Opinion ID: 852380
Heading Depth: 2
Heading Rank: 3

Heading: The Department's Contentions

Text: 1. The Merits of this Dispute. As a preliminary matter, we decline the Department's request to rule on the merits of this case. This interlocutory appeal is from an order resolving only issue preclusion, and we are not faced with the merits of the Department's contentions at this point. For purposes of this interlocutory appeal, we hold only that the Department's new arguments in support of its destination rule are not precluded by Miller I. 2. Appellate Rule 63. The Department argues that issue preclusion should not apply in tax cases because Indiana Appellate Rule 63(M)(4) [3] contemplates relitigation of the same facts or issues in subsequent tax cases. (Appellee's Br. at 25.) Specifically, the Department points out that one of this Court's considerations for granting review is that the Tax Court has correctly followed the ruling precedent, but such precedent is erroneous or in need of clarification or modification in some specific respect. The Department claims it would be nearly impossible to justify this Court's review of a subsequent tax court decision if parties were not allowed to relitigate the same facts and issues. (Appellee's Br. at 25-26.) This argument is inapposite. Appellate Rule 57(H)(5) provides the same consideration for granting transfer from cases heard by the Court of Appeals. These rules generally refer to grounds for review of issues raised by parties who have not previously litigated them. They do not refer to issue preclusion in tax cases or in general. 3. Changes in the Law. The Department also contends that issue preclusion is inappropriate because the relevant legal climate has changed in two respects since the last case. We do not agree because the changes cited postdate the tax years in issue in this case. As noted above, a change in the legal landscape can affect the decision whether to apply issue preclusion. But Indiana did not begin moving to a single-factor allocation of income until January 1, 2007. See 2006 Ind. Acts 3262-3269, P.L. 162-2006 § 25; Ind. Code § 6-3-2-2(b) (2008). And Indiana rejoined the Multistate Tax Commission on July 1, 2007, after a thirty-year absence. See 1977 Ind. Acts 467, P.L. 90-1977; 2007 Ind. Acts 2191, P.L. 145-2007 § 17. These changes were made eight to ten years after the tax years in question. The resolution of a case should not turn on subsequent events if for no other reason than to remove the incentive to drag out litigation in hopes of relief from some external source. And there is nothing to suggest that these legislative changes were intended to apply retroactively. See Izaak Walton League of Am. v. Lake County Prop. Tax Assessment Bd. of Appeals, 881 N.E.2d 737, 741 (Ind. Tax Ct.2008) (the party seeking retroactive application of a statute must prove that the legislature unambiguously and unequivocally intended it). The Department is not foreclosed from arguing the effect of these changes involving later tax years, but they do not inform our decision as to issue preclusion today. 4. Inconsistency with Reports to Other States. The Department also argues that the facts and issues in this case are not the same because this case involves Miller's failure to follow regulations addressing the reporting of income to different states on inconsistent bases. (Appellee's Br. at 23, 29-31.) The Tax Court rejected issue preclusion principally because it concluded that the Department has a right to pursue this litigation on a different legal theory than it pursued in Miller I.  (Appellant's App. at 363-64.) We agree that this contention is available to be raised in this case. The Department claims that Miller failed to disclose inconsistencies between its apportionment of sales to Indiana as compared to other states. The Indiana regulations provide that the sales factor for apportionment of income must be consistent with the taxpayer's treatment of sales in other states having apportionment statutes and regulations substantially similar to Indiana's. 45 Ind. Admin. Code 3.1-1-42, -50 (2004). Returns that are not consistent should disclose the nature and extent of the inconsistency. Id. at 3.1-1-42. The sales factor of Indiana's statutory apportionment formula tracks the language of section 16 of the Uniform Division of Income for Tax Purposes Act (UDITPA), which is incorporated into article IV, section 16 of the Multistate Tax Compact. Compare I.C. § 6-3-2-2(e) (Regardless of the f.o.b. point or other conditions of the sale, sales of tangible personal property are in this state if: (1) the property is delivered or shipped to a purchaser that is within Indiana, other than the United States government) with Multistate Tax Compact, art. IV, § 16 (1966) (Sales of tangible