, 597 N.E.2d at 1336-37 (citations omitted). Employing this scheme, Judge Fisher analyzed the relationship between the transactions producing the gross income and Bethlehem's activities in Indiana and held that the sales of tax benefits were not sufficiently related to Bethlchem's business activities at Burns Harbor to support the Indiana tax. We generally approve Judge Fisher's reading and application of the statute.

A. The Interpreting Regulation. The Department's regulation, 45 LA.C. 1-1-51, provides two tests for determining when intangible income derives from an Indiana activity, business, or source. First, the "business situs" test provides that if the taxpayer has established a business situs in Indiana, and "the intangible forms an integral part of a business regularly conducted at [that] si-tus," then the intangible has an Indiana situs for tax purposes. Second, the "commercial domicile" test holds that if the taxpayer has 'Established its commercial domicile in Indiana, then "all of the income from intangibles will be taxed ... except that income which may be directly related to an integral part of a business regularly conducted at a 'business situs' outside Indiana." If the taxpayer has established its commercial domicile in another state, then "no income from intangibles will be taxed ... unless the taxpayer has also established a business situs in Indiana and the intangible income derived therefrom forms an integral part of that Indiana activity." Id.

In the present case, the Department and Bethlehem agree that Bethlehem is commercially domiciled in Pennsylvania. The parties also agree that Bethlehem enjoys a business situs at its Burns Harbor Plant in Indiana. Thus, Indiana may not tax Bethlehem's income from the sales of the tax benefits unless the sales form an "integral" part of Bethlehem's in-state business activities.

While the regulation does not explain when an intangible or the income from an intangible forms an "integral part" of a business operation, the Department did not construct its situs approach from whole cloth. The analysis was derived from the property tax context,⁶ and an understanding of this histoty provides insight into the meaning of this language.

B. The History of Situs Analysis. The long-established rule for taxing tangible property, mobilia sequuntur personam, held that such property followed the person of the owner. Under this rule, the owner's domicile had the sole authority to tax his personal property. A subsequent exception permitted the state in which the property was kept or used to levy a property tax. These were not competing rules, but a rule and its exception. The property still had only one situs for tax purposes, and only one state had the authority to tax.

In Wheeling Steel Corp. v. Fox, 298 U.S. 193, 56 S.Ct. 773, 80 L.Ed. 1143 (1936), the Supreme Court applied this rule to intangibles, holding that due process demanded that intangibles be taxed only at the legal domicile of the owner.⁷ This rule was subject to an exception, however, where the intangible had acquired a situs at the owner's commercial domicile. The Court upheld the commercial domicile's ad valorem property tax on the accounts receivable and bank deposits of a corporation legally domiciled in another state. The Court affirmed the proposition that " 'choses in action may acquire a situs for taxation other than at the domicile of their owner, if they have become integral parts of some local business.'" Id. at 210, 56 S.Ct. at 777 (quoting Farmers' Loan & Trust Co. v. Minnesota, 280 U.S. 204, 50 S.Ct. 98, 74 L.Ed. 371 (1930).

The Indiana Supreme Court had already recognized this doctrine in Miami Coal Co. v. Fox (1931), 203 Ind. 99, 176 N.E. 11, holding that Indiana could not levy a property tax on the accounts receivable of an Indiana corporation where those intangibles were an integral part of the business operations of an Illinois branch of the corporation. The taxpayer owned and operated coal mines in Indiana, with its management offices in Illinois. The Court observed that the Illinois office made the sales, accepted payment on the sales, set the prices, consummated the contracts, paid the Indiana employees, and ordered the shipments. Comparing the two operations, the Court held that the intangibles had their situs in Illinois, not Indiana:

Inasmuch as the business of appellant at its office in Chicago has gained a business situs, the bills and accounts receivable are a part of and so intertwined with and affized to the business of appellant at its foreign office, that a taxing unit in Indiana may not reach into a business situs in Illinois and grasp the intangible thing which is so affized to a business that it is a part and parcel of it.

Id. at 112-183, 176 N.E. at 16.

Significantly, the Court in Miami Coal did not base its decision on the location of the account records or on the fiction that the accounts receivable had some physical location. The Court looked at all of the cireum-stances and activities surrounding the property in order to determine its tax situs. Similarly, the Department's modern regulation states: "The physical location of the intangible at the time any income is received under either the 'business situs' test or the 'commercial domicile test is not a controlling factor but will be considered in view of all of the facts presented." 45 LA.C. 1-1-51.

