Indiana Governor Mike Pence has signed several bills that significantly change elements of the Indiana income and sales tax laws. Changes to the corporation income tax include the elimination of the throwback rule, an expansion to the definition of business income and modifications to the intercompany addback rules. With respect to the sales tax, numerous exemption provisions have been expanded, including the manufacturing and agricultural exemptions, while the research and development exemption has been narrowed. Finally, the Indiana Department of Revenue will administer a broad tax amnesty program at some point in 2015 or 2016.1 Unless otherwise noted, all of the legislative changes are effective on January 1, 2016.
Income Tax Legislation
Elimination of Throwback Rule
The Indiana "throwback rule" applies to situations where a seller ships products from an Indiana location to a destination state where the seller is not subject to tax. In Indiana (as in many states), these sales historically have been "thrown back" and included in the sales factor numerator when computing the Indiana apportionment factor. The legislation eliminates the throwback rule, which will benefit taxpayers shipping products from Indiana locations.2
Business Income Definition
The legislation expands the definition of business income. Under current law, the term "business income" is defined as "all income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes integral parts of a taxpayer's regular trade or business operations." Under the expanded definition, "business income" includes "all income that is apportionable to the state under the Constitution of the United States."3 Following the trend seen in other states, this new provision will make it more difficult for a taxpayer to use allocation rather than apportionment as a means to source a gain from a non-recurring transaction fully outside Indiana.
Intercompany Expense Addbacks
Under current law, intercompany interest expense is required to be added back to Indiana adjusted gross income only in situations where the intercompany interest was the result of transactions involving intangible assets. Under the recent legislation, all intercompany interest, not just interest related to intangibles, must be added back to Indiana adjusted gross...