personal property are in this state if: (a) the property is delivered or shipped to a purchaser, other than the United States government, within this state regardless of the f.o.b. point or other conditions of the sale). The Department asserts that all states that follow UDITPA construe their statutory sales factor to require a destination rule and that every state that has a corporate income tax uses a destination rule. (Appellee's Br. at 38-39.) Specifically, Ohio and Wisconsin treat customer-arranged transportation as destination sales. See Dupps Co. v. Lindley, 62 Ohio St.2d 305, 16 O.O.3d 354, 405 N.E.2d 716 (1980); Pabst Brewing Co. v. Wis. Dep't of Revenue, 130 Wis.2d 291, 387 N.W.2d 121 (1986). The Department asserts that it is entitled to apportion Miller's income as the department reasonably believes is fair under Indiana Code section 6-3-2-2(1) (2004), which provides that [i]f the allocation and apportionment provisions of this article do not fairly represent the taxpayer's income derived from sources within the state of Indiana, the department may require the use of any method to effectuate an equitable allocation and apportionment of the taxpayer's income. We agree with Miller that the Department raised this contention for the first time on appeal to the Tax Court in this case. The Department's own Letter of Findings asserts that the issue presented by Miller's claim for refund was identical to the issue in Miller I, namely whether Indiana is entitled to tax the income taxpayer earns from `customer-arranged-transportation' sales to Indiana. (Appellant's App. at 38.) An agency cannot generally rely on arguments and issues not presented at the administrative level. Scheid v. State Bd. of Tax Comm'rs, 560 N.E.2d 1283, 1284, 1286 (Ind. Tax Ct.1990). However, appeals from final determinations of the Department of State Revenue, including denials of a tax refund, are to be heard de novo by the Tax Court. I.C. §§ 6-8.1-5-1(h) to (i), 6-8.1-9-1(d). The Tax Court was therefore bound by neither the evidence nor the issues raised at the administrative level and was not barred from considering this new issue. Barney v. Ind. Dep't of State Revenue, 823 N.E.2d 339, 340-41 (Ind. Tax Ct.2005). Miller argues that even if the issue may be raised initially with the Tax Court, in Miller I it failed to disclose inconsistencies with its reports to other states, so this circumstance is merely a new argument, not a new fact. Ordinarily a new argument is insufficient to reopen an issue of law already determined as between two parties. Restatement (Second) of Judgments § 27 cmt. c (1982). We think, however, that in tax cases that principle should be relaxed. If failure to raise an omitted argument can forever preclude the Department from relitigating a legal issue, the state is in effect barred by the omission of its agents who generally do not bind the government by a mistake of law. See Rydstrom, supra, § 8.5. We have also noted the concerns for equity in taxation and for potential competitive effects that perpetuating a legal rule for one taxpayer can produce. 5. Equitable Considerations. The Department argues that issue preclusion should be avoided in the interest of equity. It alleges that if sales are not allocated under the destination rule followed in other states, these sales will be included in no state's allocation of income, producing nowhere sales and giving Miller an advantage over competitors. (Appellee's App. at 66-67.) Although equity is of course a concern in applying issue preclusion, the Department provides no evidence for this assertion. Specifically, the Department asserts that Indiana breweries who make customer-arranged transportation sales to Ohio and Wisconsin will be taxed on those sales by Ohio and Wisconsin, while Miller avoids taxation on similar sales in Indiana. (Appellee's Br. at 46.) This may be the case, but there is no evidence that any Indiana brewery makes sales to those states. For its part, Miller argues that equity favors issue preclusion because it would vindicate the purposes of issue preclusion, namely the saving of court and party resources and promoting confidence in the judicial system by eliminating the possibility that an identical question would be decided one way in one case and a different way in a later case. (Appellant's Br. at 13.) For purposes of this interlocutory appeal, it is sufficient that the relevant equities of the interpretations of the statute and regulation were not presented in Miller I. They are therefore not precluded in this case. Insofar as these alleged inequities are urged as a basis for denying issue preclusion, they are unsupported by the record. To the extent they bear on the merits of the interpretation of the statute or regulation they remain for another day.