Of course, Miami Coal involved a property tax, and the Court of Appeals subsequently questioned whether it presented a valid approach for analyzing a gross income tax problem. In Indiana Dep't of State Revenue v. Sohio Petroleum Co. (1976), 170 Ind.App. 123, 352 N.E.2d 95, overruled on other grounds, Indiana Dep't of State Revenue v. Harrison Steel Castings Co. (1980), Ind.App., 402 N.E.2d 1276, the court held that Indiana could impose its gross income tax on dividends paid from one Indiana corporation to another even where the shares of stock were held out of state. The court issued its holding in spite of Department regulations prohibiting the taxation of shares of stock with legal situs outside Indiana and criticized the Department for "muddy[ing] the waters" by "engraft[ing] the Miami Coal business situs rule for personal property tax onto the gross income tax." Id. at 132, 352 N.E.2d at 100-01.

Certainly, the Department may not issue regulations inconsistent with the statute which it is administering, but the defect in the regulation at issue in Sohito was its reliance on the physical evidence of the intangibles to establish their tax situs.⁸ This was not the mode of analysis in Miami Coal. Instead, the Court compared the Indiana and Illinois activities that contributed to the production of the accounts receivable and determined that the intangibles were too closely tied to the sale of coal in Illinois to permit the Indiana tax. Similarly, in the income tax context, we look to the whole of the income-producing transaction-the actors, activity, and property-and weigh the in-state and out-of-state elements to determine if the intangible has an Indiana tax situs.

C. Judicial Treatment of Taxes on Income from Intangibles. The Court of Appeals has employed this analysis in determining the taxability of the income from intangibles.⁹ See Indiana Dep't of State Revenue v. J.C. Penney Co. (1980), Ind.App., 412 N.E.2d 1246; Indiana Dep't of State Revenue v. Convenient Indus. of Am. (1973), 157 Ind.App. 179, 299 N.E.2d 641. These precedents establish that whether a nondo-miciliary's gross income from an intangible derives from an Indiana "source" depends on the relationship between Indiana and the actors, activities, and property creating the income. Indiana may not tax nondomiciliar-ies where the relation between Indiana and the subject of the tax is merely remote or incidental to the interstate transaction. J.C. Penney, 412 N.E.2d at 1248, 1252. The Indiana connection must be at least "more than minimal." Convenient Indus., 157 Ind.App. at 185, 299 N.E.2d at 645.

In Convenient Industries, the Department attempted to tax an out-of-state corporation on the proceeds from the sale of food mart franchises in Indiana. Specifically, the Department wanted to tax the proceeds from the service and advertising fees received from Indiana franchisees.¹⁰ The Court of Appeals held for the corporation, concluding that the Indiana activities associated with the fees were minimal in comparison to the activities conducted out of state.

The court announced that "[the activities contemplated by the statute must be more than minimal," explaining that "(lf it were otherwise, the statute itself would promote cumulative tax burdens upon interstate commerce contrary to the Constitution." Convenient Indus., 157 Ind.App. at 185, 299 N.E.2d at 645. Applying this standard to the facts, the court compared the in-state and out-of-state activities that produced the proceeds. Regarding the service fees, the court found that supervisory inspections and an occasional report sent from Indiana to the main office in Kentucky were not sufficient to permit the tax. Regarding the advertising fee, the court found that the window banners and displays given to the Indiana franchisees represented only a fraction of the advertising fee. Again, the court held these connections insufficient for tax purposes.

Similarly, in J.C. Penney, the court dealt with a gross receipts tax on an out-of-state corporation. The Department attempted to tax an out-of-state corporation's gross proceeds from direct mail catalog sales and service charges on credit sales in Indiana.¹¹ The corporation owned and operated retail and warehouse facilities in Indiana and advertised extensively in the state. Despite these connections with Indiana, the court held that proceeds from the catalog sales and service charges were the product of interstate, not intrastate, commerce and were not derived from an Indiana "source." J.C. Penney, 412 N.E.2d at 1250, 1252.

For our purposes, the treatment of the intangible service charges is most important. The trial court in J.C. Penney had found that "the service charge income was income earned by a non-domiciliary corporation upon intangibles outside Indiana." Id. at 1251. As in Convenient Industries, the Court of Appeals compared the in-state and out-of-state elements of the income-producing transactions and noted that the out-of-state offices of the taxpayer kept the accounts and records, mailed account statements directly to the customers, collected payments directly from the customers, fielded inquires from customers, and collected on delinquent accounts. The court then stated: "On the basis of these facts, the trial court was justified in concluding that the local activities with respect to the credit service income were remote and incidental." Id.

J.C. Penney suggests continued vitality for situs analysis, even where a taxpayer enjoys a substantial Indiana presence. The decision in Indiana Dep't of State Revenue v. General Foods Corp. (1981), Ind.App., 427 N.E.2d 665, stands in accord. In General Foods, the court isolated the specific income-producing activities in determining whether the Department could tax the gross receipts from the sale of goods by an out-of-state corporation to Indiana customers. While the corporation operated a distribution and sales office in Indiana, the court found that the particular sales at issue were not closely enough related to these Indiana activities to constitute income derived from an Indiana source. The out-of-state offices made the sales, received the proceeds, solicited most of the orders (though some orders were solicited in Indiana by out-of-state representatives), accepted the orders, and shipped the goods from their out-of-state warehouses and factories. Id. at 666-67. The court concluded that the Indiana activities were "merely incidental to [the corporation's] total operation and were therefore insufficient for the Department to seize upon in attempting to apply 1.C. § 6-2-1-2 [currently Ind.Code Ann. § ]." Id. at 670.

V. Conclusion

Applying this analysis to the present case, we conclude that the proceeds from Bethlehem's sale of tax benefits were not "integrally related" to its business situs at Burns Harbor for the purposes of 45 L.A.C. 1-1-51. Although Indiana may tax the proceeds from sales of federal tax benefits where the taxpayer is incorporated and commercially domiciled in Indiana and the underlying property is located in Indiana, Hoosier Energy 572 N.E.2d 481, in the present case only the property was located in Indiana. Both the buyer and seller were non-Indiana corporations with non-Indiana commercial domiciles; the decisions to enter these agreements were made out of state, not by the Burns Harbor management; and the sales themselves were negotiated and completed out of state. We cannot say that the Tax Court erred when it weighed the in-state and out-of-state elements of the income-producing transactions and concluded that the degree activity connecting Indiana with the sales was insuffi-client to support the gross income tax.

We recognize that this approach to taxing income from intangibles may appear disadvantageous in a case like Bethichem Steel, where Indiana has a some relation to income arising from the sale of intangibles by a nondomiciliary, but not a strong enough claim to defeat the domicile's right to tax the same proceeds. Under Indiana's situs analysis, when such a situation arises the domiciliary state retains the sole authority to tax. Since Indiana does not hesitate to claim the benefits of this scheme by taxing the entire proceeds from the sale of intangibles by an Indiana domiciliary despite the involvement of other states (as we did in Hoosier Energy, 572 N.E.2d at 486), Indiana must accept the costs of the scheme when its connection to the transaction is modest.

On the basis of the Department's regulation, the history behind that regulation, and the case law interpreting the imposition statute, we hold that the proceeds from Bethlehem's sale of tax benefits were not "derived from activities or businesses or any other sources within Indiana" for the purposes of § 6-2.1-2-2(a)(2). Because we decide the case on statutory grounds, we need not reach the Commerce Clause issue. Accordingly, we affirm the decision of the Indiana Tax Court.

GIVAN and DICKSON, JJ., coneur. DeBRULER, J., dissents with separate opinion. SULLIVAN, J., dissents with separate opinion, in which DeBRULER, J., concurs.

1 . Congress enacted § 168(f)(8) in 1981 to supplement existing tax incentives for business investment. Traditional deductions and credits provide incentives only to businesses with taxable income. Under § however, even companies without taxable income could benefit from qualifying investments because they could sell the tax benefits to companies having taxable income.

2 . "The Lessor and the Lessee desire to obtain the benefits of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended. In connection therewith, the Lessor and the Lessee have agreed that for Tax Purposes ... the Lessee will assign to the Lessor the Tax Interest ... in each item of Equipment ... and the Lessee will lease the Tax Interest from the Lessor, all on the terms and subject to the conditions hereinafter set forth." Assignment and Lease Agreement of Dec. 29, 1982, between Deluxe Check Printers, Inc. and Bethichem Steel Corporation, Ex. 7G at 1.

3 . Bethlehem's actual tax liability was $956,043, but the corporation overpaid its 1979 income taxes and received a $226,455 credit. Restated Stipulation of Facts at 8.

4 . While this case involves the gross income tax, Indiana also employs an adjusted gross income tax. In 1963, the Indiana legislature recognized that Indiana was losing revenue because the U.S. Supreme Court had declared that Indiana's unapportioned gross income tax could not constitutionally reach proceeds from interstate commerce. See Freeman v. Hewit, 329 U.S. 249, 67 S.Ct. 274, 91 L.Ed. 265 (1946) ("The tax on the sale itself cannot be differentiated from a direct unapportioned tax on gross receipts which has been definitely held beyond the State taxing power...."); J.D. Adams Mfg. v. Storen, 304 U.S. 307, 58 S.Ct. 913, 82 L.Ed. 1365 (1938) ("'The vice of the statute as applied to receipts from interstate sales is that the tax includes in its measure, without apportionment, receipts derived from activities in interstate commerce...."). The legislature determined to reach interstate proceeds by enacting an apportioned adjusted gross income tax. Ind.Code Ann. art. 6-3 (Burns 1989). Presently, the gross income tax and the adjusted gross income tax form a single tax scheme, under which corporations are given a credit on their adjusted gross income tax liability for gross income taxes paid. Ind.Code Ann. § 6-3-3-2 (Burns 1989). For a discussion of the history of these provisions, see Carlyn Johnson, Taxing Interstate Commerce: A New Experience in Indiana, 39 Notre Dame L.Rev. 557 (1963).

5 . For additional applications of Fisher's interpretation, see SFN Shareholders Grantor Trust v. Indiana Dep't of State Revenue (1992), Ind.Tax, 603 N.E.2d 194; Indiana-Kentucky Electric v. Indiana Dep't of State Revenue (1992), Ind.Tax, 598 N.E.2d 647; First National Leasing and Financial Corp. v. Indiana Dep't of State Revenue (1992), Ind.Tax, 598 N.E.2d 640.

6 . The situs analysis for income from intangibles is not the only notion lifted from the property tax context and employed in the income tax arena. Early property tax cases also provide the basis for the current apportionment principles in state income tax schemes. Walter Hellerstein, State Taxation of Interstate Business: Perspectives on Two Centuries of Constitutional Adjudication, 41 Tax Lawyer 37, 47-48 n. 85 (1987).

7 . "[Even] before the adoption of the fourteenth amendment, however, the Court had invalidated state taxes on the basis of natural law concepts of 'jurisdiction' and 'situs.'" Hellerstein, supra note 6, at 52 n. 115 (citation omitted).

8 . Similarly, the court in Indiana Creosoting Co. v. McNutt (1936), 210 Ind. 656, 5 N.E.2d 310, distinguished Miami Coal in determining that Indiana could tax the gross income derived from the creosoting of railroad ties in Indiana by an Indiana corporation even where the contract for these services was negotiated and consummated out of state. As in Sohio, the concern in Indiana Creosoting was that the Miami Coal analysis would truncate the investigation of Indiana's role in the transaction.

9 . The language of the imposition statute for nonresidents and nondomiciliaries has remained substantially the same since 1933. See Burns Ind.Stat.Ann. § 64-2602 (1933) (''There is hereby imposed a tax, measured by the amount or volume of gross income, and in the amount to be determined by the application of rates on such gross income as hereinafter provided. Such tax shall be levied upon the entire gross income of all residents of the state of Indiana, and upon the gross income derived from sources within the state of Indiana, of all persons and/or companies, including banks, who are not residents of the state of Indiana, but are engaged in business in this state, or who derive gross income from sources within this state, and shall be in addition to all other taxes now or hereafter imposed with respect to particular occupations and/or activities...."); Burns Ind.Stat Ann. § 64-2602 (as amended by 1937 Ind.Acts ch. 117, § 2) (Supp. 1943) ("Such tax shall be levied ... upon the receipt of gross income derived from activities or businesses or any other source within the state of Indiana, of all persons who are not residents. ..."); Burns Ind.Stat. Ann. § 64-2601 (1951 & Supp.1960); Burns Ind.Stat.Ann. § 64-2602 (1961); Burns Ind.Stat.Ann. § 6-2-1-2 (Supp.1974); Ind.Code Ann. § 6-2-1-2 (Burns 1978); Ind.Code Ann. § 6-2.1-2-2 (Burns Supp. 1983); Ind.Code Ann. § 6-2.1-2-2 (Burns 1989 & Supp.1993).

10 . The Department attempted to tax the franchise fee itself, but the trial court held that the franchise fee itself was not taxable.. The court explained:

The franchise fee is income from the sale of an intangible. Plaintiff is a non-resident of the state of Indiana and such intangible does not have a situs in the state of Indiana, but rather has a situs in Louisville, Kentucky, the principal place from which the business of plaintiff was directed or managed.

Convenient Indus., 157 Ind.App. at 183 n. 1, 299 N.E.2d at 644 n. 1. The Department did not contest this finding or holding on appeal. Instead, the Department contended only that Convenient owed taxes on the service and advertising fees.

11 . J.C. Penney, of course, paid gross income tax on the amounts charged initially. At issue in the case was the taxability of the income from the service or interest charges on the charge accounts. J.C. Penney, 412 N.E.2d at 1251.